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WEST and the JBX Exchange Offer

Following up on my post from October 6th, Western Sizzlin Corporation (WEST) announced yesterday that it has commenced an exchange offer for up to 680,500 shares of JBX. The exchange ratio for the offer is 1.607 shares of WEST common stock for one share of JBX common stock and is set to expire at 5 p.m. ET on November 13. WEST already owns 100 shares of JBX so based on the exchange ratio for the offer, if the maximum 680,500 JBX shares are exchanged, WEST would own about 1.2% of JBX’s shares outstanding.
As I mentioned in my past post, the CEO and controlling shareholder of WEST is Sardar Biglari. Mr. Biglari holds a 35% interest in WEST through The Lion Fund L.P., a private investment partnership. Mr. Biglari is the general partner of The Lion Fund L.P., which is an activist hedge fund. WEST and The Lion Fund have bought positions in several public restaurant companies that were perceived to be value plays. In the past, Mr. Biglari has been very public about putting pressure on senior management of these public companies to unlock shareholder value. JBX, however, is already a value stock trading below 5x NTM EV/EBITDA.

Mr. Biglari’s intentions are still widely unknown. Based on the prospectus, following the offer, WEST “intends to evaluate its investment in the Jack in the Box common stock on a continual basis and may, from time to time, communicate with Jack in the Box management, members of Jack in the Box’s board of directors and other stockholders of Jack in the Box. Following the consummation of the offer, Western may, from time to time, acquire additional shares of Jack in the Box common stock, dispose of shares of Jack in the Box common stock or formulate other purposes, plans or proposals regarding Jack in the Box or the Jack in the Box common stock, to the extent deemed advisable in light of its general investment policies, market conditions or other factors… Except as indicated in this prospectus, neither Western nor any of Western’s subsidiaries or affiliates has any current plans or proposals which relate to or would result in (1) any extraordinary transaction, such as a merger, reorganization or liquidation of Jack in the Box or any of its subsidiaries, (2) any purchase, sale or transfer of a material amount of assets of Jack in the Box or any of its subsidiaries, (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of Jack in the Box or any of its subsidiaries, (4) any change in the current board of directors or management of Jack in the Box, (5) any other material change in Jack in the Box’s corporate structure or business, (6) any class of equity security of Jack in the Box ceasing to be authorized to be quoted in an automated quotation system operated by a national securities association or (7) any class of equity securities of Jack in the Box becoming eligible for termination of registration under the Exchange Act.”

To be clear, WEST is an illiquid, holding company with no real brands. Its revenues have declined for the last 3.5 years, resulting in a net loss of $0.13 per share in FY07 and a net loss of $2.14 in the 6 months ended June 30. JBX, on the other hand, has experienced revenue growth over the same timeframe (and longer), leading to increased operating income growth (growth only slowed 0.3% in the forty weeks ended July 6).

On October 3, the last full trading day before WEST announced its intention to commence this offer, the closing price of WEST was $14.10 and the closing price of JBX $19.37. Based on these closing prices and the exchange ratio in the offer, the WEST offer had a value of $22.66 per share of JBX, which represented a 17% premium over JBX’s $19.37 closing price.

Since then, however, WEST’s stock price has declined rather significantly and closed on October 14 (the last full trading day before date of the prospectus) at $10.50 relative to JBX’s $18.49 closing price. Based on these more current prices, the WEST offer has a value of $16.87, which represents an 8.7% discount to JBX’s price. If JBX shareholders really wanted to own WEST at those prices, which I would be hard-pressed to understand, they would be better off selling their shares on the open market for $18.49 and buying 1.8 shares of WEST on the open market versus the offer of 1.607 shares. My guess is that no shares will be tendered.

HSY Quarterly Conf.Call just ended: Key Takeaways

I just got off the HSY call. Some of the main concerns for FY09 stem from the company’s significant price increase in August (up an average of 10% in U.S. business). In FY09, HSY is raising both its everyday price points and its promotional price points. In the past, when HSY has raised its prices, it has typically not raised its promotion price points. Management’s lowered FY09 2%-3% revenue growth (from long-term 3%-5% range) is based primarily on the fact that they could see lower volumes as a result of the higher prices and some shift in mix between products sold at everyday price points vs. promotion price pts. They are also expecting revenues to be hurt slightly by currency in FY09, but they don’t have much emerging mkt exposure, which they said is a good and bad thing (only good b/c they won’t be as hurt by FX YOY).

