Upbound Group, Inc. · NASDAQ:UPBD
Upbound — Rent A Center Inc DE — Proxy Contest (May 2017)
92 slides from Upbound's proxy contest presentation, May 2, 2017
Slide 1: Special Interests vs. Shareholder Interests
Connecting Markets East & West Special Interests vs. Shareholder Interests STRICTLY PRIVATE AND CONFIDENTIAL May 2, 2017 © Nomura
Slide 2: Disclaimer
Disclaimer This presentation is for discussion and general informational purposes only. It does not have regard to the specific investment objective, financial situation, suitability, or the particular need of any specific person who may receive this presentation, and should not be taken as advice o
Slide 3: Contact Information
Contact Information Investor Contact: Saratoga Proxy Consulting, LLC John Ferguson, 212-257-1311 [email protected] Media Contact: Bayfield Strategy, Inc. Riyaz Lalani, 416-907-9365 [email protected]
Slide 4: Table of Contents
Table of Contents 1. Introduction to Engaged Capital, LLC (“Engaged Capital”) and Rent-A-Center, 4 Inc. (“Rent-A-Center,” “RCII” or the “Company”) 2. Executive Summary 8 3. RCII’s History of Underperformance & Governance Failures 19 a. Failed Strategy & Execution 19 b. Value Destructive Capital Allo
Slide 5: Introduction to Engaged Capital and Rent-A-Center
Introduction to Engaged Capital and Rent-A-Center 4
Slide 6: About Engaged Capital
About Engaged Capital Value investment focus Focused on the small-mid capitalization space ($500mm - $8bn) Highly concentrated, conviction indexed portfolio of 10 to 15 positions Strategy Typically own 1.0% to 9.9% of portfolio companies, no control positions Bring an owner’s perspective t
Slide 7: RCII Company Overview
RCII Company Overview Company Overview 2016 Revenue Mix1 Leases brand-name household goods (furniture, Mexico Franchise 2% Smartphones appliances, electronics) on a rent-to-own (“RTO”) basis 1% Computers 6% Furniture and 8% Offers flexible lease agreements to cash-constrained accessories 34% con
Slide 8: Timeline of Engaged Capital's Interactions with RCII
Timeline of Engaged Capital’s Interactions with RCII Aug. – Nov. 2016 December 2016 January 2017 Feb. – Mar. 2017 March 2017 March 2017 (share price in $) CFO is terminated. Met with Chairman Nominated directors RCII proposed RCII adopted Began discussions Send private letter to and Chair of Finance
Slide 9: Executive Summary
Cee Executive Summary
Slide 10: Why We Invested In RCII
Why We Invested In RCII Unique retail/consumer finance business model misunderstood by the public market Competitive moat driven by merchandise portfolio and collections capabilities Drop in equity valuation mostly attributable to Company-specific factors Core U.S. business generates substan
Slide 11: RCII Has Materially Underperformed the Market and Peers Over All Relevant Periods
RCII Has Materially Underperformed the Market and Peers Over All Relevant Periods Total Return Performance 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr Rent-A-Center (39%) (76%) (72%) (75%) (52%) (66%) Aaron's 34% (5%) 13% 11% 111% 80% Russell 2000 39% 18% 27% 84% 144% 100% S&P 1500 Specialty Retail Index 10% 9%
Slide 12: RCII Has Failed to Create Value for Shareholders on a Short-Term or Long-Term Basis
RCII Has Failed to Create Value for Shareholders on a Short-Term or Long-Term Basis 1 Year – Indexed1 3 Year – Indexed1 60 60 50 40 43% 40 30 34% 20 20 13% 10 10% 0 0 (20) (10) (20) (40) (30) (60) (40) (39)% (72)% (50) (80) Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Jan-14 May-14 Sep-14 Jan-15
Slide 13: RCII Underperforms its Peer Group Selected by the Board
RCII Underperforms its Peer Group Selected by the Board 1 Year Total Return 3 Year Total Return 5 Year Total Return United Rentals 130% Big Lots 82% United Rentals 234% Pier 1 Imports 93% United Rentals 64% Tractor Supply Co. 93% Aaron's 34% Western Union 39% Brinker International 89% Big Lots 33% A
