
Ethan Allen Can't Dodge This Proxy Fight by Merely Redecorating
NEW YORK (The Deal) -- With Sandell Asset Management raising the specter of a proxy fight, Ethan Allen Interiors (ETH) - Get Report may need to look long and hard at its alternatives.
The New York-based activist investor wrote to the interior design and furniture company's chairman and CEO, Farooq Kathwari, on Aug. 14, suggesting that the company's sum-of-the-parts share price should be $41 a share, either through a sale of the company or a move to monetize its real estate.
The Danbury, Conn.-based company's 60-day moving average stock price as $28.07 as of the close Friday.
Tom Sandell, the fund's founder, argued that the company could monetize its real estate through a "series of sale leaseback" transactions or the creation of a publicly traded real estate investment trust. He also suggested that there would be a "line out the door" of private equity firms interested in buying the company if it were to put itself up for sale.
He also said he is prepared to launch a proxy fight to nominate dissident directors at the company's recently announced Nov. 24 annual meeting, though he added would prefer to find an "amicable resolution" instead.
However, people familiar with Sandell point out that the activist fund is eyeing a Sept. 25 deadline to nominate a slate of dissident directors to the company's board if the company doesn't take his recommendations into consideration.
A proxy solicitor familiar with the situation also noted that indications are that Sandell is planning a contest and moving in that direction.
The activist is in a stronger position to launch a change-of-control contest at the furniture company as Ethan Allen doesn't have a staggered board. It has eight directors, each of whom is elected annually.
One analyst who follows the company said rivals such as Restoration Hardware Holdings (RH) - Get Report and Williams-Sonoma (WSM) - Get Report are taking some of Ethan Allen's market share. Ethan Allen has had a harder time courting younger customers, the analyst noted.
The company and the investor have already squared off over the timing of the annual meeting. Ethan Allen had scheduled this year's meeting for Oct. 15, a month earlier than last year's. The furniture seller then rescheduled after Sandell described it as an "underhanded" attempt to thwart the nomination process. Kathwari said, in an Aug. 14 statement that he wanted to "ensure" that any shareholder had the opportunity to submit nominations.
For his part, Sandell has stepped up proxy fight efforts in recent years, and he has even launched a few change of control contests. According to FactSet, Sandell has engaged in 35 activist campaigns and instigated nine proxy fights since the fund's formation in 1997. Most were settled to include one or more Sandell nominees.
Sandell has targeted a number of companies with the goal of pressing them to sell or monetize their real estate holdings.
Under the imminent threat of a change-of-control proxy fight from Sandell, for example, Bob Evans Farms (BOBE) in May announced it had retained a real estate servicing company to help it conduct a series of property sale-leasebacks and use the proceeds for share repurchases. By June, Bob Evans announced it would work on a sale-leaseback arrangement of up to 60% of its roughly 500 restaurants in a last ditch effort to stave off a new Sandell proxy fight. The activist had already succeeded in getting a number of his directors on the board.
At Ethan Allen, Sandell, a 5.5% stakeholder, points to the company's 53 wholly owned retail design centers, corporate headquarters, an 18-acre campus, 200 room hotel and conference center and eight company-owned manufacturing facilities as being valued at roughly $450 million or $16 a share, "little of which" is reflected in the stock. Sandell added that he believes there are "interested parties" that could help monetize the real estate. An Ethan Allen official did not return calls.
Ethan Allen overall has a strong governance score of two out of 10, with 10 being the worst score, according to an ISS QuickScore report obtained by The Deal. Nevertheless, there are a number of significant red flags Sandell could point to as part of an effort to convince institutional investors to back a potential proxy fight campaign. For example, ISS notes that Kathwari's pay last year was 461% higher than the next highest paid executive officer. In addition, ISS points out that 43% of the nonexecutive directors on the board have lengthy tenures. Clinton Clark, 71, for example, was first elected as a director of the company in 1989 while Kristin Gamble, 68, came on board in 1992.
In addition, the role of chairman and CEO have not been separated, a point of contention among institutional investors. Shareholders need a 20% stake to hold a special shareholder meeting and they can't act by written consent -- both governance red flags that make it hard for any contest to take place outside of Ethan Allen's annual meeting.
In a proxy contest, however, Sandell would need to gain the backing of a large number of typically passive institutional investors, including substantial Ethan Allen stakeholders BlackRock (BLK) - Get Report, Vanguard and T. Rowe Price.
Also Ethan Allen reported in October that Kathwari owned an 11% stake -- a major block that would likely be opposed to Sandell's efforts.
Nevertheless, a settlement could be in the offing, one that could include some new directors backed by Sandell and a move by the company to consider its alternatives.
Otherwise, Ethan Allen may find that the interior design of its "dream" boardroom looks a whole lot different in November than it did just a few months earlier.