There were also a lot of questions around commodity costs in 2009 because the company recently hedged a lot of their costs (management won’t specify what % of costs are hedged) and cocoa and sweetener prices have since come down. Commodity cost increases are expected to be higher in FY09 vs. FY08. Management really won’t give too many details on this front except to say that from where they sit they are comfortable having greater visibility on 2009 as a result of their hedging strategy.

They are seeing improvements in volumes on the core brands they have increased advertising behind. Hershey Milk, Reese’s, Twizzlers were all up mid sd. Refreshment, snacks and Kisses brand are still all underperforming.

In FDM, ex convenience, market share was flat for the quarter. In the last 4 weeks (first month of 4Q), HSY gained share in the c-store category for the first time in 2 years. Company attributes these improved share trends to their increased retail coverage efforts.

They are seeing some slowdown in the overall premium chocolate category, but they have little exposure so although it is bad for the category, they think is somewhat of a positive for their overall core brands.

Kerry Bauman
Senior Analyst

Eye On Obamerica, Part 1: Unionization and Wage Inflation

We watched the final Presidential debate last night and we won’t bore you with our interpretation, but the facts suggest that Obama increased his lead this morning as he is now trading at 84.6 on Intrade (www.intrade.com) versus McCain at 15.3. As we hammered home in some detail yesterday, it is likely the Obama and the Democrats will win on November 4th and win big. As part of our Obamerica theme, Tood Jordan posted yesterday on his portal about the potential union and wage implications of an Obama presidency, which we have reprinted below. This is a key theme that you should be focused on going into the next four years of Obamerica.


Every consumer analyst needs to start preparing for a pro-union Senate, House, and President. Start by analyzing HOT’s margins.
“We will pass the Employee Free Choice Act. It’s not a matter of if, it’s a matter of when.” – Barack Obama

“Madam Speaker, I rise today in support of the Employee Free Choice Act, because the right to organize is essential to the path to prosperity for all Americans.” – Speaker of the House Nancy Pelosi

“Every single Senator ought to support this bill.” – Senate Majority Leader Harry Reid

These quotes should remove any doubt. If Obama is elected President, the Employee Free Choice Act will become law. Whether or not the removal of secret ballots in deciding union elections makes employees more free is not important. Since 1989, unions have contributed almost $500 million to political campaigns. Over 90% of that cash has gone to Democrats. The favor will be paid back by an Obama administration and a Democratic congress.

So what does this mean? The elimination of secret ballots will make it much easier to unionize. Secret ballots are the cornerstone of any modern democracy for a reason. People can vote without the pressure that an open petition would apply. More unions = higher wages and benefits for hotel, casino, and leisure companies to name just a few.

Margins are going down over the next few years and not just because the top line is under pressure. Sorry to pick on Starwood but the hotel industry is pretty easy to analyze in this regard. The consensus EBITDA margin estimate for HOT declines only 80 basis points in 2009. With likely RevPAR declines of at least low to mid single digits, this projection is laughable.

A note to analysts: labor costs are going up not down.

Daryl G. Jones
Managing Director

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Joe The Plumber

“It is important to foster individuality, for only the individual can produce new ideas”
-Albert Einstein

After the sharpest single-day US stock market decline since the 1987 crash there better be some great long ideas out there. Crisis creates opportunity; creative destruction is taking hold; and after having our 3rd consecutive up day in the ‘Hedgeye Portfolio’, we’re ready to roll here this morning at Research Edge.

If you don’t like the feeling of waking up to a counterparty that is confident in this environment, my team is definitely not for you. We don’t do well hanging out in the hallways of investor conferences asking everyone else what their best ideas are – it’s hard enough to find the time to do all of the research that is required to execute on our own ideas.

Having been there for the last decade, I think there are three basic things that the “buy side” wants: speed, accuracy, and ideas. Be first and be right; rinse and repeat. That’s called “idea” generation, and Wall Street pays a premium for it. The key to building that intellectual property is to simply have your own process and your own ideas. It is critical to “foster individuality”. If you can’t stand alone, you’re probably best served to get out of the game until the next bull market begins.

Jack Bogle at Vanguard, amongst others, has proven, that it is very rare for a money manager to outperform the market across economic cycles. Investment styles come and go, and so do the faces and the names. That’s not a contrarian point. That’s just the math. The reality is that “Joe The Plumber” has just as good a shot as over 90% of us of at being right on the market when volatility is low. I love plumbers. I’m glad that Obama and McCain do to. They gave Joe at least a dozen shout outs in the final Presidential debate last night! In fact, plumbers are in relatively low supply right now, and will probably be rightly paid more in 2008 than your run of the mill “hedgie”.