Slide 14: The Board Has Acknowledged This Value Destruction
The Board Has Acknowledged This Value Destruction RCII Investor Presentation On April 10, 2017, RCII quantified the impact of its mistakes at $255 million of lost EBITDA Source: RCII Investor Presentation, April 10, 2017 13
Slide 15: Engaged Capital Has Urged the Board to Evaluate All Strategic Alternatives
Engaged Capital Has Urged the Board to Evaluate All Strategic Alternatives Before Embarking on a Public Turnaround Strategy Engaged Capital recommends the Board adopt a thorough process to evaluate the risk-adjusted present value of RCII’s shares under all strategic alternatives: 1. Formulate and
Slide 16: This is Not "Your Average" Turnaround
This is Not “Your Average” Turnaround RCII shareholders have seen $1.5 billion of market value erased since January 2015 under the leadership of the current Board By their own admission, the incumbent directors approved and oversaw operational initiatives that destroyed $255 million of annual EB
Slide 17: A Strategic Alternatives Process Could Offer the Same or More Value Than a Turnaround
A Strategic Alternatives Process Could Offer the Same or More Value Than a Turnaround Current Price $10.67 Strategic Acquirer $18 $21 Financial Sponsor $14 $16 M&A Range $14 $21 RCII Strategic Plan $8 $18 $5 $10 $15 $20 $25 RCII Share Price We believe a risky THREE-YEAR turnaround could be avoided w
Slide 18: Directors Have Refused to Explore Strategic Alternatives Because Their Incentives Are Not Aligned
Directors Have Refused to Explore Strategic Alternatives Because Their Incentives Are Not Aligned with Shareholders RCII Chairman and CEO Mark Speese is Conflicted RCII Independent Directors Own Very Little Stock1 Given his history with the Company and long tenure on the Board, we can only surmise
Slide 19: Executive Summary
Executive Summary We believe the Board has failed to protect the interests of RCII shareholders for the following reasons and must be held accountable The incumbent Board has repeatedly fallen short of sound corporate governance practices – The Board’s failed growth and operational initiatives, su
Slide 20: RCII's History of Underperformance & Governance Failures
RCII’s History of Underperformance & Governance Failures Value Destructive Failed Strategy & Failed Corporate Capital Execution Governance Allocation 19
Slide 21: RCII's Financial Performance Has Languished Due to Destabilized Core U.S. Stores
RCII’s Financial Performance Has Languished Due to Destabilized Core U.S. Stores and Struggling Growth Segments RCII Total Revenue RCII has suffered from strategy and execution $5,000 (3%) missteps across the Company: $4,500 CAGR $4,000 2013 - 2017E Core U.S. – Wide ranging, deliberate strategic
Slide 22: Board-Approved Core U.S. Operational Initiatives Were a Departure from the Status Quo
Board-Approved Core U.S. Operational Initiatives Were a Departure from the Status Quo Initiative Impact Pricing • Lengthened terms created distorted path to ownership • Fatigue from long terms led to returns and unfavorable aging idle inventory Moved away from traditional two-by-two • Return on inve
Slide 23: Core U.S. EBITDA Decreased Dramatically
Under the Company’s Numerous Failed Initiatives, Core U.S. EBITDA Decreased Dramatically Core U.S. EBITDA EBITDA EBITDA Margin 14.8% $450 15.0% 14.0% $400 13.3% $375 13.1% Adjusted EBITDA ($M) 13.0% EBITDA Margin $350 (18%) $322 $310 CAGR 12.0% $300 11.0% $250 10.1% 10.0% $208 $200 9.0% $150 8.0% 20
Slide 24: All Key Performance Metrics for RCII's Core U.S. Segment Have Deteriorated
