Mac-Gray Corporation
(NYSE:TUC) executives may have to fight for their jobs after an
activist hedge fund expressed their concerns about the company in a
letter
to the board of directors. Fairview Capital Investment Management
voiced its apprehension over the laundry company’s growth and capital
allocation strategies and suggested that it either pursue a
high-dividend payout model or a sale in order to unlock shareholder
value.
“Ever since its ill-fated attempts to enter other lines
of business through the MicroFridge and Copico acquisitions in the late
1990s, Mac-Gray has focused on its core laundry facilities management
business,” said Clark & Mathieson of Fairview Capital. “Despite
achieving the revenue and EBITDA growth targets needed to earn large
bonuses for Management, these investments have not led to improvements
in ROIC, ROE, or EPS.”
Fairview Capital encouraged the company
to remedy this problem by instituting a high-dividend payout model or
pursuing a sale. The first option would entail the company restricting
its annual acquisition and capital spending to $25 million and
returning excess annual free cash flow of $19 million (or $1.45 per
share) to shareholders through a dividend. This would result in an
implied valuation of approximately $20 per share. Meanwhile, the second
option would generate more immediate value for shareholders that may
exceed $20 per share.
“Mac-Gray's current share price of $11.79
is only 7% higher than its 1997 IPO price of $11.00,” said Fairview in
its letter to the board. “How much longer must Mac-Gray shareholders
endure low returns on their capital and a depressed share price?”
Clearly,
Mac-Gray is facing several issues that it cannot solve without a
serious change of strategy. A high-dividend payout model would increase
its valuation by distributing some of its free cash flow to
shareholders while a sale of the company would provide more immediate
returns. Whether or not the company decides to take either action
remains to be seen, but this is definitely a stock
worth watching in the meantime!
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