Activist's campaign at Ann Taylor owner raises M&A questions

Activist investor Stadium Capital Management LLC on Monday launched an activist campaign at Ascena Retail Group Inc. (ASNA), suggesting that the owner of the Ann Taylor Loft, Dressbarn and Lane Bryant brands may want to consider "mergers, consolidations, sales or acquisitions of assets" in a move that comes after the company recently issued downbeat 2017 guidance and posted fiscal 2016 fourth-quarter earnings that missed analysts' expectations.

The activist fund's foray comes after Ascena last month announced it was making a number of organizational changes that it expects will provide cost-savings of $100 million to $150 million by fiscal 2019. It also comes after Ascena on Sept. 19 issued a troubling earnings report that drove its stock price down from about $8.12 a share to $5.69. Since then Ascena's stock price has continued on a downward trajectory, trading up slightly on the news of the campaign early Monday at about $4.96 a share.

Stadium Capital had been accumulating shares since 2012, first as a passive investor, making a lot of its accumulations at prices well above Ascena's current share price, according to FactSet. The insurgent fund recently significantly increased its position and reported acquiring a 6.9% Ascena stake in an activist filing Monday that noted that it may seek to communicate with other shareholders and industry participants about the company. The fund added that it has been in discussions with Ascena's management "given the numerous changes" to its board in the prior year.

The Mahwah, N.J.-based company on Oct. 11 appointed Linda Yaccarino, a division chairman at NBCUniversal Media LLC, to its board. According to relationship mapping service BoardEx, a service of TheDeal, Ascena also installed four new directors in 2015.

With Stadium Capital's campaign, Ascena comes off The Deal's Watch list of possible activist targets. The company had been on the list since 2014 and in 2015 speculation that an activist could launch a campaign increased after San Francisco buyout shop Golden Gate Capital revealed a 9% stake in the retailer including a letter gushing with praise and touting the retailer as "great business." Disappointing 2016 fourth-quarter earnings, drove its stock price down, making it all the more attractive to an activist pushing for a deal. 

Golden Gate Capital, according to people familiar with the situation, was among the final two bidders seeking to acquire Ann Inc. before the buyout shop ultimately lost out to Ascena and its $2.2 billion cash and stock deal in May 2015. The private equity firm likely acquired a large stake in Ascena, partly, to drive a potential partnership between the retailer and private equity firm. It is possible that Stadium Capital could put pressure on Ascena to sell itself, perhaps to Golden Gate, which acquired its stake between August and October 2015 at prices ranging from $11.58 a share and $13.92 a share.

Stadium Capital is not among the top-tier U.S. activists. However, it has some experience with activism and proxy contests seeking to elect dissident directors to drive a share-price-improving agenda. The fund has launched nine activist campaigns, including four publicly disclosed letters to companies, and one proxy contest since being founded in 1999, according to FactSet. In May Stadium called off a director-election battle at one of its targets, Big 5 Sporting Goods Corp. (BGFV), after the two-sides reached a settlement agreement to add new directors and remove a few anti-takeover protections. In addition, other activists own stakes in Ascena, including Discovery Group LLC, with a 1% stake, and Private Capital Management LLC, with a 1.25% stake and Engine Capital Management LLC, with a 0.12% stake, according to FactSet. 

An analyst following Ascena said he was skeptical about whether any financial or strategic buyer would be interested in acquiring the retailer, noting that very few companies want to acquire businesses like Ascena, which has a lot of brick and mortar locations. He said it wouldn't make much sense for Ascena to divest one or more retail brands, in part, because the company built two state-of-the-art distribution centers for all its brands. He said that one potential strategic buyer that could make a play would be GAP Inc. (GPS), but that even it wouldn't be that interested. He added that Stadium Capital may want to have a seat at the table with a board position. 

Stadium Capital officials declined to comment.