From the Wires
ADW Capital Seeks Strategic Alternatives Process to Pursue Immediate Sale of PAR Technology
By: PR Newswire
Oct. 11, 2018 08:05 AM
NEW YORK, Oct. 11, 2018 /PRNewswire/ --
Dear Board and Management of PAR Technology Corporation (NYSE:PAR),
As you are aware, ADW Capital Management LLC ("ADW Capital") is the advisor to entities that beneficially own 1,623,000 shares of PAR Technology (NYSE:PAR) or (the "Company") representing approximately 10.3% of the Company's outstanding shares. We made these purchases after completing an exhaustive due diligence process in which we concluded that the Company trades at a deep discount to the sum-of-its-parts excluding Brink, its burgeoning cloud-based SaaS business that we believe could be worth billions of dollars over time. While we recognize that the Company has generated negative shareholder returns since going public 36 years ago and has a track record of serial strategic blunders, we expected the current members of the Board of Directors (many of whom were recently appointed) to take steps to insure a solid future for the Company. Several months after we acquired our position in the Company it became apparent to us that the Company was making little progress towards funding Brink and pursuing other avenues to narrow the disconnect in valuation. Accordingly, we approached the current Board of Directors with a detailed plan to maximize the potential of the Company's assets. It was our sincere hope that the Company would be open to act in a way that might help dispel its poor history of value destruction. While external discussions helped reinforce our view that Brink and the legacy assets within PAR are worth multiples of the current market cap, our conversations with representatives of the Company have highlighted our impression of internal dysfunction endemic in the Company. We also strongly believe that the Company lacks the resources to maximize shareholder value by executing on a strategy to both finance Brink and restructure/divest its other businesses profitably. As a result, we believe the Company's only path to maximize shareholder value is to pursue an outright sale of the entire Company immediately.
Strategic Blunders, Mismanagement and Irresponsible Decision Making
We ask this Board of Directors to closely review its history of s strategic errors and poor decisions to truly recognize its abysmal track record. A look at the corporate governance issues in the past 5 years speak to the significant dysfunction in this Company:
The list goes on…
Before our involvement, since taking this Company public 36 years ago, John Sammon's leadership had produced a total shareholder return of roughly -55% while the S&P returned over 5,500%. Clearly, Mr. Sammon's failure is not limited to his ineptitude in leading a Board of Directors, his shortcomings as CEO also speak to the poor quality of his decision making. Our due diligence suggests that while Mr. Sammon is no longer CEO of PAR, he has been micro-managing the Company and has remained very active in strategic decision making. A Board of Directors that allows such behavior is utterly irresponsible.
The current management team continues John Sammon's legacy of poor performance. Since taking the CEO role in 2017, Don Foley has demonstrated a severe lack of qualifications to be running this Company. During our discussions, we were surprised to find out that Mr. Foley spent his time running the Company from his home in Potomac, Maryland. How can the CEO of a public company that is in the midst of transitioning from "old tech" to "new tech" be effective 400 miles away? What is even more worrying considering this Board understands the importance of growing Brink, is that Don Foley has no experience running a software company. This Board's irresponsible decision making needs to stop now.
Insular Board of Directors and Self-Inflicted Damage
In mid August 2018, we provided this Board of Directors with a detailed plan of raising capital at the Brink subsidiary level in order to capitalize on Brink's growth opportunity and allow it to effectively compete given that Brink has been strained for resources relative to its peers. Simply put, we believed that a subsidiary financing created a new paradigm where only Brink could use/spend the capital that was invested and establish separate governance from the Company. We explicitly stated our opposition against a capital raise other than that at the Brink level because we believe that the Company's Board of Directors can NOT BE TRUSTED to invest capital given its abysmal track record.
Moreover, financing at the Brink level provided a number of benefits to the Company's other subsidiaries. Firstly, those subsidiaries would have no longer been responsible for funding Brink's growth – or to our later surprise we found that those other subsidiaries were in fact not funding Brink's growth but rather the Company's loss leading hardware and corporate infrastructure business. With a substantial amount of capital devoted solely to Brink, management could have focused on operationally improving the performance of the Company's other subsidiaries while also exploring ways to right-size its corporate G&A, automate processes, and explore strategic alternatives to maximize the value of these other subsidiaries. We believed a subsidiary financing would have brought new rules, new management, and accountability to an organization that today has little.
