July 7 (Bloomberg) -- PetSmart Inc. investor Longview Asset Management LLC joined Jana Partners LLC in calling for the pet-supply seller to consider a sale while the retailer said it was reviewing ways to return more cash to shareholders.
PetSmart would be more highly valued by private holders than investors in public markets, and a sale would prevent a protracted activist battle that would distract executives and erode value, Chicago-based Longview said today in a letter included in a securities filing. Longview said its clients own about 9 percent of the company’s shares and would consider contributing some or all of their stock into a deal.
Longview’s request ramps up pressure on PetSmart to make changes following Jana’s call last week for the retailer to consider options including a sale, return “significant” capital to shareholders and improve its operating performance. PetSmart said today that it was reviewing changes to its capital structure to return more money to investors.
“Now that Jana has raised the possibility of a sale and that prominent brokerage firms have suggested that PetSmart is ‘in play,’ we believe the board should consider this path,” Longview Chief Executive Officer James A. Star said in the letter, which noted that his firm didn’t advocate for a sale in previous discussions with the retailer.
PetSmart said today in an e-mailed statement that its leadership appreciates the views of its investors and will consider them as it works to enhance shareholder value.
PetSmart, based in Phoenix, rose 2.5 percent to $68.95 at the close in New York. The shares have slid 5.2 percent this year.
“It’s not clear to me that a buyout does anything,” Sean McGowan, an analyst at Needham & Co. in New York, said in an interview before Longview’s filing. “There aren’t any easy fixes because there aren’t any obvious problems.”
Executives have already worked to boost growth and returns in recent years by slowing expansion and adding higher-margin products such as super-premium pet food, McGowan said.
PetSmart has a payout ratio, which measures the percentage of its profit paid out as dividends, of about 18 percent, according to data compiled by Bloomberg. That’s about half of the 35 percent average ratio for companies in the Standard & Poor’s 500 Index. The company spent about $485.4 million buying back stock in the year through Feb. 2, according to data compiled by Bloomberg.
“Returning that cash to the shareholders in the form of a repurchase or a dividend increase, or taking on more debt -- they could accelerate that,” said McGowan, who recommends holding the shares.
Slower growth is “inevitable” at the retailer now that the easy fixes are completed, McGowan said. He added that management needs to put more emphasis on online sales, where PetSmart has a “great opportunity” to compete with Wag.com, the online pet-supply site that is part of Amazon.com Inc.’s Quidsi Retail unit.
“Their biggest vulnerability, which they’ve ignored, is online,” McGowan said.
Jana, which is known for pushing corporate managements to make changes, also called on PetSmart to improve disclosures and the composition of management and its board.
PetSmart responded to Jana’s filing with a statement saying that it welcomes communication with shareholders and that its board and management are committed to creating value for shareholders.
The retailer, which has about 53,000 employees, operates more than 1,340 pet stores, as well as 200 in-store dog and cat boarding facilities.
PetSmart’s relatively low valuation -- before the news of Jana’s stake pushed the shares up -- may appeal to private-equity suitors, with potential double-digit returns, David Strasser, an analyst at Janney Capital Markets, said in a note last week.
PetSmart also earns less operating profit for each dollar of sales than its peer group average, which means an acquirer would have an opportunity to boost margins, data compiled by Bloomberg show. PetSmart rival Petco Animal Supplies Inc. was acquired by private-equity investors led by Leonard Green & Partners LP in 2006.
Jana, the $10 billion New York hedge fund run by Barry Rosenstein, said it has a 9.9 percent stake in PetSmart.
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