All Key Performance Metrics for RCII’s Core U.S. Segment Have Deteriorated Same Store Sales Charge-offs Due to Customer Stolen Merchandise 2.0% 0.1% 0.1% 4.0% 3.7% 0.0% (2.0%) 3.5% 3.1% 3.1% (4.0%) 3.0% (4.0%) 2.7% (6.0%) 2.5% 2.4% (6.3%) (8.0%) (10.0%) (9.0%) 2.0% (12.0%) 2012 2013 2014 2015 2016 1
Slide 25: The New POS System Was Particularly Damaging
The New POS System Was Particularly Damaging In 2010, under then-CEO Mark Speese, RCII announced it had begun to internally develop a POS system (Store Information Management System, or “SIMS”) to replace its off-the-shelf solution, thus proactively deciding to become a software developer as well
Slide 26: Returned Acceptance Now Inventory is a Major Contributor to the Merchandise Problem
Returned Acceptance Now Inventory is a Major Contributor to the Merchandise Problem in the Stores Collected ANow merchandise originally purchased for retail prices is returned to the Core U.S. stores. The stores must re-rent this higher priced and arbitrary merchandise, which generates a lower ren
Slide 27: The Board Has Acknowledged This Value Destruction
The Board Has Acknowledged This Value Destruction RCII Investor Presentation On April 10, 2017, RCII quantified the impact of its mistakes at $255 million of lost EBITDA Source: RCII Investor Presentation, April 10, 2017 26
Slide 28: RCII's Problems Contrast with the Private RTO Industry
RCII’s Problems Contrast with the Private RTO Industry… Northcoast Research Private RTO Dealer Survey – Current Sales Index While the Board approved and oversaw initiatives that decimated the core business, a private RTO industry survey indicates a constructive environment Source: Northcoast Researc
Slide 29: As Observed by RCII and Other Industry Participants
…As Observed by RCII and Other Industry Participants RCII Q4 2016 Question: “What's hitting the industry in terms of same-store sales impact versus, say, what's specific to Preannouncement Call you guys, which might be say potential upside for you as you think about your strategy going forward?” (1/
Slide 30: ANow Has Grown Rapidly at the Expense of Profitability
ANow Has Grown Rapidly at the Expense of Profitability ANow EBITDA Revenue EBITDA Margin $900 20% $818 $818 18.7% $800 19% 18.0% $700 18% $645 17% $600 EBITDA Margin EBITDA ($M) 15.6% 16% $489 $500 15% $400 13.4% 14% $300 13% $200 12% $100 11% $0 10% 2013 2014 2015 2016 We believe RCII grew ANow, on
Slide 31: ANow's Long Term Growth and Margin Profile Are Unclear
ANow’s Long Term Growth and Margin Profile Are Unclear ANow Same Store Sales ANow Charge-offs Due to Customer Stolen Merchandise 35.0% 10.5% 10.0% 30.1% 30.0% 25.8% 9.5% 25.5% 8.5% 25.0% 8.5% 7.8% 20.0% 7.5% 15.0% 6.5% 5.9% 5.5% 10.0% 4.5% 5.0% 3.5% 0.0% 2.5% (5.0%) (0.4%) 1.5% 2013 2014 2015 2016 2
Slide 32: The Mexico Business is a "Zombie"
The Mexico Business is a “Zombie” International/Mexico Cumulative Losses1 ($10) ($30) ($30) Cumulative Losses ($M) ($50) ($59) ($70) ($90) ($88) ($110) ($108) ($111) ($114) ($130) 2011 2012 2013 2014 2015 2016 Once billed as a 1,000 store opportunity, there are now only 130 stores in Mexico RCII has
Slide 33: Corporate Expense Has Increased Sharply
Corporate Expense Has Increased Sharply to Support Failed Operational and Growth Initiatives… Corporate Expense (ex-D&A) Corporate Expense Margin $160 4.7% 5.0% 4.5% 4.2% Corporate Expense Less D&A ($M) $150 Percent of Total Revenue 3.8% $142 $141 4.0% $139 $140 3.5% 30% growth $130 2012 - 2016 3.0%
Slide 34: While EBITDA Continues to Decline
…While EBITDA Continues to Decline EBITDA and Corporate Expense (ex-D&A) Total EBITDA Corporate Expense Ex-D&A $350 $335 $298 $300 $285 $250 $200 $M $185 $150 $142 $139 $141 $139 $116 $100 $50 $0 2013 2014 2015 2016 2017E 2017E EBITDA is less than half of 2013 levels Note: 2017E EBITDA consensus est
