Activist investor David Kanen writes letter in response to EZPW news of convertible debt offering, excoriating Chairman Phillip Cohen
AUSTIN, Texas, Dec. 07, 2022 (GLOBE NEWSWIRE) -- The following is a statement issued by David Kanen, who serves as President of Kanen Wealth Management. Kanen entities control over 4% of NASDAQ: EZPW common shares.
Dear Mr. Cohen and EZPW board,
We are writing this letter in response to the announced ill-advised convertible debt offering this morning, and exhort you to rescind immediately. While we are aware that EZCorp’s voting structure is such that Mr. Cohen essentially has a license to behave like a dictator, we urge you to carefully consider the following facts.
Since the start of 2005, EZCorp shares have returned 70% while the lone other publicly traded pawn operator FirstCash Holdings (FCFS) has a total return of ~648% over the same period. Over the past 10 years EZPW’s total return is -54% while FCFS has returned >100%.
Phillip Cohen has a track record that is truly appalling. Cohen has paid himself (including his consulting company) over $52,000,000 from EZPW over the last 17 years while delivering significant underperformance, including ~$450M in shareholder value destruction over the last decade.
We question whether the EZPW board can fulfill their fiduciary duty to shareholders. EZPW seems to insist on doing the same things it has done for most of its history and is expecting a different result (the definition of insanity) – EZPW has yielded little to no fruit for shareholders to date: EZPW has continued to use dilutive financing for M&A, continued non-core investments, turnover of senior management, all while continuing to line Phillip Cohen’s pockets with “pay for underperformance”.
The good news is, EZPW can “fix” a meaningful portion of its tenured history of epic underperformance by making simple changes.
Firstly, the company must immediately suspend its offering of 2029 convertible notes. And instead spend the coming weeks/months pursuing non-convertible debt for ~$150M, and seek to avoid significant dilution to shareholders. After obtaining ~$150M in non-dilutive debt, the company should retire most of its 2024 convertible notes.
Just two weeks ago at an ideas conference, our CEO made the comments that EZPW is “very, very similar (to FirstCash), very similar metrics… its very, very similar, almost staggering… on the whole, metrics, business model metrics, very, very similar.” We generally agree that EZPW’s core business is very similar to FirstCash, but EZPW has drastically underperformed FCFS over essentially any time horizon. EZPW needs to pivot from its failed capital allocation approach and its dilutive capital structure in order to truly become “very, very similar to FCFS”. FCFS has $1.37B in long-term gross debt at an average interest rate of ~5.7%, that is against ~$400M in EBITDA. Surely, we could have $150M in traditional debt at an average interest rate of ~7% by replacing the 2024 converts with traditional debt, this is a very modest amount compared to our $120M+ in EBITDA.
Secondly, plan on $200M in total share repurchases over the next 5 years – but only if the stock continues to trade at an extremely cheap EV/EBITDA valuation.
Given EZPW is currently earning ~130M+ in EBITDA on a run rate basis, EZPW should generate more than enough FCF over the next 5 years to support bountiful M&A in the core business, organic growth investments, and $200M in share repurchases – all while having a very strong balance sheet. We conservatively forecast the above leading to EZPW earning at least $180M in EBITDA in 5 years with a reduced share count of 42M, for $4.30 per share in EBITDA, with a fair value of 10x EBITDA EZPW should be worth $43 in 5 years (5x the current stock price).
For the first time in a long time, EZPW has an opportunity to create sustainable shareholder value – if it takes the right path at this juncture. These are simple strategy shifts that a board should take to seek to fulfill its fiduciary duty, and not bow solely to the demands of its Chairman who has led the company to significant long term underperformance while lining his own pockets.
We ask all directors to stand up to “the dictatorial Chairman” and insist upon the value creative path. Mr Cohen’s results in our opinion are no better than Chavez and Maduro’s results in Venezuela. Neither better than Castro’s results in Cuba, nor Kim Jong-Il of North Korea. Thus far Mr. Cohen is not a winner for shareholders. The scorecard has a massive “Loss”. We will not be surprised to see him behave obstinately and shake off our recommendations as most in his dictatorial position do.
“Insanity is doing the same thing over and over and expecting different results.”
- Albert Einstein.
Kanen Wealth Management, LLC.