Finance

The strange case of the ‘$100m deli’ and the universities that own a slice

Duke and Vanderbilt universities, two of the most prestigious seats of learning in the US, are among the biggest shareholders of a company that owns a single sandwich shop in New Jersey and has a stock market valuation of $100m despite recording just $13,976 in sales last year.

The delicatessen in Paulsboro, a dusty refinery town abutting the Delaware river near Philadelphia, has attained notoriety on Wall Street after its parent company Hometown International was named by hedge fund manager David Einhorn as an example of the “quasi-anarchy” that he said had taken hold in financial markets.

“The pastrami must be amazing,” Einhorn quipped in a letter to investors a fortnight ago, citing Hometown’s nine-figure valuation as an example of how toothless financial regulators were permitting a destructive feeding frenzy. “Small investors who get sucked into these situations,” he wrote, “are likely to be harmed.”

Hometown has filed financial statements as a public company since 2015. Its shares are not listed on an exchange, making them far less liquid than blue-chip stocks; instead they trade “over the counter” through a network of broker-dealers who negotiate transactions with potential buyers and sellers. On a typical day, trades in Hometown’s stock add up to only a few thousand dollars. Yet the share price has soared, from $1.25 in October 2019 to $13 this week.

Unlike GameStop and other “meme stocks” that have ridden a wave of interest from housebound day traders, Hometown’s valuation was propelled not by amateur speculators but institutional investors. Among its key backers is a Hong Kong firm set up by up by veterans of Och-Ziff Capital Management, which sees its investment as a potentially lucrative variation on the special purpose acquisition companies that have recently helped to drive corporate dealmaking to 40 year highs.

Through a review of securities filings and public records, and interviews with key insiders, the Financial Times has pieced together this account of one of the strangest episodes in an extraordinary period for US capital markets — one that has appalled some experts. “[This] is a self-parody of a Spac,” said John Coffee, a professor at Columbia University’s law school who has written about hostile takeovers. “And that is what I would expect at the end of a bubble.”

Hometown “has had limited success operating its current delicatessen”, a lawyer for the company told the Securities and Exchange Commission in September. During a recent lunchtime rush, three customers waited in a harshly lit dining room while staff tended the griddle and struggled with a temperamental credit card machine.

The company has excelled, however, at raising cash. Hometown brought in $2.5m in a private share placement in April last year, despite a six-month closure of its deli prompted by New Jersey governor Phil Murphy’s pandemic stay-at-home order. About $1m has already gone to cover last year’s losses, loan repayments and other outgoings, according to financial statements filed in March. By December last year, the kitchen was open again, with monthly losses of about $70,000 — and enough cash to sustain them for more than a year.

Much of that money came from the multibillion-dollar endowments of Duke and Vanderbilt Universities, which together invested about $2m. Both colleges referred questions about their investments to Maso Capital, a Hong Kong-based investment firm.

Now, Hometown plans to use what remains of the cash to fund a business acquisition that sounds as if it would set the company on a trajectory leading far beyond Paulsboro. The company, whose chief executive Paul Morina is also chief wrestling coach and principal at a nearby high school, is keeping an open mind about what it will acquire.

“We will not restrict our potential candidate target companies to any specific business, industry or geographical location,” Hometown told investors in March. That phrase echoed a formulation commonly used by “blank cheque” companies, or Spacs, which raise capital on the stock market as empty corporate shells and use the cash to go shopping for deals.

Spacs are fuelling America’s mergers and acquisitions boom, accounting for $172bn worth of US corporate acquisitions in the first quarter, according to data from Refinitiv, and persuading emerging technology companies including Lucid Motors, a rival to the electric car maker Tesla, and the online broker eToro to embrace public ownership.

Although critics say Spacs are a lightly regulated backdoor to the stock market, which allows untested companies to go public with little scrutiny, the vehicles are gaining widespread acceptance. Still, experts say it is unusual for a business such as Hometown with existing operations to try to reinvent itself as a blank-cheque company, years after it filed to become a public company.

During a recent lunchtime rush, three customers waited in a harshly lit dining room while staff tended the griddle and struggled with a temperamental credit card machine. The FT ordered a cheesesteak © Mark Vandevelde/FT

The plan to consummate a merger is the latest twist in Hometown’s puzzling corporate existence, which began with its incorporation in Nevada in 2014. Barely a year later, the company filed for an initial public offering, identifying itself in a 2015 SEC submission as “the originator of a new delicatessen concept” featuring “‘homestyle’ sandwiches and other entrées in a casual and friendly atmosphere”.

