PetSmart Put On Defense By Jana Partners

Luke Jacobi

PetSmart (NYSE: PETM) is garnering attention after Jana Partners sent a letter to the board of directors. By more than one million shares, Jana is the largest shareholder after showing a 9.9 percent stake in early July.

If PetSmart does not consider a sale or other strategic alternatives, Jana told PetSmart it would look to change directors at the upcoming annual meeting. Jana’s board members would push for a sale.

The letter states, “Given PetSmart's chronic underperformance and significant private equity interest in the Company, a sale in this case very likely offers the highest risk-adjusted return for shareholders.”

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Further outlining the board’s incompetence, the note criticizes the board’s intentions to undergo a leveraged recapitalization: “A leveraged recapitalization is appropriate only where a company can credibly say that it will drive future value higher by addressing the underlying causes of its share price underperformance.”

Jana notes that the “humanization” of pets has helped the industry as a whole, but gave competitors another opportunity to steal PetSmart’s market share as the board stood idly by.

Other opportunities Jana claims PetSmart missed include e-commerce, margins far below the industry average, resistance to change and a lack of product innovation.

Shares of PetSmart shot higher when the letter was first filed in a 13D, but have since pulled back. Shares of PetSmart were last trading flat at $70.46.

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