Red Alder Group Delivers Letter to Board of ClubCorp Holdings Urging Pursuit of Restructuring

Believes ClubCorp is Meaningfully Undervalued and has a Unique Opportunity to Maximize Value for all Shareholders

Urges ClubCorp to Move Immediately to Evaluate and Implement Conversion to a REIT and Spin-Off of Non-Real Estate Assets

Calls Upon the Board to Form a Special Committee to Explore Restructuring that is in the Best Interests of All Shareholders

Believes ClubCorp Could be Conservatively Worth Between $31 (No Incremental Leverage) and $36 (Appropriate Leverage) per Share upon Restructuring

Sep 29, 2014, 06:00 ET from Red Alder Group

NEW YORK, Sept. 29, 2014 /PRNewswire/ -- Red Alder LLC ("Red Alder") and ADW Capital Partners L.P. ("ADW") (the "Red Alder Group"), significant shareholders of ClubCorp Holdings, Inc. ("ClubCorp" or the "Company") (NYSE: MYCC), today announced that they have delivered a letter to the independent members of the Company's Board of Directors (the "Board"), the full text of which is included below, urging the Company to immediately pursue a restructuring transaction.  The Red Alder Group believes that the Company's conversion to a REIT and spin-off of its non-real estate assets to shareholders would enable the Company to increase dividends, lower its cost of capital and significantly enhance long-term shareholder value.  The Red Alder Group believes that the time is ripe for the Company to pursue this strategic alternative and has called upon the Board promptly to form a special committee so as not to allow the window of opportunity for this transaction to close.

The full text of the letter follows:

September 29, 2014

Independent Members of the Board of Directors c/o Mr. John A. Beckert, Chairman ClubCorp Holdings, Inc. 3030 LBJ Freeway, Suite 600 Dallas, TX 75234

Dear Independent Board Members:

Red Alder LLC ("Red Alder") and ADW Capital Partners L.P. ("ADW") (the "Red Alder Group" or "we") are significant shareholders of ClubCorp Holdings, Inc. ("ClubCorp" or the "Company"). We have made a sizable investment in ClubCorp because we believe the Company is materially undervalued. However, we believe the Company's Board of Directors (the "Board") can substantially increase shareholder value if it seizes a unique (but fleeting) opportunity to restructure the Company's operations. 

Our extensive due diligence on ClubCorp has furthered our initial view that management, the Board, and the current largest shareholder, KSL Capital Partners, LLC ("KSL"), have done a praiseworthy job nurturing ClubCorp from a financially troubled enterprise into North America's largest scale owner / operator of golf and country clubs with a brighter future than ever. ClubCorp now enjoys a 4-5x stronger market position than its closest peer in the highly fragmented ~4,000 North American golf and country club segment. ClubCorp and KSL have proven to be successful consolidators, culminating with the recent Sequoia acquisition. KSL's expertise as a premier investor in travel and leisure businesses and its significant Board representation have so far positioned the Company on a promising trajectory.

In particular, we laud CEO Eric Affeldt and his management team for carefully navigating the financial crisis and subsequently taking advantage of the resulting circumstances by buying distressed assets and leveraging the Company's best-in-class platform to make them valuable additions to the network. As long term investors, we have great faith in the operational abilities of current management. However, we believe that the Company's current corporate structure limits its ability to allocate capital effectively and maximize shareholder value.

The success thus far of KSL's ClubCorp investment and its positive broader track record are encouraging to us that reasonable and competent stewards of capital are involved and equipped to study and execute the corporate structure change we are calling for. We recognize private equity can have its limitations, though. Our research suggests that the fund that consummated the investment in the Company is nearing the end of its life. The recent secondary offering by KSL (taking its stake from almost two thirds to 51%) was multiple times oversubscribed and could have warranted a restructuring of the original transaction to allow far more shares to be sold. KSL clearly believes that ClubCorp's best-in-class fee simple real estate portfolio and operating company are worth substantially more than the public markets are currently assigning. Unfortunately, the current corporate structure will create, in our view, ongoing difficulties for other investors to see through the overhang of KSL subsequent equity sales to the robust real estate of the Company; in fact, the golf and country club real estate value was recently appraised at $1.1 Billion, essentially the entirety of the Company's current market capitalization and a dominant percentage of its enterprise value.

After consulting a range of real estate experts and legal advisers specializing in relevant corporate structure changes, we believe the optimal structure for ClubCorp is to convert into a real estate investment trust ("REIT") such as through an "OpCo / PropCo" structure.  Although composition of shareholder base would be a gating issue, from our direct experience with family-oriented publicly traded REITs, and through our study of other companies that have gone through similar conversions, we are confident that there are a number of established precedents for how the Company and KSL could work together quickly to resolve the remaining ownership issue.           

It is clear to us that a corporate restructuring will significantly enhance shareholder value. A restructuring will enable the Company to diversify its real estate investment portfolio by pursuing real estate acquisitions outside the Company's existing core business of golf courses and country clubs.  In addition, the Company will have the ability to partner with other golf course and country club operators to take advantage of opportunities within its existing core business in geographic markets where the Company has underperformed.  By combining the ability to diversify its real estate portfolio and pursue a wider array of business opportunities in its core business with the increased tax efficiency inherent in operating as REIT, the Company also should be able to increase dividends to its shareholders and lower its cost of capital.

To facilitate your review, we attach a basic financial model outlining the projected outcome of a proposed change, using the "OpCo/PropCo" structure for modeling purposes. As shown in the financial model, we believe a restructuring could yield equity values per share of $31 (assuming no incremental leverage) and $36 (assuming appropriate incremental leverage), offering shareholders approximately 65% to 90% upside, respectively, from the current stock price of $18.74.

