The
Committee to Enhance Denny's Nominates Highly Qualified Independent Directors
for Election to Denny's Board to Rejuvenate Struggling Restaurant
Chain
Companies: Denny's
Corp.
Press Release Source: The
Committee to Enhance Denny's On Tuesday March 2, 2010, 7:00 am EST
CHICAGO,
March 2 /PRNewswire/ -- The Committee to Enhance Denny's, headed by Oak Street
Capital Management, LLC and Dash Acquisitions, LLC, announced today that it has
notified Denny's Corporation (Nasdaq:DENN - News) of its
intention to nominate three highly qualified individuals for election to the
Board of Directors at the Company's 2010 Annual Meeting of Shareholders.
The members of the Committee collectively own approximately 6.5% of
Denny's outstanding shares.
The
Committee's three independent director nominees are Patrick H. Arbor, Jonathan
Dash and David Makula. The relevant portions of their biographies are set
forth below.
Patrick H. Arbor is a director
of Macquarie Futures USA Inc., a Futures Commission Merchant and clearing member
of the Chicago Mercantile Exchange and other exchanges. Mr. Arbor is a
long-time member of the Chicago Board of Trade, the world's oldest derivatives
exchange, and served as its Chairman from 1993 to 1999. During that
period, Mr. Arbor also served on the Board of Directors of the National Futures
Association. Prior to that, he served as Vice Chairman of the Chicago
Board of Trade for three years and as a director of the Chicago Board of Trade
for ten years. Mr. Arbor's extensive experience serving on the Board of
Directors of the Chicago Board of Trade and a wide-range of other public and
private companies has given him a strong understanding of corporate
responsibility and corporate governance.
Jonathan Dash is the President
of Dash Acquisitions LLC, an investment management firm. He is a director
of Western Sizzlin Corporation, a publicly-traded restaurant chain with 102
restaurants. He is an Advisor to the Chairman and Chief Executive Officer
of The Steak n Shake Company, a publicly-traded restaurant chain with 485
restaurants. Mr. Dash helped to revitalize the Steak n Shake brand and
reverse a long history of negative sales comparisons that culminated in double
digit positive same store sales comparisons within 18 months. Mr. Dash
brings valuable experience in the restaurant business due to his significant
roles in restructuring the marketing, supply chain and research and development
departments of Steak n Shake and Western Sizzlin.
David Makula is the Founder
and Managing Member of Oak Street Capital Management, LLC, an investment
management firm. He was previously a Research Analyst with Coghill Capital
Management, LLC, an investment management firm. He also served as an
Investment Banker for Salomon Smith Barney, where he focused on mergers and
acquisitions across a variety of sectors. Mr. Makula holds a CPA
certificate from the State of Illinois. He brings significant capital
markets experience and he will work to address Denny's capital allocation and
other financial issues.
The
Co-Chairmen of the Committee - Jonathan Dash, David Makula and Patrick Walsh -
commented:
"The
Company's existing board and management team have been given a sufficiently long
period of time to demonstrate the effectiveness of their strategy, and we
believe they have failed. We do not believe their strategy has created
value for shareholders. The weaknesses of Denny's management have forced
us to seek changes to the board in the interest of all shareholders. If
the status quo is maintained, we are deeply concerned that the Company's future
will mirror its past. Shareholders cannot afford to allow the board and
management to have more time to implement an effective strategy. We will
not linger on the sidelines at this critical juncture. Our nominees can
help implement a strategic plan designed to create value for all shareholders.
We must act now!"
"The
record is clear - the current Denny's board has overseen significant destruction
of shareholder value. Denny's share price has plummeted by approximately
75.6% since the shares began trading in November 1997 through December 31,
2009(1). Over the past five completed years alone, Denny's share price has
declined by 51.3%(2), an unacceptable outcome. We note that the share
price has appreciated significantly since the filing of our initial Schedule 13D
on January 21, 2010."
"We
believe the board should have admitted years ago that Denny's CEO, Nelson
Marchioli, will not be able to turn around the Company. We believe that
his poor operating and capital allocation records speak for themselves. To
add insult to injury, the Denny's board has generously rewarded management
despite poor stock price and financial performance."