Slide 35: RCII's History of Underperformance & Governance Failures
RCII’s History of Underperformance & Governance Failures Value Destructive Failed Strategy & Failed Corporate Capital Execution Governance Allocation 34
Slide 36: Board-Approved Growth Investments Have a Checkered History
Board-Approved Growth Investments Have a Checkered History The brick and mortar RTO business is mature and generates substantial cash flow, leaving RCII ample capital for growth investments Unfortunately, RCII’s Board approved several growth investments that have failed and as a result have been
Slide 37: The Board's Capital Allocation Decisions Have Been Value Destructive
The Board’s Capital Allocation Decisions Have Been Value Destructive Share Repurchases RCII has been an aggressive acquirer of its own stock at prices far above today’s levels RCII completed a $200 million (>45% of the Company’s market value1) accelerated share repurchase in 2013 at $37 per shar
Slide 38: Share Repurchases Since 2010 Exceed Today's Market Capitalization
Share Repurchases Since 2010 Exceed Today’s Market Capitalization $279M repurchased at $36/share $164M repurchased at $28/share RCII Share Price $85M repurchased at $24/share Share price1: $8.01 Market value: $426 More than $528 million of shareholder capital has been spent on share repurchases sinc
Slide 39: RCII Has Managed its Balance Sheet Aggressively
RCII Has Managed its Balance Sheet Aggressively LTM Net Debt / EBITDA (FYE 2010 - 2016) 4.0x 3.5x 3.5x 3.4x 3.0x 3.0x 2.6x 2.5x 2.0x 1.6x 1.7x 1.6x 1.5x 1.0x 0.5x 0.0x 2010 2011 2012 2013 2014 2015 2016 While RTO cash flows permit a levered capital structure, RCII’s use of debt has created risk Sour
Slide 40: RCII Has Traded at a Persistent Valuation Discount to AAN
RCII Has Traded at a Persistent Valuation Discount to AAN Due to Failed Strategy and Poor Capital Allocation EV / NTM EBITDA 10.0x RCII AAN 9.5x 9.0x 8.5x 8.0x 7.5x EV / NTM EBITDA 7.0x 6.5x 6.0x 5.5x 5.0x 4.5x Engaged Capital 4.0x 13D Filing 3.5x Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct
Slide 41: RCII's History of Underperformance & Governance Failures
RCII’s History of Underperformance & Governance Failures Value Destructive Failed Strategy & Failed Corporate Capital Execution Governance Allocation 40
Slide 42: We Believe RCII's Gross Underperformance is the Result of Failed Governance
We Believe RCII’s Gross Underperformance is the Result of Failed Governance Failed Strategy / Capital Allocation Failed Succession Planning Failed Oversight Conflicts of Interest in the Boardroom Contested Election 41
Slide 43: Failed Governance Began With Strategy Missteps and Poor Succession Planning
RCII’s Failed Governance Began With Strategy Missteps and Was Accentuated By Poor Succession Planning “And with that, I would like to now introduce the man that I've entrusted to go get the next $1 billion, the new CEO of Rent-A-Center, please welcome Robert Davis.” – Mark Speese, 2014 RCII Investor
Slide 44: The Board Failed to Provide Proper Oversight
The Board Failed to Provide Proper Oversight The Board failed to take decisive action despite accumulating execution issues and negative long term trends, such as the doubling of employee turnover and changing product mix amid sliding results SIMS delays and impacts were surely a mainstay issue
Slide 45: Drastic Declines in Return on Invested Capital
The Board’s Failed Strategy, Succession Planning, And Oversight Led to Drastic Declines in Return on Invested Capital RCII HOLT CFROI 20.0% CFROI Discount Rate 15.6% 15.6% 14.5% 15.0% 12.8% 12.3% 11.5% 11.0% 10.0% 8.4% 6.8% 7.0% 5.0% 3.5% 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 A
Slide 46: Engaged Capital Suggestions to the Board Have Been Rebuffed