The Company's shocking failure to best position Brink for the years ahead was made abundantly clear throughout our discussions. A look at the latest earnings report shows the Company has been drawing on its revolver to fund a bloated corporate overhead instead of right-sizing itself and making legacy operations profitable to feed Brink's growth – a scathing indictment of how fiscally irresponsible and reckless we believe that this Board's conduct has been. It is clear to us that this management team is unable to take the bold actions necessary to restructure the Company – in fact, due to the bloated overhead costs, we believe the Government and Hardware segments are generating negative EBITDA. Clearly, this Board of Directors is on a path to self-destruction, which we believe dilutes the value of Brink with or without a subsidiary financing.
It is now too late for this Board to do a "180", the damage has already been done. Simply, every day that passes, as Brink continues to gain value with new bookings and installed units, the delta between the Company's share price and its intrinsic value becomes larger. We believe it would be irresponsible to let this Board of Directors make any further strategic decisions absent a sale of the entire business. It is evident that there is a clear path for Brink to become a multi-billion dollar business but we do not believe that this Board of Directors and management have what it takes to ensure Brink reaches its full potential.
Brink and The Value of PAR's Assets
For all of the reasons stated in this letter, we urge the Board of Directors to initiate a sale process immediately. We set forth below why the Company could be of significant interest to a strategic and why we believe that the assets within the Company are worth multiples of today's market cap:
Firstly, the empirical evidence of how undervalued Brink is within the Company is about as damning as it gets. While remaining neglected within the corporate umbrella, Brink's impressive growth with de minimis capital investment relative to its peers speaks for the quality of this asset – from the time it was acquired in 2014, installed units grew from 400 to over 7,000 today and 10,000 expected at year end. What's even more compelling is that Brink is the only proven enterprise solution that has successfully supported large scale multi-unit chains. Brink's customer base, which includes: Five Guys, Dairy Queen, Arby's and more – have all praised the system. While we believe management's target of 34,000 installed units by 2020 may end up looking conservative, it still highlights the value of this asset. We assume monthly ARPU will be roughly $250 including mandatory $50 monthly support – on 34,000 booked/installed units in 2020, that is over $100mm in SaaS revenue exiting 2020. Based on current "growthy" publicly traded SaaS companies, we believe this business could be worth in excess of $1 Billion today.
While the SaaS component of Brink is extremely compelling in itself, we believe an even larger opportunity lays in payments. According to our research, Toast, one of Brink's peers – has a 100% penetration rate on merchant processing for its POS customers and captures over 50bps of net revenue on the transaction volume that flows through their system. If we assume that Brink scales to a conservative 50% penetration rate on its customers – 50 percent of 34,000 in 2020, we believe that it can also capture ~50bps on the $1.5 million/per restaurant of transaction volume – which could yield as much as $130 million in EBITDA. This business could be worth as much as $1.8 Billion to $2.6 Billion at scale.
If Brink accomplishes its near-term growth objectives and capitalizes on the payments opportunity, we estimate this business could be worth $3bn by 2020 and ascribes zero value to the Company's legacy assets. Therefore, any capital raise at the holding company level today would be massively dilutive at an ~300 MM market capitalization and if the Board of Directors approves a value destructive transaction such as this, we would view it as a clear breach of the Board of Directors' fiduciary duties and would hold each director personally responsible for the value destroyed. Although a transaction such as this would be a continuation of John Sammon's 36 years of adventures in corporate value destruction!
The most attractive part of owning shares in the Company today, is that at these levels, investors are getting Brink for free – we believe that the legacy assets within the Company are worth the current market cap.
The Company's current share price is a clear indicator the market is factoring in a "John Sammon / Don Foley" discount.
Path Forward: What is Right for the Company
The Board of Directors' choices regarding capital allocation reflects a decision-making process that is based on a sentimental agenda and its continuing to finance a massive and bloated corporate overhead makes no sense from a strategic and financial perspective. Even more disheartening is that the Board of Directors has stymied growth in Brink by funding these losses and focusing on other things like family run fitness clubs. This Board of Directors and management team have denied the opportunity to "turn the ship" too many times – giving this Board of Directors another chance reminds us of the old adage: "the definition of insanity is doing the same thing over and over again and expecting different results."
Bluntly speaking, by denying its failures and remaining complacent, we think the Company is offering competitors the opportunity to "catch up" given they are raising capital at unprecedented valuations and investing heavily in both their product and sales & marketing. While it is clear that Brink has a significant head start, in order to maintain growth and market share, we urge this Board of Directors to FINALLY do what is right for all its stakeholders and proceed with a sale of the Company immediately.
ADW Capital Partners, L.P. and its affiliates are the largest outside shareholders in the Company's common shares and urge the board to take our recommendations seriously. We look forward to hearing your response.
Adam D. Wyden
Managing Member of the General Partner,
Cautionary Statement Regarding Forward-Looking Statements:
SOURCE ADW Capital Partners, L.P.
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