The
Committee's issues with the current Denny's board and management can be
summarized as follows:
· Ceding
the #1 market position to International House of Pancakes ("IHOP")
· Failure
to grow system-wide restaurants
· Unsustainable
declines in key operating trends such as guest traffic
· Inappropriately
high general and administrative expenses
· Imprudent
capital allocation decisions
· Lack of
accountability for management at the board level
· Extremely
poor stock performance
Strategic
Errors
Denny's
system-wide units peaked ten years ago, at 1,822 restaurants, shortly before
Nelson Marchioli was appointed CEO in 2001. Over the past decade, Denny's
management and board oversaw a 15% decline in total system-wide restaurants to
1,551 units. This stands in stark contrast to the Company's closest
competitor, IHOP, which during the same timeframe increased system-wide
restaurants from 922 units to 1,433 units(3).
We
believe that management will not be able to improve critical operating trends
such as guest traffic - a key barometer of a restaurant's health - under the
current board regime. Mr. Marchioli also presided over same store traffic
declines in seven of the previous eight years. Denny's served
approximately 900,000 guests per day in 2005, versus only some 725,000 per day
currently, a 19% decline. We are deeply concerned that if these guest
traffic declines are allowed to persist, the effect on shareholders will be
dire.
We are
also concerned that Denny's management has failed to apply an effective
marketing and pricing strategy focused on delivering value to customers.
While Denny's customer attendance has declined, management has responded
by consistently raising prices. We believe management's pricing strategy
has been unsuccessful, particularly during the recent economic downturn when
price hikes failed to resonate with an ailing consumer and guest count losses
accelerated. We view the consistent price increases as an unsustainable
strategy. Management needs to align the price of Denny's food with its
perceived value.
After ten
years of pursuing this strategy, Denny's recently ceded its historic leadership
in casual family dining to IHOP. Since 2000, IHOP has more than doubled
system-wide sales from $1.2 billion to $2.5 billion estimated for this year.
During this same timeframe, Denny's system-wide sales have stagnated.
As a result, IHOP's system-wide sales have now surpassed Denny's.
Other than the differences in their respective leadership teams, we see no
fundamental reason for Denny's underperformance relative to IHOP.
Capital
Allocation
Since
2005, management invested approximately $150 million in capital expenditures,
principally for store remodelling. Unfortunately, given Denny's share
price performance over the past five years, long-term shareholders have nothing
to show for these investments. Investors should not be surprised that
shareholder value was eroded when management coupled a low return, expensive
remodelling program with an ineffective marketing strategy. Since these
significant capital expenditures failed to produce the desired results, we are
now concerned that management has resorted to selling restaurants to franchisees
at fire sale prices.
Excess
Corporate Overhead
Since
2002, Denny's management has refranchised or closed approximately 310 locations.
Based on our research of the industry, and conservatively assuming all locations
were refranchised, we would expect general and administrative expenses to
decline by $18.6 million, or $60,000 per unit. Surprisingly, Denny's
general and administrative expenses have actually increased by $7.3 million
since 2002. We believe this is attributable to a culture of wasteful
spending and the lack of representation on the Denny's board by significant
shareholders.
Corporate
and Franchisee Governance Issues
We
believe shareholder concerns have been ignored. We are aware that the
Denny's Franchisee Association has expressed to the Denny's board its specific
concerns with current management which have also been ignored. We are
deeply concerned that many of the largest franchisees of Denny's have lost faith
in management's ability to turn around the Company's operating
performance.
We are
also frustrated that Mr. Marchioli has not built a strong management team.
Rather than recruiting and nurturing talented executives, the Company has
announced drastic leadership changes involving key members of management - most
recently the departure of the Chief Marketing and Innovation Officer and the
Chief Operating Officer. Merely replacing those two executives will not
address the critical operational issues facing CEO, Nelson Marchioli, who hired
those two executives.
