Activist investor Mick McGuire on Wednesday escalated his battle with UGG-boot maker Deckers Outdoors Corp. (DECK) - Get Report by seeking total control of the company's board in a move that he hopes will help drive an auction process.
"While we appreciate that the company is undergoing a strategic review and we are eagerly awaiting the results of that process, we continue to believe that Deckers lacks proper oversight," McGuire said in a statement. "Should the company's process not culminate in a desirable outcome, we believe the entire board must be replaced."
It currently trades at $64.49, up about 2% on the news of the battle.
Nevertheless, The Street had expected a boardroom battle since McGuire said in June that he would launch a director contest to replace Deckers full board if an ongoing strategic review process didn't culminate in a sale of the whole company at a fair price. So far, a strategic review the company launched in recent months hasn't resulted in a sale of the business. Also, the deadline to nominate dissident director candidates for the company's 2017 annual meeting is set for Friday, giving McGuire and his fund, Marcato Capital Management, a limited time frame to take action.
However, it is unclear if the UGG boots maker could find a buyer at a price McGuire would be satisfied with. Sam Poser, an analyst at Susquehanna Financial Group, said a sale of Deckers does not appear to be materializing in a timely manner.
A key issue is the state of the UGG brand, which isn't as healthy as it once was. In June, Poser said in a report that he spoke with potential strategic buyers who have told him that they wonder why anyone would pay for a UGG brand that has annual revenue of about $1.5 billion when the company would be a more efficient brand at $1 billion in annual revenues. Poser noted that Deckers had an EBIT margin in fiscal 2017 of about 9.25%, significantly down from its 2014 EBIT margin of 12.9%.
Marcato's total board take over effort is unusual since most activist campaigns, even those employed by McGuire in the past, have sought to install a minority-slate of directors. The most high-profile, recent total-control battle took place in 2014, when Starboard Value's Jeff Smith succeeded at replacing all the directors at Darden Restaurants, a chain that had a $6.5 billion market capitalization at the time the contest was launched. It now has a $10.4 billion market capitalization.
However, FactSet notes that Marcato has never sought control of a board before. In addition, he doesn't have that much experience in the activist world, at least not as much as Starboard's Smith. Marcato has launched 23 campaigns including two proxy fights since 2011, FactSet said. That raises the question about whether he could succeed at the effort. His previous boardroom battle suggests he could win: McGuire is coming off a successful effort in which he drove Buffalo Wild Wings (BWLD) CEO Sally Smith to resign at the same time that he was able to install a minority slate of dissident directors onto the restaurant chain's board.
In a statement, Deckers said it welcomed open communications with its stockholders and "values constructive input toward the shared goal of enhancing stockholder value." The company added that its management and board held "a number of discussions" with Marcato over the past eight months, with discussions continuing. It added that the company has brought on three new directors since 2014 and that it will give "full and fair" consideration to Marcato's nominees.
With Deckers, Marcato has a slate with a wide-variety of backgrounds. One candidate, Kirsten Feldman, had been employed by Morgan Stanley in their mergers & acquisitions and global retail group. Should Fedlman get a seat expect her to bring an M&A viewpoint to the board. Another candidate, Steve Fuller, served between 2004 to 2016 as chief marketing officer at L.L. Bean. Most other candidates came with C-Suite retail backgrounds, though one nominee, Matthew Helper, is a partner at Marcato. McGuire did not nominate himself.
Nevertheless, even if a sale is forthcoming, analysts don't have high hopes that it could result in much of a premium to the company's current share price. Poser said he values Deckers, based on a some-of-the-parts analysis, at $62 a share, with a $52 a share to $71 a share range for high and low scenarios. Poser added that if nothing comes of the strategic review, he expects the stock to revert to about $42 a share.
If McGuire succeeds at the boardroom battle, which is set to take place Dec. 14, it is very likely that he will try to shake up the company's management team, which is headed by CEO Dave Powers.