Rather than watching yesterday’s market swoon recaps on CNBC, or the battle of the “who knows less” about economics in last night’s debate, Joe and his kids were probably watching the Phillies go to the World Series last night. Rather than waking up to his portfolio manager pointing fingers at him this morning, the worst thing Joe might be waking up to is something that really smells… but hey, at least he can call it for what it is. His stress isn’t in the area code of Wall Street’s right now, and it shouldn’t be. If ‘Investment Banking Inc’ owned up to what they had in their sewage system 12 months ago, we all might have less pressure on our temples. Never mind this “Level 3 Asset” stuff – if it smells like one, it usually is one… Joe calls it a liability.

The best idea I have for you this morning is to start buying stocks again, but do so patiently. The S&P 500 closed at 907, and my downside target line has moved to 854.11 this morning. You have 6% downside from here, and you should be able to leg into our or your team’s “best ideas” at a measured pace. We have an 80% position in cash that is open to buy this morning. We are accountable for every trade that we have on our sheets. If we liked it on the long side yesterday, we better like it more today, because it’s cheaper. Our gains on the short side, as always, are meant to be taken.

Our top 3 domestic stock ideas are: BMY, HSY, and PENN. All of these stocks are cheap. All of these companies have dominant market shares in their respective businesses. All of these tickers were down yesterday. Buy low.

Our top 3 global ETF ideas are: FXI, EWH, and EWG (China, Hong Kong, and Germany). All of these ETFs were down yesterday. All of the shorts that we have against them (Japan, India, and the UK) were down more. Some might actually call that “hedged” portfolio construction. Genius, I know. Sell high, buy low.

No, this business isn’t rocket science. Yes, those who told you they were are probably having a bad week. Proactively managing risk includes shunning leverage. Waking up every morning like Joe the Plumber does includes smelling the coffee before he has to deal with the smelly stuff for what it is. The story telling is over folks. The accountability cards are on the table, and the YouTube split screen on McCain & Obama last night is a metaphor for this game’s new rules. Speed and accuracy of independent and transparent ideas will win.

Best of luck out there today,

Point Counterpoint: LIZ, COLM, TBL, WRC, GES.

I focus on the fundamental research call and Keith drills the timing and sizing. We don’t always agree -- which results in debate that ultimately boosts our batting average. KM called out a few names to me over the past 24 hrs, and we’re in perfect synch on these puppies.

KM: LIZ finally washed out, buy it under 10.07, patiently.

BM: The sell off in conjunction with JNY’s miss makes sense. But LIZ is cutting capex by more than people think in 2009, and SG&A cuts will follow. This will become apparent in 1Q. Maybe a bit early now, but there’s well over $1 in EPS power here.

KM: COLM looks like TBL, a buy in the washed out hole.

BM: I like TBL better from a fundamental standpoint, and still think it is more likely than not that it will be owned by another company in 12 months. COLM has structural challenges given the incremental growth it is pushing in sportswear -- a crowded and commoditized category. But COLM has been gaining share in the sporting goods channel over the past month, which is one of the first times in a while I recall COLM do anything other than lose share.

KM: GES looks the same as WRC, wackamole on all strength. (Note: KM noted this to me post close yesterday – before Wednesday’s downward move. He’s still bearish).

BM: I’ve been vocal on both of these names, but fundamentally view WRC as being much worse off than GES. I still can’t get over how WRC can have some of the poorest returns and brand portfolio, yet among the highest multiples in the group.


My partner Brian McGough sent me an email noting that the sell side seems to make only group calls in the gaming sector. Interesting insight that is not lost on me. Looking at the chart it is clear that the group has been lumped together this year, with the exception of WYNN, by the buy side as well.

Year to date, the average gaming operator stock has declined 75%. WYNN is down “only” 56% on the year and ISLE, which had been absolutely demolished since late 2006, is down 66%. The remaining stocks have dropped in a fairly tight band, ranging from -74% (PENN) to -89% (LVS).

What makes sense to me is that during a credit crisis, investors hammer one of the most heavily leveraged sectors in consumer land, gaming. No doubt the credit freeze is partly, if not mostly responsible for the gaming carnage. What doesn’t make sense to me is that, except for WYNN, the liquidity haves are dumped in with the have nots. PENN and BYD should be outperforming along with WYNN. PENN is actually underleveraged and maintains huge liquidity. BYD maintains average leverage but will de-lever at a faster rate than the industry. BYD’s liquidity is outstanding with $2.4bn in availability on its credit facility, no significant cash needs, and no debt maturities until 2013.

Divergence will ultimately occur. Best to be on the right side of this liquidity trade.

PENN and BYD lumped in with the highly leveraged and illiquid

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