Wednesday, December 16, 2009

In a rebuke to the founder, VCG Holdings' board rejects buyout offer (VCGH)

VCG Holdings is a midwest operator of adult entertainment clubs, with names like SHIEK'S. Here's an example of the risk we run when an executive officer owns a huge stake in the company, in this case about 37% of the common stock through various entities.

Back in early November, the CEO and largest shareholder offered to steal buy the company from other shareholders, for $2.10 per share.

Amazingly, after stating that "We believe that our offer represents significant value for the Company’s shareholders," he goes on to say that "In considering our proposal, please note that the undersigned will not agree to any other transaction involving their stake in the Company."

It's certainly his right to do what he wants with his own shares, but to say that right after saying this offer presents "significant" value for other shareholders is a joke, and may set up the board for legal action against them if they didn't respond properly.

No surprise, the ambulance-chasers of the securities industry are all over the situation here and here and here and here, pointing out numerous reasons shareholders should be suspect.

Today, the board released a statement from its Special Committee that was formed to evaluate this offer:

"The Special Committee was formed in order to evaluate the proposal made by Troy Lowrie, the Company's Chairman and Chief Executive Officer, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively, "Lowrie"), to acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the "Proposal"). The Special Committee has informed Lowrie that it has determined, with input from its advisors, that the terms of the Proposal are currently inadequate. In addition, the Special Committee has directed its financial advisors, North Point Advisors LLC, to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with the Company."

Cheers to the board! While I'm sure they'll earn the wrath of Mr Lowrie, they not not only turned down his offer but also invited others to come forward with competing bids.

What's unfortunate in this situation is the "discount" applied to this business due to Mr. Lowrie's involvement. Looking at their third quarter release, this company is seriously profitable, to the tune of $10million in EBITDA this year and maybe $5-6million in Free Cash Flow.

"Troy Lowrie, Chairman and Chief Executive Officer, stated, "We achieved solid operating results for the third quarter and first nine months of 2009. Despite a challenging economic environment, we generated nearly $14.0 million in revenues for the third quarter. The elasticity of our tiered venue model -- where a decline in revenues caused by fewer patrons at our high-amenity A clubs is offset by the increased margins generated at our more affordable B and C venues - in combination with improved cost efficiencies throughout the Company has allowed us to remain profitable, produce EBITDA margins of 17.1%, and generate free cash flow of $3.8 million for the first nine months of 2009."

Not mentioned there is the BIG debt load, of approximately $22million. VCG Holdings' EBITDA (Earning before interest, taxes, depreciation & amortization. Basically the money available to cover interest payments.) of about $2.4million covers the quarterly interest payments of $800k, but not by a huge margin. That said, their robust earnings could be used to pay down debt and increase Free Cash Flow. If Mr. Lowrie would simply get the hell out of the way, the "discount" in the stock price due to his meddling might disappear.

Copyright 2009 AlphaNinja

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