May 5, 2011 |
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Dear Fellow Mac-Gray Stockholder: |
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TIME FOR CHANGE: VOTE THE GOLD PROXY CARD AND |
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PROTECT YOUR INVESTMENT! |
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On April 8, 2011, TUC Investor Value Creation Group announced its nomination of three independent directors to replace those incumbent directors whose terms expire at the 2011 Annual Meeting of Stockholders. We are NOT seeking control of Mac-Gray. Our directors, if elected, would constitute a minority of the Board of Directors and will work diligently on behalf of all stockholders to improve Mac-Gray's financial and operational performance, refine capital allocation strategies, adopt corporate governance policies consistent with "best practices" and explore strategic opportunities to create shareholder value. |
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As Mac-Gray stockholders for more than 11 years, we believe that the incumbent directors have overseen a flawed acquisition strategy that has resulted in a transfer of nearly $7/share, or over 40% of YOUR equity value to the sellers of companies acquired by Mac-Gray. If the Board had insisted on more reasonable prices for those acquisitions, we believe that value would have remained with YOUR company, and that Mac-Gray's stock price would be significantly higher. Additionally, we believe that the current Board has taken steps to disenfranchise independent stockholders by implementing and maintaining corporate governance policies that are inconsistent with "best practices," and that stockholders have resoundingly rejected. Despite what they say, we believe their actions demonstrate that this Board does not respect the views of the stockholders. For these reasons, we believe it is TIME FOR CHANGE on the Mac-Gray Board, and urge you to use the enclosed GOLD proxy card to vote TODAY. |
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IMPROVED BOARD OVERSIGHT REQUIRED TO |
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PROTECT YOUR INVESTMENT |
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Mac-Gray's Operating Results Show a Long-Term Pattern of Underperformance |
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In their April 21 letter to you, the incumbent directors claimed that "by all financial measures, your current Board and management team have delivered substantial shareholder value." |
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Unfortunately, the Board's statement does not hold up against the facts. We believe that Mac-Gray's "acquisition-at-any-price" strategy has resulted in declining returns on invested capital (ROIC), a critical metric in our opinion. |
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Exhibit 1: Mac-Gray's Declining Returns on Invested Capital, 2005 - 2010 |
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(Photo: http://photos.prnewswire.com/prnh/20110505/CG96133-a) |
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We believe that the primary driver behind Mac-Gray's dwindling return on invested capital is more than $300 million of high-priced acquisitions. While we believe that there are material cost savings opportunities to be realized from the incremental route density and fixed-cost leverage that occur after the consolidation of route laundry operators, we also believe that it is the responsibility of the Board (as the ultimate gatekeepers of the company's resources) to ensure that Mac-Gray does not pay the sellers of acquired companies for the majority for those cost savings. We note that the Board has approved and supported an EBITDA-driven compensation structure that incentivizes management to complete acquisitions even if such acquisitions have low consolidated returns on invested capital. |
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Our analysis of the multiples paid for Web East, Web West, Hof, and ALC suggests that ALL OF THESE ACQUISITIONS were consummated at EV/EBITDA multiples 22% to 146% more expensive than Mac-Gray's own valuation on the date of close. In our analysis in Exhibit 2 below, we calculate that had Mac-Gray simply paid the equivalent EV/EBITDA multiple that it was trading for at the time of each of these acquisitions, the company would have spent $96 million less on these acquisitions, representing nearly $7/share (based on approximately 14 million shares outstanding), or more than 40% of the current market cap! |
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Exhibit 2: Mac-Gray Acquisitions, 2004 – 2008 |
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(Photo: http://photos.prnewswire.com/prnh/20110505/CG96133-b) |
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Exhibit 3: Mac-Gray Acquisition Prices: Actual vs. Implied Price at Mac-Gray Multiples |
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(Photo: http://photos.prnewswire.com/prnh/20110505/CG96133-c) |
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Instead, Mac-Gray paid multiples for each of these acquisitions that the public market has NEVER ascribed to Mac-Gray: |
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Exhibit 4: Mac-Gray EV/LTM EBITDA Multiple vs. Acquisition Price EV/EBITDA Multiples; |
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2001 – April 2011 |
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(Photo: http://photos.prnewswire.com/prnh/20110505/CG96133-d) |