Engaged Capital Provided Suggestions to the Board to Restore Shareholder Value, Which Have Been Rebuffed Engaged Capital felt leadership, strategy, and governance changes were needed to improve valuation Engaged Capital Suggestions Board Actions Management Change Management Change − Operating pe
Slide 47: When Evaluating Strategic Options, Apparently Ignorance is Bliss
When it Comes to Evaluating Strategic Options at RCII, Apparently Ignorance is Bliss Is this any way to govern a company? 46
Slide 48: In Desperation, the Board has Resorted to Telling Lies
In Desperation, the Board has Resorted to Telling Lies in the Company's Most Recent Investor Presentation This is FALSE RCII’s Board has refused to evaluate opportunities to transact the business Source: RCII Investor Presentation, April 10, 2017 47
Slide 49: We Believe Mr. Speese is Conflicted
We Believe Mr. Speese is Conflicted Given his history with the Company and long tenure on the Board, we can only surmise Mr. Speese has an outsized influence in the boardroom Look no further than language in RCII’s recent investor presentation: “Mark Speese is Again Committed to Making RAC Suc
Slide 50: RCII's Governance Structure Has Allowed Entrenchment
RCII’s Governance Structure Has Allowed Mr. Speese and the Incumbent Directors to Entrench Themselves Classified board with three year terms Recently recombined Chairman/CEO roles No special meetings may be called by shareholders Written consent requires unanimous shareholder support Super
Slide 51: The Board Has Used Corporate Machinery as an Entrenchment Tactic
The Board Has Used Corporate Machinery as an Entrenchment Tactic Changing the Record Date Without Proper Notice RCII revealed on April 24th that it changed the record date for the annual meeting from April 10th to April 24th Given the significant short interest in the stock (>40%), we believe th
Slide 52: The Board Has Used Corporate Machinery as an Entrenchment Tactic (cont.)
The Board Has Used Corporate Machinery as an Entrenchment Tactic (cont.) Poison Pill On March 28, 2017, RCII announced adoption of a poison pill preventing stockholders from acquiring 15% or more of the Company The poison pill covers derivative securities in its definition of beneficial ownershi
Slide 53: Evaluation of Management's Turnaround Plan
Evaluation of Management’s Turnaround Plan 52
Slide 54: Can We Take a Mulligan?
Can We Take a Mulligan? We believe the Company’s turnaround plan largely consists of a “do over” of the previous strategic plan designed by the same directors we seek to replace The turnaround plan assumes RCII can return to 2015 EBITDA levels over time by improving Core U.S. stores, but this wi
Slide 55: RCII Shareholders Have Seen This Movie Before
RCII Shareholders Have Seen This Movie Before RCII 2017 Investor Presentation RCII 2014 Investor Day Source: RCII 2017 Investor Presentation, April 10, 2017 and RCII 2014 Investor Day, February 12, 2014 54
Slide 56: RCII's Plan is to Turn the Business Around Over Three Years
RCII’s Plan is to Turn the Business Around Over Three Years $400 EBITDA ($M) Margin 12.0% 10.8% $350 10.0% 10.0% $335 9.0% 9.1% $300 $298 8.0% $299 $285 8.0% $250 EBITDA Margin EBITDA ($M) 6.3% $227 $200 6.0% 5.0% $185 $150 4.0% $139 $100 2.0% $50 $0 0.0% 2013A 2014A 2015A 2016A 2017E 2018E 2019E We
Slide 57: We Question the Viability of the Turnaround Plan
We Question the Viability of the Turnaround Plan RCII Investor Presentation Reduced term requires higher rate to keep margins unchanged, all else equal Management’s 40% ownership rate target is a step change relative to the current rate of 25%1 “The goal of a 40% keep rate is unlikely… as the weekly
Slide 58: Industry Analysts Are Skeptical Too
