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A shareholder activist group is asking the management of Winn-Dixie Stores to either buy back shares in the company so that cash can be returned to investors, or to sell the company outright.

A letter from George Schultze of Schultze Asset Management to Winn-Dixie CEO Peter Lynch called for the company to stop investing cash in new stores and remodels.

According to the letter, “We view WINN as an undervalued and underleveraged food and drug retailer. We urge management to close this value gap by implementing a more efficient capital structure as soon as possible. By doing so, the board and management of WINN will send a very clear message to the investing community that they share their shareholders’ valid concerns about the Company’s valuation. WINN has significant sources of excess cash available from its balance sheet and through its capacity for a reasonable amount of additional leverage. We estimate this available excess cash to be approximately $590 million and believe it should entirely be used to repurchase WINN stock so the remaining shareholders may benefit from accretion of future earnings per share and cash flow.

“We believe this course of action, repurchasing stock with the Company’s available excess cash, is more likely to create shareholder value than management’s current strategy of investing hundreds of millions of dollars on store remodeling. As an example of the lack of success of the current store remodeling effort, the Company has already remodeled 170 stores but WINN’s share price is at nearly the same level as its IPO price1 in November 2006! Similarly, management stated in its October 27, 2009 quarterly conference call that the Company took $3.5 million in impairment charges related to writing down the value of two recently remodeled stores. Clearly, it does not make sense to invest more of our Company’s money in remodeling stores only for such stores to become valuation-impaired right after we make the multi-million dollar investment.”

The letter goes on: “As you can imagine, we are also of the opinion that the Board must honor its role as a fiduciary for all shareholders and thereby remain open to selling the entire company if market prices exceed your internal calculations of fair value. As such, in the event management and the Board cannot close the obvious valuation disparity between our Company and similarly positioned firms by implementing our requested recapitalization and share repurchases, we would then strongly encourage the Board to hire a reputable investment bank to help explore a sale of the entire enterprise at a fair price.”

No response yet from Winn-Dixie.
KC's View:
If Winn-Dixie does not invest in its fleet, then it might as well sell the whole damn thing. Thought I’m not sure that Winn-Dixie, in the current environment, is going to get what these investors view as a “fair price.”

What this illustrates to me is that there is a huge gap between the investor class and the retailer class. I can understand investors wanting a fair return, but I’m not sure that handicapping a retailer’s ability to compete is the best way to get it.