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The Board has suggested that change is not warranted because of the recent run-up in the company's stock price. We believe, however, that the Board's performance should be judged by the wealth creation that has resulted from the decisions it has made. Our analysis in Exhibit 5 shows what Mac-Gray's share price performance would have been had the EV/EBITDA multiple stayed at a constant 5.0x level for the past 10 years – roughly the average valuation over this time frame. In fact, the stock would have only appreciated at a 1.2% annual rate from 2001 – 2010 and 3.4% from 2006 – 2010. This suggests that SUBSTANTIALLY ALL OF MAC-GRAY'S RECENT STOCK PRICE PERFORMANCE CAN BE ATTRIBUTED TO MULTIPLE EXPANSION. We believe that multiple expansion is simply a reflection of the supply and demand for the company's stock – NOT of the quality of the Board's stewardship, operational improvements or execution of an articulated strategic plan. We also note that these implied rates of appreciation are below the returns that investors could have realized by investing in risk-free assets over the same time period, indicating that the Mac-Gray Board has presided over capital allocation decisions that failed to meet the company's consolidated cost of capital. |
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Exhibit 5: Mac-Gray Acquisition Prices: Actual vs. Implied Price at Mac-Gray Multiples; |
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2001 – 2010 |
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(Photo: http://photos.prnewswire.com/prnh/20110505/CG96133-e) |
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Unfortunately, relying on continued multiple expansion is not a sustainable strategy for creating long-term shareholder value. We are very worried about the future value of our investment in Mac-Gray without proper oversight from the Board. |
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IMPROVED BOARD OVERSIGHT REQUIRED |
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TO PROTECT YOUR INVESTMENT Mac-Gray's owners deserve a Board that is accountable to shareholders |
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At the 2010 Annual Meeting, stockholders representing the majority of shares outstanding voted to declassify the company's Board of Directors and to redeem all rights outstanding under the company's shareholder rights plan (remove the "poison pill"). In an October 2010 news release, the company announced that the Board had elected to maintain both the classified board structure and the poison pill, despite the results of the vote. The Board also continues to maintain a policy that does not allow shareholders to call special meetings. We note that maintaining these corporate governance policies has disenfranchised stockholders by eliminating the ability for stockholders to hold ALL directors accountable for their actions and performance on an annual basis. In addition, we believe that Mac-Gray's current corporate governance policies make it more difficult for potential transactions to occur that would deliver maximum value to shareholders. |
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We believe that a Board that EXPLICITLY DISREGARDS SHAREHOLDER WISHES is not working for you, the stockholders – the true owners of the company – and we urge you to HOLD THEM ACCOUNTABLE NOW by voting for the GOLD proxy card right away. |
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TUC INVESTOR VALUE CREATION GROUP'S NOMINEES ARE |
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HIGHLY QUALIFIED AND WILL WORK |
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TO CREATE VALUE FOR ALL STOCKHOLDERS |
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We believe that our nominees will bring extensive executive level experience and independent oversight to Mac-Gray's Board of directors. Mr. Drexler has more than 30 years of board and executive experience, including CEO, CFO, and COO roles at various industrial and manufacturing companies, including board roles at former Fortune 500 company Allied Products Corporation, Quality Products, Inc., ABC Rail, Trausch Inc., ProGard LLC, Restoration Clearners LLC and Kenrich Holdings. Mr Soenen has current and past board experience on four public company boards including FTD Group, Inc., OptionsExpress, Inc., Rewards Network, Inc. and Youbet, Inc. Mr. Soenen held both the COO and CEO role at FTD Group, Inc. until its roughly $732 million sale to United Online in April 2008. In addition, Mr. Soenen brings valuable investment banking and buy-side investment experience to our slate. Mr. Kovler is an investor and stockholder of Mac-Gray for more than 11 years and is highly motivated as the owner of approximately 2.9% of total Mac-Gray shares outstanding to enhance value for all stockholders. |
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Our nominees have the financial and operational expertise required to evaluate opportunities to create shareholder value, including potential acquisitions and divestitures, operational efficiencies and capital allocation strategies. Our nominees will also advocate for corporate governance policies consistent with "best practices." |
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TUC INVESTOR VALUE CREATION GROUP URGES YOU |
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TO VOTE THE GOLD PROXY CARD NOW |
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Mac-Gray's Board has overseen an acquisition strategy that we believe has resulted in long-term underperformance of key financial metrics. At the same time, the Mac-Gray Board has not listened to shareholders' concerns on corporate governance. We believe now is the time for stockholders to vote the GOLD proxy card to elect our highly qualified nominees to the Board. |
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This is your best chance to effect change at Mac-Gray. Make your vote count NOW. |
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Sincerely, |
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Richard Drexler Benjamin Kovler |
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Michael Soenen TUC Investor Value Creation Group, LLC |
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