Industry Analysts Are Skeptical Too… “RCII put numbers behind its goals although the poor recent performance and obvious reasons for putting these goals out will no doubt result in serious questions as to the viability of these targets.” “Rent-A-Center's resurrection of the 2X2 pricing model assumes
Slide 59: The Plan Presents a Wide Range of Outcomes At Various Levels Of Success
The Plan Presents a Wide Range of Outcomes At Various Levels Of Success RCII Strategic Plan Sensitivity % EBITDA Opportunity Realized -- 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% '18-'19 Annual EBITDA Impact ($M) $0 $16 $32 $48 $64 $80 $96 $112 $128 $144 $160 2019E EBITDA ($M) $139 $155 $171 $187 $20
Slide 60: Operational and Financial Leverage Create Turnaround Risk
Operational and Financial Leverage Create Turnaround Risk RCII Stock Price Present Value Percent of EBITDA Opportunity Realized $20.87 -- 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 5.00x $ 2.68 $ 4.02 $ 5.35 $ 6.69 $ 8.03 $ 9.37 $ 10.70 $ 12.04 $ 13.38 $ 14.72 $ 16.05 5.25x $ 3.24 $ 4.64 $ 6.04 $ 7.44
Slide 61: Who Will Execute this Three-Year Turnaround Plan?
Who Will Execute this Three-Year Turnaround Plan? Mr. Speese has retired as an executive of RCII twice – first, in 1999 and then again in 2014 Since retiring as CEO in 2014, Mr. Speese oversaw a 50% decline1 in shareholder value as Chairman Mr. Speese was appointed interim CEO on January 9, 20
Slide 62: Engaged Capital's Proposal
Engaged Capital’s Proposal 61
Slide 63: Engaged Capital Has Urged the Board to Evaluate All Strategic Alternatives
Engaged Capital Has Urged the Board to Evaluate All Strategic Alternatives Before Embarking on a Public Turnaround Strategy Engaged Capital recommends the Board adopt a thorough process to evaluate the risk-adjusted present value of RCII’s shares under all strategic alternatives: 1. Formulate and
Slide 64: Why Explore Strategic Alternatives?
Why Explore Strategic Alternatives? Improved Valuation and Operations The RTO industry straddles both retail and consumer finance and therefore is generally misunderstood by the market The RTO business model offers slow growth but high cash flows, especially during periods of contraction Wall
Slide 65: Strategic Alternatives Process – Strategic Acquirer
Strategic Alternatives Process – Strategic Acquirer We estimate that a large strategic acquirer could realize $300 million in synergies % of RCII Synergies Combined Revenue Corporate Expense $141 $100 1.6% Merchandise Procurement 633 100 1.6% ANow Operating Expense 313 75 1.2% Advertising Expense
Slide 66: Strategic Acquirer Example Synergies
Strategic Acquirer Example Synergies Deal Synergies vs. RCII Plan EBITDA Growth $350 $300 $300 $25 $250 $75 EBITDA ($M) $200 $160 $150 $100 $100 $50 $100 $0 Corporate Merchandise ANow Advertising Total RCII Plan Expense Procurement Operating Expense Synergies EBITDA Expense Growth Deal synergies cou
Slide 67: Strategic Alternatives Process – Financial Sponsor
Strategic Alternatives Process – Financial Sponsor A private or heavily franchised owner has a greater ability to streamline operations outside the view of the public markets (e.g. rationalize store base) A financial acquirer could improve profitability significantly by reducing corporate expens
Slide 68: Transaction Valuation Range With Example Synergies
Transaction Valuation Range With Example Synergies A transaction can result in valuations well above the low end and above the high end of RCII’s turnaround plan at modest pro-forma multiples We see limited downside risk from running a strategic alternatives process and significant risk mitigati
Slide 69: RCII's Capital Structure Allows Both an Acquirer And Shareholders To Realize Significant Value