The improving economy and looming rise of interest rates make us believe that any delay in implementing a corporate restructuring, including to allow KSL to further liquidate its position in the Company, would be ill-advised and against KSL's own economic interests. In our view, the Company must act now while the window to lock in attractive long-term fixed financing is still open. We believe the successful execution of the initiatives outlined in this letter will reward shareholders, many of whom have earned little return on their investment to date, and to whom the Board owes a foremost fiduciary duty.

Accordingly, we request that the Board immediately establish a special committee to explore all available options regarding a corporate restructuring.  Providing transparency on the formation of the special committee would underline to stakeholders the seriousness and urgency with which the Board determines to approach this matter. If the Company does not formally communicate to shareholders its expedited timetable, we believe it would be a clear signal to shareholders the Board is failing to act in a manner that is in its own best interest and would maximize value for all shareholders.

In conclusion, we believe that the Board has a unique and pressing opportunity to pursue a corporate restructuring to achieve a materially higher valuation for the benefit of all shareholders without commensurately increasing risk to investors. In fact, we believe that a properly valued equity currency in combination with attractive long-term fixed financing could serve to accelerate the Company's long-term consolidation plan and increase its ability to create significant shareholder value.  The confluence of the availability of the Company's tax loss carryovers and interest rates at unsustainably low levels makes the time for focus and action now.

We hope that the Company will take the required steps to capitalize expeditiously on this opportunity. We look forward to hearing your prompt response and working constructively with the Board.

Sincerely,

Schuster Tanger                                                                   Adam Wyden Red Alder LLC                                                                      ADW Capital Partners L.P. Managing Member                                                                Managing Member

 

Financial Appendix

Real Estate Analysis ($ in MM)

Real Estate Company "PropCo"

Management / Operating Company "OpCo"

PropCo EBITDA

$        143

OpCo EBITDA

$      142

ClubCorp Total Acreage (as of Sep 2013)

18,000

(-) Public Co Costs

(10)

Sequoia Acreage Purchased

7,000

PropCo Net Debt Split

85%

OpCo EBITDA

$      132

PF Acreage

25,000

PropCo Net Debt

$        755

Assumed Interest Rate

5.0%

Propco Net Debt Split

15%

ClubCorp Real Estate Appraisal (MM)

$   1,100

  (-) Interest

(38)

OpCo Net Debt

$      133

ClubCorp Value per Acre

61,111

  (-) Maintenance CapEx

0

  (+) Stock Comp.

0

Net Debt / EBITDA

1.0x

Implied Value of Total Real Estate

$   1,528

AFFO

$        105

  (/) Diluted Shares Out.

64

Implied Rental Rate

10.0%

AFFO / Share

$       1.64

Implied Rental Income

$       153

  (x) Payout Ratio %

90%

Public Company Costs

(10)

Dividend / Share

$       1.48

Property Company EBITDA

$       143

Net Debt / EBITDA

5.3x

UNLEVERED SCENARIO

Sensitivity of Various  OpCo & PropCo EV / EBITDA Multiples

Combined (2016E) = 

PropCo

EBITDA

$       285

OpCo

12.0x

13.0x

14.0x

15.0x

16.0x

5.0x

23.2

25.5

27.7

29.9

32.2

Net Debt

888

5.5x

24.3

26.5

28.7

31.0

33.2

Net Debt / EBITDA

3.1x

6.0x

25.3

27.5

29.8

32.0

34.2

6.5x

26.3

28.6

30.8

33.0

35.3

7.0x

27.4

29.6

31.8

34.1

36.3

7.5x

28.4

30.6

32.9

35.1

37.3

8.0x

29.4

31.7

33.9

36.1

38.4

Implied PropCo Valuation Metrics Pro Forma

12.0x

13.0x

14.0x

15.0x

16.0x

P / AFFO

9.1x

10.5x

11.8x

13.2x

14.6x

Div. Yield %

9.9%

8.6%

7.6%

6.8%

6.2%

LEVERED SCENARIO

Sensitivity of Various  OpCo & PropCo EV / EBITDA Multiples

Combined (2016E) = 

PropCo

EBITDA

$       342

OpCo

12.0x

13.0x

14.0x

15.0x

16.0x

5.0x

26.1

29.1

32.1

35.1

38.1

PF Net Debt

$   1,388

5.5x

27.3

30.3

33.3

36.3

39.3

PF Leverage

4.1x

6.0x

28.4

31.4

34.4

37.5

40.5

6.5x

29.6

32.6

35.6

38.6

41.6

7.0x

30.7

33.8

36.8

39.8

42.8

7.5x

31.9

34.9

37.9

40.9

44.0

8.0x

33.1

36.1

39.1

42.1

45.1

Implied PropCo Valuation Metrics Pro Forma

12.0x

13.0x

14.0x

15.0x

16.0x

P / AFFO

8.8x

10.2x

11.6x

13.0x

14.4x

Div. Yield %

10.3%

8.9%

7.8%

6.9%

6.3%

 

About Red Alder LLC Red Alder LLC is an SEC-registered investment adviser based in New York City that focuses on event-driven, value-oriented investment opportunities.

Investor contacts: Schuster Tanger (212) 257-4288 schuster.tanger@red-alder.com

About ADW Capital Partners L.P. ADW Capital Partners L.P. is a value-driven investment fund founded in January 2011 that utilizes a concentrated, long-term, and tax-sensitive strategy focused on capital preservation.

Investor contacts: Adam Wyden (212) 920-9634 adam@adwcapital.com

SOURCE Red Alder Group