Engaged Capital will learn on June 8 if its Texas-size brawl against publicly traded Rent-A-Center Inc. is successful.
That’s when Plano, Texas-based Rent-A-Center holds its annual meeting. The publicly traded company had a $584 million market cap last week.
In one corner is the Newport Beach-based activist firm founded by Glenn Welling, a Wall Street insider with lengthy experience in activist investing who’s now the largest shareholder with 17%. Engaged Capital wants three seats on the seven-member board and for the board to explore all options, including a potential sale.
“There’s been a pattern of manipulation of the corporate machinery from the Rent-A-Center board to entrench the directors and disenfranchise shareholders,” Welling said in an interview.
In the other corner is Rent-A-Center founder Mark Speese, who started his company in 1986 and who took back the reins as chief executive in January. The 2005 Ernst & Young regional entrepreneur of the year is seeking redemption through his own turnaround plan, which doesn’t include a sale.
Rent-A-Center has also implemented the notorious “poison pill” to thwart a takeover and said Engaged Capital wants “a quick flip” of the business.
“Engaged Capital’s hand-picked nominees will be first and foremost loyal to Engaged Capital and will pursue its agenda to run a sale process, however value destructive it may be for long-term stockholders,” Rent-A-Center said in a May 15 letter to shareholders.
The activist fight is the latest for Engaged Capital, which Welling started in 2012 with an $85 million seed investment from Grosvenor Capital Management.
Activist Background
Welling’s background includes seven years as a managing director at Credit Suisse over the Investment Banking Department’s Advisory Business, where he advised on more than $100 billion in transactions in the 12 months prior to leaving in 2008.
Prior to Engaged Capital, he was managing director at Relational Investors LLC, a $6 billion activist equity fund founded by Ralph Whitworth and David Batchelder and which became famous for battles against management at J.C. Penney Co. and Hewlett-Packard Co. Whitworth was chairman of Lake-Forest based healthcare provider Apria Healthcare. Engaged Partners include many alumni from Relational, which closed its doors in 2015.
Engaged Capital’s strategy is to find good businesses trading at a significant discount to their intrinsic value and then serve as the catalyst for changes in management or boards, Welling said.
Among its winners were Outerwall Inc., a 61% gain, and Medifast Inc., a 49% gain. Among its losers were Abercrombie & Fitch Co., an 18% loss, and Rentech Inc., a 66% loss. Its average holding period is 1.7 years, according to an investor presentation.
The firm has exited 15 core positions, with an average median return of 36%, Welling said.
Subprime Furniture
He said his firm studied Rent-A-Center and its competitors for about three years.
“We like the industry because it provides an important service to the subprime customer who doesn’t have credit to purchase furniture and appliances needed to furnish their homes,” he said.
Rent-A-Center employs 21,600 at 2,600 stores in the United States, Mexico, Canada and Puerto Rico.
The company generated $2.9 billion in revenue last year, an almost 10% decline from 2015. It reported losses of more than $1 billion combined in both years as it experienced challenges, such as installing a new computer system. Chief Financial Officer Guy Constant resigned in December. Chief Executive Robert Davis, who succeeded Speese in 2014, left in January.
Speese, after returning as chief executive, devised a plan to increase profit with higher prices, more e-commerce offerings and fewer employees.
The plan hasn’t convinced many investors. After reviewing it, Marcato Capital, which owns 4.9% of shares, urged Rent-A-Center to pursue a sale.
Rent-A-Center shares reached a high of almost $40 in 2013 and had steadily declined to a low of $7.76 in January. They’ve since climbed to $11.18.
Speese, who declined to comment for this article, and other board members own 3.4% of shares.
No to Two Seats
Rent-A-Center said it offered two board seats to Engaged Capital, which replied that that was insufficient because the board wouldn’t review strategic alternatives.
Welling said the Rent-A-Center board hasn’t evaluated all of its options, which include a sale of the entire company to a larger rival, such as Aaron’s Inc.
“We believe there is $300 million conservatively of synergies in a transaction with one of the large strategic players in the industry,” he said.
Accepting a takeover by Aaron’s might be a bitter pill, because Rent-A-Center unsuccessfully tried to buy Aaron’s, Reuters reported in 2015. Engaged Capital’s slate of nominees might be more bitter still.
“Engaged Capital’s nominees lack the necessary and relevant experience to shape the Company’s strategy,” said Rent-A-Center’s May 15 proxy letter.
It’s an ironic argument, because one nominee is Mitchell E. Fadel, who was president of Rent-A-Center from 2000 to 2015 and was a director for 13 years. Rent-A-Center accused Fadel of making “several” missteps, including inventory misalignment, and said he was forced to resign from the board. Rent-A-Center accused him of violating a loyalty agreement by working with Engaged Capital.
“Mitch Fadel has an exemplary record of value creation,” Welling said. “Mr. Fadel is one of the best operators in the rent-to-own industry. It’s very convenient for the company he spent almost 32 years with to forget that.”
Another nominee is Jeffrey J. Brown, founder of Corona del Mar-based Brown Equity Partners LLC. He’s sat on the boards of over 40 companies, and the company’s capital partners are affiliates of Edward P. Bass, one of the four famous Bass brothers from Texas.
Share Dump?
Besides Speese, Rent-A-Center has nominated two other sitting directors who have a lot of experience in controversial companies: Jeffery Jackson, who was CFO at Sabre Holdings Inc. and is managing director of Thayer Ventures, a VC firm that invests in the travel industry; and Leonard Roberts, a director at J.C. Penney and a former chief executive of RadioShack Corp.
In the past three months, three analysts have raised their ratings to a buy, while another five have maintained a hold, and one has cut the rating to sell. Raymond James analyst Budd Bugatch rates the shares a “strong buy,” with a $16 target price but with a caveat on the June 8 meeting.
“Should Engaged lose its contest and ‘dump’ its shares, the bottom might fall out from under the shares again,” Bugatch wrote in a report to investors.
