- Reduce corporate SG&A. On the May 5, 2011 conference call, management noted that there are more than 90 people at Mac-Gray corporate. While a full review is necessary to determine the extent to which this workforce is essential to the profitable operation of the business, we note that CoinMach's SG&A expense for the twelve-month period ended September 30, 2007, was just $13.7 million to support $552 million of sales, or 2.5%, whereas Mac-Gray's SG&A expense in the twelve-month period ended March 31, 2011, was $32.8 million to support just $320 million of sales, or 10.4%. We will work to recapture at least HALF of the difference between Mac-Gray's SG&A as a percentage of sales and CoinMach's, which would yield an incremental $12.7 million of annual EBITDA, or more than $6/share in equity value at the company's current trading multiples. In our due diligence, we learned that one route operator with $150 million in annual sales had just seven people at corporate before it was acquired by one of Mac-Gray's competitors. We believe that Mac-Gray's bloated corporate cost structure is impeding its ability to compete with regional competitors on the basis of price, despite the considerable cost advantages that should emanate from the company's status as the second largest player nationally.
- Lower Capital Expenditure Per Unit of Equipment. Mac-Gray is the second largest operator of coin- and card-operated laundry routes in the United States, and we believe that its capital expenditures – in excess of $30 million annually – make it an important customer to its commercial laundry equipment suppliers. We believe that the company has not fully capitalized on its considerable buying power and believe there could be opportunities to reduce Mac-Gray's equipment cost per unit by negotiating with or consolidating vendors.
- Execute Intelligent Add-On Acquisitions. We believe that Mac-Gray is well positioned to further consolidate the route laundry space, and that there are multiple competitors of material size and strategic value to Mac-Gray with owners that are both financially motivated and economically rational (and thus likely to be realistic with respect to valuation expectations). However, we do not believe that these acquisitions should be consummated at any price; in our May 5 letter to you, our analysis showed that Mac-Gray overpaid for its last four acquisitions by at least $96 million, or $7/share! Our nominees have the ability to analyze the potential returns on these transactions and will ensure discipline on acquisition opportunities going forward.
- Execute Strategic Disbursements. Mac-Gray operates in 44 states and overlaps with other well-capitalized competitors in many of those states. Our nominees, if elected, will conduct a review to determine whether Mac-Gray has failed to achieve the scale required in certain regions to generate sufficient EBITDA margins and returns on invested capital. We would then seek to sell those routes to the highest bidder and either redeploy capital in more attractive opportunities or return it to our stockholders. Our nominees would also be open to selling the entire company in the event a fair offer is received, unlike the current Board, which we believe rebuffed a bid from CoinMach at $13.75/share (just 13% below the current trading level) almost five years ago.
TUC Investor Value Creation Group Outlines Plan To Create Value For All Mac-Gray Stockholders
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