At TravelCenters, Former Icahn Executive Pushes for $400M Sale-Leaseback Deal

NEW YORK (The Deal) -- Under pressure from a former executive in Carl Icahn's world, TravelCenters of America (TA) may soon be on the road to raising as much as $400 million by selling its real estate and leasing it back.

The possible move comes after activist RDG Capital Fund Management's Russell Glass said last week that he was "pleased" that the operator of travel rest areas was considering the "monetization" of its remaining company-owned real estate. TravelCenters did not return calls seeking comment.

Glass, who was one of Icahn's top executives before establishing his own fund in 2005, said he recently had a "constructive dialogue" with TravelCenters' CEO Tom O'Brien and other board members.

According to people familiar with the situation, "monetization" for Glass involves having TravelCenters conduct a significant sale-leaseback of its remaining company-owned facilities, stores and gas stations. The fund manager suggested in a May 1 letter that such a move could generate more than $400 million and "unlock" what he believes to be the fair value of the company at $24 to $27 a share -- considerably above the stock's current sub-$17 level. According to the company's March annual report, TravelCenters owns 37 truck stops and 27 convenience store/gas stations.

As for the proceeds, Glass wants to see the company pay down debt and acquire and develop new locations, according to a person familiar with the situation. TravelCenters, based in Westlake, Ohio, has debt that becomes redeemable in January 2016.

In addition, some proceeds could be deployed to improve existing company-owned locations. TravelCenters owns 348 acres of property, according to a 2014 presentation, a large chunk of which could be used to build new travel rest areas. Much of the acreage is located primarily along the interstate highways.

Seeking to pique O'Brien's interest, Glass added that RDG officials have had "discussions" with a "leading real estate firm" that estimates the property value of the remaining TA company-owned TravelCenters sites to be worth more than $400 million. TA's company-owned convenience stores and undeveloped acreage are worth at least another $75 million, Glass suggests. Those figures are significant for a company with a $652 million market capitalization.

The most likely buyer for the real estate is Hospitality Properties Trust (HPT), a Newton, Mass-based real estate investment trust that already owns the real estate under 189 facilities operated by TravelCenters. HPT would make a natural acquirer, and it likely has a right of first refusal on any sale-leasebacks. An HPT spokesperson did not return calls.

A person familiar with the situation notes that the "leading real estate" firm approached by Glass was not Hospitality Property Trust but another firm, suggesting that there are at least two suitors that could be interested. The valuation by the second real estate firm gives Glass a "high degree of confidence" about the value of the real estate overall, the source said.

TravelCenters is clearly open to the idea: It has already completed substantial sale-leaseback deals for 80% of its real estate. Some of the proceeds from those sales were used to acquire and develop properties, which eventually became attractive for sale-leaseback deals with HPT. "They've shown a propensity to do sale-lease backs in the past and they seem to be enthusiastic to do it again," said one institutional investor.

John Lawrence, an analyst at Stephens, said he believes that TravelCenters and Glass both agree that a major sale-leaseback of the company-owned travel centers makes sense, but they may not agree on the timing. Glass clearly wants it to take place right away, while O'Brien may want to hold out while the properties are developed further. "They are not debating whether it is the right thing to do but rather when is the right time to do it," Lawrence said.

Lawrence noted that the company-owned locations, as a group, have had a 100% increase in Ebitda (earnings before interest, taxes, depreciation and amortization) since they were acquired by TravelCenters, suggesting that the time might be right to sell them as a group. However, he qualified his comments, pointing out that the locations are in various stages of development. "We're getting closer," he said.

Another analyst following the company noted that TravelCenters points out in its annual report filed in March that the company "may finance or sell" real estate it owns to help generate liquidity.

But critics argue that there are negative long-term consequences of separating all the real estate from a parent company, such as new expenses that come with being a tenant in an environment where leases are lengthy. "A sale-leaseback is still a financing method that requires TA to pay rent to the landlord," another industry watcher said. "It's not like that cost goes away and you get a wad of cash."

In addition, Glass had previously called for the company to spin off its truck-repair unit -- though the fund manager hasn't made noise about it of late after O'Brien voiced his doubts in March and analysts generally support keeping it in-house. According to people familiar with the situation, Glass is still interested in having TravelCenters spin that unit off but that he's put that suggestion on the backburner because he has had "more agreement with management" when it comes to monetization of the real estate. "It's the easier low hanging fruit where there is more agreement with management," said one investor familiar with Glass.

It is unclear whether Glass would take his insurgency up a notch and propose dissident directors if the company doesn't follow through. Glass was involved in a number of proxy fights -- including as a dissident director -- during his time working for raider-turned-activist Icahn. His own fund, RDG Capital, hasn't launched any formal proxy fights. Instead Glass typically takes a quieter, behind-the-scenes approach that involves urging management in private meetings to do what he wants.

When that doesn't work, Glass occasionally goes public with his criticism. At DST Systems (DST), for example, he set up a New York shareholder forum for 20 big investors as part of an effort to win support for his unsolicited takeover bid. In that case, after DST rebuffed his offer, Glass asked for board seats and urged the company to review alternatives. The company hired advisers but decided not to sell.

TravelCenters' institutional investors wouldn't necessarily back a proxy fight. The stock price close enough to its 52-week high of $17.99 to allow the company to raise debt or equity at an attractive price, without the need for any near-term real estate monetization.'

But don't expect RDG's pressure on TravelCenters back down just because the stock price is moving in the right direction. Being an Icahn disciple counts for something.

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