Our
Plan to Enhance Shareholder Value at Denny's
We
believe that Denny's is an iconic American brand and shareholder value can be
restored with the help of our highly qualified director nominees. If
elected at the 2010 Annual Meeting of Shareholders, our nominees would, subject
to their fiduciary duties, endeavor to work with the other board members to
address the concerns discussed above. A general outline of the initiatives
that our nominees would seek to implement are as follows:
· Create a
pay-for-performance culture that clearly and measurably aligns management's
interests with those of shareholders
· Implement
a cost structure that provides Denny's with a source of competitive advantage,
by sustainably reducing annual operating expenses by at least $15
million
· Reverse
the declining trend in guest traffic and comp store sales with more effective
marketing and an improved price-to-value relationship for the
customer
· Rationalize
capital expenditures to an average of less than $10 million per
year
· Halt
value-eroding sales of company-owned restaurant units at unreasonably low
prices
· Refocus
marketing efforts on a consistent value message, not on marketing gimmicks that
send the wrong message and attract the wrong customer base, and
· Restore
system-wide unit growth through franchisee development
The
Committee to Enhance Denny's will continue to apprise you during the coming
weeks of our plans to maximize shareholder value.
CERTAIN
INFORMATION CONCERNING THE PARTICIPANTS
The
Committee to Enhance Denny's (the "Committee"), together with the other
Participants (as defined below), intends to make a preliminary filing with the
Securities and Exchange Commission ("SEC") of a proxy statement and accompanying
proxy card to be used to solicit proxies for the election of its slate of
director nominees at the 2010 annual meeting of stockholders of Denny's
Corporation (the "Company").
THE
COMMITTEE STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY
STATEMENT WHEN IT IS AVAILABLE BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION.
SUCH PROXY STATEMENT WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEBSITE
AT HTTP://WWW.SEC.GOV.
IN ADDITION, THE PARTICIPANTS IN THE SOLICITATION WILL PROVIDE COPIES OF THE
PROXY STATEMENT WITHOUT CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD BE
DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR, MACKENZIE PARTNERS, INC.,
TOLL-FREE AT (800) 322-2885 OR COLLECT AT (212) 929-5500 OR VIA EMAIL AT ENHANCEDENNYS@MACKENZIEPARTNERS.COM.
The
Participants in the proxy solicitation are anticipated to be Oak Street Capital
Master Fund, Ltd. ("Oak Street Master"), Oak Street Capital Management, LLC
("Oak Street Management"), David Makula, Patrick Walsh, Dash Acquisitions LLC
("Dash Acquisitions"), Jonathan Dash, Soundpost Capital, LP ("Soundpost
Onshore"), Soundpost Capital Offshore, Ltd. ("Soundpost Offshore"), Soundpost
Advisors, LLC, Soundpost Partners, LP ("Soundpost Partners"), Soundpost
Investments, LLC, Jaime Lester, Lyrical Opportunity Partners II, L.P. ("Lyrical
Onshore"), Lyrical Opportunity Partners II, Ltd. ("Lyrical Offshore"), Lyrical
Opportunity Partners II GP, L.P., Lyrical Corp III, LLC, Lyrical Partners, L.P.,
Lyrical Corp I, LLC, Jeffrey Keswin and Patrick H. Arbor (collectively, the
"Participants").
Information
regarding the Participants, including their direct or indirect interests in the
Company, by security holdings or otherwise, is contained in the Schedule 13D
initially filed by Oak Street Master with the SEC on January 21, 2010, as
amended or may be amended from time to time (the "Schedule 13D"). The
Schedule 13D is currently available at no charge on the SEC's website at http://www.sec.gov.
As of the date hereof, the Participants collectively own an aggregate of
6,245,476 shares of Common Stock of the Company, consisting of the following:
(1) 1,826,333 shares owned directly by Oak Street Master, (2) 101,743 shares
held in accounts managed by Oak Street Management, (3) 43,000 shares owned
directly by Patrick Walsh, (4) 1,202,300 shares held in accounts managed by Dash
Acquisitions, (5) 1,407,587 shares owned directly by Soundpost Onshore, (6)
551,882 shares owned directly by Soundpost Offshore, (7) 340,531 shares held in
accounts managed by Soundpost Partners, (8) 338,500 shares owned directly by
Lyrical Onshore, (9) 368,600 shares owned directly by Lyrical Offshore and (10)
65,000 shares owned directly by Patrick H. Arbor.
(1) Based
on November 20, 1997 closing price of $9.00 per share and December 31, 2009
closing price of $2.19 per share, including dividends.
(2) Based
on December 31, 2004 closing price of $4.50 per share and December 31, 2009
closing price of $2.19 per share, including dividends.
(3) Based
on third quarter 2009 system-wide units.