RCII’s Capital Structure Allows Both an Acquirer And Shareholders To Realize Significant Value Example Transaction Range Transaction Offer Current Equity Enterprise EV Price Price Premium Value Premium $15.00 $10.67 41% 1,394 20% $16.00 $10.67 50% 1,447 24% $17.00 $10.67 59% 1,500 29% $18.00 $10.67
Slide 70: This is Not "Your Average" Turnaround
This is Not “Your Average” Turnaround RCII shareholders have seen $1.5 billion of market value erased since January 2015 under the leadership of the current Board By their own admission, the incumbent directors approved and oversaw operational initiatives that destroyed $255 million of annual EB
Slide 71: A Strategic Alternatives Process Could Offer the Same or More Value Than a Turnaround
A Strategic Alternatives Process Could Offer the Same or More Value Than a Turnaround Current Price $10.67 Strategic Acquirer $18 $21 Financial Sponsor $14 $16 M&A Range $14 $21 RCII Strategic Plan $8 $18 $5 $10 $15 $20 $25 RCII Share Price We believe a risky THREE-YEAR turnaround could be avoided w
Slide 72: Reactions from the Investment Community
Reactions from the Investment Community “We strongly urge the Board to immediately commence a process to review all strategic alternatives including a sale of the entire Company. Shareholders The key point to consider is simply whether existing shareholders can receive a greater risk-adjusted return
Slide 73: Engaged Capital is Advocating for the Highest Risk-Adjusted Alternative
Engaged Capital is Advocating for the Highest Risk-Adjusted Alternative RCII contends that Engaged Capital is self-serving and not advocating a path of value creation which would benefit all shareholders…nothing could be further from the truth Engaged Capital’s communications from the outset pre
Slide 74: It is Time to Hold the RCII Board Accountable
It is Time to Hold the RCII Board Accountable 73
Slide 75: RCII Has Materially Underperformed the Market and Peers Over All Relevant Periods
RCII Has Materially Underperformed the Market and Peers Over All Relevant Periods Total Return Performance 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr Rent-A-Center (39%) (76%) (72%) (75%) (52%) (66%) Aaron's 34% (5%) 13% 11% 111% 80% Russell 2000 39% 18% 27% 84% 144% 100% S&P 1500 Specialty Retail Index 10% 9%
Slide 76: Mr. Speese and the Board are Long-Tenured
Mr. Speese and the Board are Long-Tenured Tenure of Incumbent Directors Rishi Garg Five of seven Two directors, incumbent directors including Mr. Speese, have served for at least have served for over Steven L. Pepper ten years twenty years Jeffery M. Jackson Leonard H. Roberts Michael J. Gade J.V. L
Slide 77: Members of the Board's Finance Committee Are Up For Election
Members of the Board’s Finance Committee Are Up For Election The challenges across RCII’s businesses began with strategic errors by the incumbent Board. This was foreshadowed at the 2010 Investor Day: “So one may ask, well, why you guys want to take on more things right now that can potentially di
Slide 78: Engaged Capital Owns a Significant Percentage of RCII's Shares
In Contrast to the Independent Directors, Engaged Capital Owns a Significant Percentage of RCII’s Shares With an average tenure of 10+ years, independent directors own only ~0.4% of RCII shares1 Engaged Capital owns ~7x as many shares as all of RCII directors combined2 Despite each serving on
Slide 79: We Seek to Replace Directors Responsible for Failed Strategy
We Seek to Replace Directors Responsible for Failed Strategy, Failed Succession Planning and Failed Oversight Mark E. Speese Leonard H. Roberts Jeffrey M. Jackson Chairman of Rent-A-Center since Director at J.C. Penney Company since Managing Director of Thayer 2001 and director since 1990 2002
Slide 80: The Time for Change is Now
Cee The Time for Change is Now 79
