Mill Road calls for a sale of Big Lots. Here’s what we might learn from the firm’s earlier deals

Business: Big Lots operates as a retailer in the United States. The company offers products under various merchandising categories, such as furniture, seasonal, soft home, consumables and food. As of March 15, 2021, it operated 1,410 stores in 47 states and an e-commerce platform.

Stock Market Value: $977.3M ($34.22 per share)

Percentage Ownership: 5.14%

Average Cost: $20.10

Activist Commentary: Mill Road Capital is an investment firm focused on investing in and partnering with publicly traded micro-cap companies in the U.S. and Canada. The firm was founded in 2004 by Thomas E. Lynch, who began his investing career at Blackstone. As of their latest 13F filing, Mill Road reported managing $300.74 million across 27 different positions. Mill Road has made 30 previous 13D filings and took Item 4 action in 14 of those situations.

On March 15, Mill Road sent a letter to the company’s shareholders announcing that it is calling on the company to pursue a sale, which it believes could happen for $55 to $70 per share (a premium of 72% to 119% over the closing price on March 14). Mill Road also praised the company’s management team and their successful implementation of a strategic plan.

Mill Road is not an activist investor, and this is far from shareholder activism. Mill Road sent a letter to the company stating that they believe its management team has done a great job over the past several years and has improved the company’s long-term outlook. They specifically cited that: (i) the Broyhill ($700 million in sales) and Real Living ($600 million in sales) brands could each reach over $1 billion in sales, (ii) the e-commerce penetration can go from 5% to 15% over time, and (iii) the long-term growth and margin outlook implies a 150% to 320% increase in annual operating income. Yet, despite this positive operational success and outlook, Mill Road urges the board to do a sale-leaseback and make “full use of the company’s existing debt facility” to generate low-cost financing that can be used to finance an acquisition of the company.

This is not Mill Road advocating for the best long-term interests of shareholders but urging the board to pursue a short-term-minded agenda to boost stock price quickly. This is not a letter on behalf of long-term shareholders, but a love letter to prospective leveraged-buyout acquirers to boost Mill Road’s return on this investment at the expense of potential long-term shareholders as the firm exits. 

Mill Road has owned 4.95% of the company since the fourth quarter of 2020. They have an average price of $20.10 per share and have been purposely quiet during their holding period, making sure they stayed under the 5% 13D threshold. When outstanding shares decreased because of stock buybacks, in the second quarter of 2021, Mill Road sold down its position to stay below 5% and prevent having to file a 13D. Now, it increases its beneficial ownership by 29,393 shares of its 1.4 million share position just to go over 5% so it can file a public 13D to get a bump in the stock price and/or attract private equity interest. 

Maybe Mill Road would even participate in an acquisition to wrest some of the future value away from shareholders. They have a history of offering to acquire their portfolio companies, and they were successful at (i) Rubio’s Restaurants, Inc (acquired in 2010), (ii) PRT Growing Services, Ltd (acquired in 2012), (iii) R.G. Barry Corp. (acquired in 2014), (iv) Skullcandy (acquired in 2016), and (v) Mother’s Market & Kitchen (acquired in 2016). This is not shareholder activism, but it is what gives shareholder activism a bad name.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.