That draft prospectus, filed before the Paulsboro deli opened its doors or even “fully executed” a lease, prompted the SEC to write a letter to Morina stating: “We believe that you are a shell company”. Morina shot back that the company had purchased new carpets, taken down walls and doors, put in gas pipes and wiring for refrigerators, and bought an oven with six burners, among other equipment — all to “accomplish its goal of [a] grand opening”.

Hometown began selling sandwiches in October 2015, but it would take longer before the public could buy shares in the company that owned it. Most of the stock was owned by Morina and his fellow director Christine Lindenmuth, who teaches mathematics at the high school where Morina is principal.

A few dozen financial investors put up $180,000 between them, in return for a roughly 5 per cent stake, in a private placement that began in 2014. Among the early backers were a state superior court judge and his wife, and several people who appear to be relatives or associates of Peter Coker, a North Carolina businessman.

Large blocks of shares have occasionally changed hands in off-market transactions. In March last year, shortly after he became chair, Coker’s son Peter Coker Jr bought a 29 per cent stake from Lindenmuth and immediately sold the shares to three separate purchasers.

The following month Hometown struck its boundary-pushing deal with an investment firm.

Hong Kong-based Maso Capital is in many ways the opposite of the meme traders that have taken stock markets on their wild ride. For much of the past decade, Maso has busied itself finding ways to help cash-rich companies in Asia transition to nimbler balance sheets. Last year Maso even launched a Spac, with Coker Jr as a director.

“We’re not afraid to roll up our sleeves and be innovators,” Maso’s co-chief investment officer Manoj Jain said. “We’re viewed as proponents of good governance in the region.”

Where Einhorn sees an overvalued food service business in southern New Jersey, Jain sees a way to control a US acquisition company on the cheap. “The concept of shell companies has existed globally for many years,” he said. “These are broadly quasi-dormant public companies, that can be used to merge with private companies quickly and easily.”

According to Jain, repurposing an existing business for M&A is an efficient way to extend the Spac model to smaller deals. “The target companies we’re speaking to are in the $300m to $600m zip code in terms of valuation,” he said. “To get it to work from a public market perspective, the Spac needs to be $75m to $100m.”

Yet setting up a Spac can cost millions of dollars in administration fees alone, eating up a large portion of the value in such a small deal. “[Hometown] is a more flexible structure . . . with a longer time to find a target, and a better economic uplift,” Jain said.

“It works like a mini-Spac,” he added. “When you execute the merger, the name changes, the ticker changes, the board changes, the management changes, everything changes, as the merged entity enters the US capital markets.”

Not everyone is convinced. “This doesn’t work at all,” Coffee said. “The [over-the-counter market] doesn’t give you real liquidity. All you get is the ability to negotiate on a bulletin board with a possible purchaser on the other side.” However, Jain believes that, with the right acquisition target, Hometown may be able to list on the Nasdaq exchange. Yet last week the company was pushed further away from the investment mainstream when trading venue OTC Markets attached a warning to its shares.

While some shareholders have recorded big gains, trading has been so thin that Hometown’s $100m valuation may be little more than hypothetical. Duke and Vanderbilt paid $1 a year ago for shares that were quoted at $13 this week, and investors who went in before 2016 have done even better on paper. Yet fewer than 2 per cent of Hometown’s shares changed hands in stock market transactions over the past 18 months, according to data from Senteio.

Uncertainty over Hometown’s valuation could yet thwart the company’s M&A plans. “Who will want to merge their company into a deli and give them a $100m valuation?” asks Joseph Grundfest, a law professor at Stanford and former SEC commissioner. “A Spac has cash. We can value cash. The deli might have pickles and pastrami, but I doubt they’ve got $100m worth of pickles and pastrami.”

Despite the limited market for Hometown’s shares, Wall Street scrutiny has at least invigorated demand for its sandwiches. Philadelphia Magazine was among the outlets to publish a restaurant review last week. When the FT ordered a cheesesteak, a clerk suggested adding a $15 dollar T-shirt with the Hometown logo and the slogan “Eat so we both don’t starve”.

“I’m keeping your credit card,” said the clerk, briefly looking as though she might be serious. “And if you write a bad review, I’m going to keep charging it.”

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