Slide 81: Engaged Capital's Plan: Reconstitute the Board
Engaged Capital’s Plan: Reconstitute the Board Jeffrey J. Brown Mitchell E. Fadel Christopher Hetrick CEO and founding member of Brown Equity President - U.S Pawn at EZCORP Director of Research at Engaged Capital Partners, LLC (NASDAQ: EZPW) from 2015 to 2016 Senior Consumer Analyst at Relat
Slide 82: Full Biographies
Full Biographies Mr. Brown’s extensive transactional and corporate governance expertise will be valuable assets to the Board Jeffrey J. Brown is the Chief Executive Officer and founding member of Brown Equity Partners, LLC (“BEP”), which provides capital to management teams and companies needing e
Slide 83: Full Biographies
Full Biographies Mr. Fadel will bring industry-leading, independent RTO operational insight to the Board Mitchell E. Fadel is currently self-employed after most recently serving as President – U.S. Pawn for EZCORP. Inc. (NASDAQ:EZPW), a leading provider of pawn loans in the United States and Mexic
Slide 84: Full Biographies
Full Biographies Mr. Hetrick is a Principal at Engaged Capital, RCII’s largest shareholder Christopher B. Hetrick has been the Director of Research at Engaged Capital, a California based investment firm and registered advisor with the U.S. Securities and Exchange Commission focused on investing in
Slide 85: Engaged Capital's Plan: Initiate a Strategic Alternatives Process
Engaged Capital’s Plan: Initiate a Strategic Alternatives Process 50% to 100% potential upside for shareholders with limited downside1 Evaluate all strategic alternatives available, including a sale of the entire Company Evaluate if a successful transaction can generate the same or greater upsid
Slide 86: Engaged Capital's Plan: Improve Corporate Governance
Engaged Capital’s Plan: Improve Corporate Governance Drive shareholder value through governance Engaged Capital’s corporate governance prescriptions include: – Separate Chairman/CEO roles – Declassify the Board for the 2018 Annual Meeting to hold all directors accountable – Implement a CEO success
Slide 87: Engaged Capital's Plan: Implement Capital Allocation Best Practices
Engaged Capital’s Plan: Implement Capital Allocation Best Practices Advise on prudent capital structure and capital allocation Immediately bring significant banking and capital structure expertise to the Board’s discussions and negotiations with lenders regarding the Company’s capital structure al
Slide 88: Engaged Capital's Plan: Corporate Strategy
Engaged Capital’s Plan: Corporate Strategy Bring a shareholder mentality to strategy development Bring extensive RTO industry experience and a large shareholder presence to a currently stale and poorly-aligned Board Ensure all operational plans approved by the Board are made to maximize return o
Slide 89: Contact Information
Contact Information Investor Contact: Saratoga Proxy Consulting, LLC John Ferguson, 212-257-1311 [email protected] Media Contact: Bayfield Strategy, Inc. Riyaz Lalani, 416-907-9365 [email protected]
Slide 90: Appendix
Cee Appendix 89
Slide 91: Estimate of RCII Turnaround Plan (100% Realized)
Estimate of RCII Turnaround Plan (100% Realized) 2013A 2014A 2015A 2016A 2017E 2018E 2019E Revenue ($M) 3,094 3,158 3,278 2,963 2,760 2,843 2,985 Growth 0.4% 2.1% 3.8% (9.6%) (6.9%) 3.0% 5.0% EBITDA ($M) 335 285 298 185 139 227 299 Margin 10.8% 9.0% 9.1% 6.3% 5.0% 8.0% 10.0% Net Income ($M) 129 104
Slide 92: Valuation of RCII Turnaround Plan
Valuation of RCII Turnaround Plan 2019E EV/EBITDA Valuation (30% Realized) 2019E EV/EBITDA Valuation (70% Realized) 2019E EBITDA 187 2019E EBITDA 251 Multiple 5.5x Multiple 6.5x Enterprise Value 1,029 Enterprise Value 1,633 Net Debt 520 Net Debt 508 Equity 509 Equity 1,125 Shares 53 Shares 53 Price