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Hostile Duel

Takeover battle rages at Aaron’s, putting ‘zees in middle


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A former franchisee is leading the charge to add hand-picked board members and force out the CEO. But management says they’re fixing any blunders and reversing a decision to remodel stores to be more upscale. 

Aaron’s, the 58-year old rent-to-own company in Atlanta, is fighting a hostile takeover battle and its franchisees are caught in the crossfire.

On one side is Aaron’s current management. Aaron’s was founded in 1955 by R. Charles Loudermilk, who borrowed $500 to buy folding chairs he then rented at 10 cents a day to auction houses. The company grew into a national chain of more than 2,000 stores, one-third of which are owned by franchisees, and went public in 1995. 

Charles Smithgall III

Charles Smithgall III is Aaron’s largest franchisee, and he is “partial to both sides,” but he favors giving management a chance.

In 2008, Loudermilk stepped aside and appointed his son Robin to take over. But three years later, Robin resigned because of illness and Loudermilk turned to his friend and longtime board member Ron Allen, former CEO of Delta Airlines, to run the company.     

Allen, who took over in November 2011, soon gained an increase in the CEO’s total compensation from $1.3 million to more than $4 million, according to Aaron’s 2013 proxy statement. Allen fired or forced out several long-tenured executives, including vice president of franchising Todd Evans on February 28, and arranged Loudermilk’s retirement from the board of directors in September 2012. 

In 2012, the first year of Allen’s tenure, profits were up 51 percent compared to 2011, helped in part by $35.5 million in income from the settlement of a sexual harassment lawsuit and increased store count. “The results for the year were the best in the company’s history,” Allen said at the time. But Aaron’s profits fell by 30 percent in 2013 compared to 2012 and its stock price remained stagnant, trading between $26 and $30 a share. 

Allen declined to be interviewed for this article. On April 15, Aaron’s announced an acquisition and other changes.

On the other side is former Aaron’s franchisee Brian Kahn, who announced in February his Orlando private equity fund, Vintage Capital Management, had bid $2.3 billion, or $30.50 a share, for the company. To ensure victory, Kahn also nominated his own slate of five candidates to take control of Aaron’s board at the company’s annual meeting in May. If they are elected, Allen would be bounced from his own board.  

Kahn, who was an Aaron’s franchisee from 2003 to 2008, said he had made three previous stabs at Aaron’s ownership, “but the board simply ignored me.” Late last year, he stepped up his campaign by buying up almost 10 percent of Aaron’s shares and making his offer known to the public. “This time,” Kahn said, “the Aaron’s board hired two investment banks and a law firm to advise them.”

And this time, Kahn said, the situation is more critical “because Aaron’s business is deteriorating.” Kahn blames the slide on CEO Allen. “Ron is cutting off Aaron’s core customer by remodeling the stores to look more upscale. He’s been wasting money trying to attract customers who will never shop there.” 

Vintage Capital is the majority shareholder in a competitor, Buddy’s Home Furnishings, a Tampa-based chain of 170 corporate and franchised rent-to-own stores mainly in the Southeast. “Ron says that our entire industry is losing customers,” Kahn said. “Buddy’s profits were up by 15 percent in 2013. The problem’s not the customers.”

Many Aaron’s franchisees agree, including the chain’s second- and third-largest franchisees, Tom Bernau, of Des Moines, Iowa, and Spencer Smith, of Cortez, Colorado, who are on Kahn’s slate of independent board candidates. Bernau said, “I figure my financial investment in 51 stores is worth at least $60 million, which is comparable to the investments of the top shareholders of Aaron’s stock, but I have no voting power. Aaron’s needs a completely different board. Ron is doing everything he knows to make the company better, but he doesn’t have any operational  understanding of our business and Brian does.”

Smith, who has 43 Aaron’s, said he joined Kahn’s side because “we are headed the wrong way and gaining speed in that direction. Morale dropped after key individuals exited quickly and sometimes not voluntarily.” Another board candidate is one of those former executives, W. Kenneth Butler Jr., who until last year had been Aaron’s COO.

‘Placating’ the franchisees

But others, like Charles Smithgall, III, of Atlanta, the system’s largest franchisee with 106 stores, says he is “partial to both sides. Allen’s son worked for me, my wife worked at Delta for 36 years and I’ve known Brian Kahn for a long time. “

On March 24, Aaron’s franchisees gathered for a franchisee association meeting in Orlando and many said they had expected it to turn into a rally for Kahn’s takeover. Instead, Ron Allen arrived and “did a good job of placating the franchisees,” Bernau said.  

According to Smithgall, the president of the franchisee association had given management a list of franchisees’ concerns.  “Ron addressed them all and said he would work hard to change every one of them,” Smithgall said. “As of that day, he suspended the store remodeling program and said we no longer have to pay the $800 a month per store marketing fee. That means a million dollars a year to me. I think the majority of franchisees there left happy and felt we should give management a chance.”

Kahn was undeterred.  “We are going full steam ahead,” he said. 

Aaron’s management formally rejected Vintage’s offer on April 15, the day after suing its takeover foe. The suit claims Vintage does not have the capital to take Aaron’s over and says Vintage has violated federal securities laws. 

Vintage Capital’s Kahn responded by accusing Aaron’s management of “desperation moves” and saying he would continue his fight for seats on the company’s board. Kahn said he is withdrawing his $30.50 a share offer because he feels recent actions by management signal Aaron’s is no longer worth that much of an investment. 

Two weeks before these latest moves, Kahn sent a letter to Aaron’s independent directors, claiming the lifting of the $800 a month advertising fee is a “bribe to muzzle the open revolt of the Aaron’s franchisee community, an action that will cost Aaron’s shareholders $7.5 million a year.”

According to Securities and Exchange Commission documents, Charles Loudermilk still owns about 6 percent of Aaron’s shares but the overwhelming majority are owned by institutions and mutual funds.  Kahn said, “I do believe a considerable number of those shares will end up supporting us in this transaction. I have no doubt that Ron will be removed from the Aaron’s board and our nominees will be elected.” Before the lawsuit was filed, Kahn said he may reopen negotiations to purchase the company after the election. 

As of press time, Aaron’s stock was trading above the $30.50 offer price.

Franchisee Berneau agreed that Kahn “is making great strides in building support” among the shareholders.  “I would like to make an impact on the Aaron’s board, whether the company is sold or not.  I love our business and want to make it the best it can be.”

Franchisee Adam Marlin, who owns two Aaron’s in Georgia and is building a third, said he was not swayed by Allen’s concessions at the franchisee meeting. “I don’t know Brian Kahn well, but I am very impressed with the two franchisees he proposed to the board and I know Buddy’s has hired excellent former staff members from Aaron’s. My big fear is that if Kahn doesn’t take us over, somebody with no record in the industry will buy and dismantle Aaron’s to suck out the cash and we’ll be left with a weaker company.”

Smithgall said, “For the past 20 years, Aaron’s annual meetings have been really boring. I bet you could sell tickets for this one.” 

 

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