- Engine Capital and its hedge fund partner Red Alder pressured Ann Inc. to sell Ann Taylor and all its subsidiaries following company’s Q2 report.
- Engine Capital and Red Alder believe Ann could gain about $2.5 billion from the sale.
- Ann Inc. has performed sluggishly over the past two years even still it has achieved better results than many retail chains.
Ann Inc. (NYSE:ANN) released its second quarter earnings report recently. Shortly after the report was released, activist investor Engine Capital and its hedge fund partner Red Alder pressured Ann Inc. to sell Ann Taylor and all its subsidiaries so as to boost shareholder value as they felt that currently the company is extremely undervalued.
Engine Capital, Red Alder push for sale
Collectively, these two partners own more than 1% of Ann Inc.'s outstanding shares. They have publicly urged the company to sell at an extensive premium that lies over its stock price currently prevalent in the market. Engine Capital and Red Alder stated in their letter to Ann Inc.'s board of directors that they believe that the company is "deeply undervalued". They also stated that Ann Inc. could raise a price of $50 to $55 for each share, and that estimate is 45% above the stock's current market price.
The two firms are prepared to start a public campaign as they claim that their meetings with the company have proved to be a failure. They state that Ann Inc. is not well equipped to face the challenges in the present retail business environment.
Recent slowdown not the reason for sale
Engine Capital and Red Alder stated in the letter that they believe the company to be an appropriate contender for a private equity acquisition. The company has performed consistently over the past many years and has the capability to generate better margins and improved free cash flow figures. Therefore these two investors predict that if Ann Inc.'s brand was acquired by a huge global retailer then it could enhance the presence of the brand over the world in a shorter period of time.
Engine Capital and Red Alder believe Ann could gain about $2.5 billion from the sale. They think that the existing state of affairs is weak. Therefore they urged the board of directors to immediately look for other options that could lead to an increase in shareholder value. Within these options they suggested the sale of the company.
In the second quarter of fiscal year 2014 Ann Inc. reported earnings of $32.7 million compared to $35.6 million in fiscal year 2013's second quarter. For the third quarter of 2014, Ann Inc. lowered its revenue outlook. Due to these results, price for Ann's stock fell by almost 5%.
Largest Investor Supporting Ann
The owner of Engine Capital, Arnaud Ajdler has also invested in other retail chains and this isn't his first time forcing changes in a women's retail brand. Despite Engine Capital's public campaign to force the company to sell the brand, the pressure on Ann would be insignificant. This is because the biggest investor for Ann Inc., Golden Gate Capital is backing the management of the company through this phase. Golden Gate Capital is not in favor of Ann to sell the brand. It has invested in the company from a long run viewpoint. The investor currently owns 9.5% of Ann Inc.'s shares.
Market capitalization for Ann is around $1.8 billion and the company's shares are up by 2.6% in this year. The two investors believe that Ann's stock or its balance sheet is not being fairly valued by the market. Ann has low amounts of debt and around $150 million in cash and cash equivalents. They also think that there's a huge gap lying between the trading value of Ann's stock and the intrinsic value of the business. Firms taking over their competitors, value 8 to 9 times Ebitda compared to the share price of Ann which is around 5.5 times earnings before interest, taxes, depreciation and amortization.
Ann Inc. has performed sluggishly over the past two years even still it has achieved better results than many retail chains. Due to slow store traffic and merchandise issues, the company has lowered its outlook for 2014. But despite these concerns, Ann Inc. is still one of the top retail brands in the U.S and has been successful in attracting more customers to its stores.
Due to the recent economic problems in the U.S, sales have decreased for most retail chains but this issue is not big enough for the company to sell the brand. Ann Inc. has significant customer loyalty and due to its resilient multi-channel retailing feature, Ann is in a good position to continue with its operations.
If the management of Ann Inc. is unable to get a striking buyout offer then Engine Capital and Red Alder will likely suggest a share repurchase which would be funded by debt. Ann Inc. publicly claimed that it welcomed communication with its investors. The company is working towards the goal of increasing shareholder value and plans to expand and grow its operations in the coming years.