Here's Why Activist Welling Just Got a Second Boost in his Rent-A-Center Sale Effort

Activist investor Glenn Welling just got a second consecutive boost in his effort to have rent-to-own retailer Rent-A-Center  (RCII)   consider strategic alternatives, such as a sale of the company. 

That's because influential investor advisory firm Glass Lewis on Thursday recommended that investors back two of the activist's three director nominations up for the company's seven-person board at an annual meeting and proxy battle set for June 8. The Glass Lewis report, which was obtained by TheStreet, comes after the other major proxy advisory firm, Institutional Shareholder Services, over the weekend, also recommended that investors back two of three dissident director candidates.

Investors, particularly large institutions, pay close attention to ISS and Glass Lewis recommendations. Some even vote automatically in lockstep with the ISS suggestions. As a result, it is very likely that Engaged Capital will succeed at installing a minority slate of directors onto the company's board, which would likely push it towards considering a sale. 

Overall both ISS and Glass Lewis raised concerns with the company. Glass Lewis said it suffers from "poor financial and operating performance" and "lagged all benchmarks over all periods" it reviewed.

And ISS, in a report obtained by The Deal, backed up its decision by arguing that Rent-A-Center's board has taken some steps that appear far more "focused on undermining the dissident campaign than in bolstering shareholder confidence regarding the turnaround plan."

Both ISS and Glass Lewis recommended that investors back Christopher Hetrick, director of research at Engaged Capital, Welling's fund. Glass Lewis said Hetrick "could provide additional oversight and ownership perspective" if elected and advocate for "the broader review of strategic alternatives Engaged Capital has requested." ISS said he brings "valuable experience analyzing consumer companies." The report noted that his interests would be aligned with the other shareholders because of Engaged Capital's big stake.

However, ISS and Glass Lewis disagreed over who should be the second activist-backed nominee elected. ISS backed Engaged's nominee Mitchell Fadel, a former Rent-A-Center president, and director, noting that he worked at the company for 22 years that were mainly positive for shareholders. However, Glass Lewis said Fadel's operating experience overlaps with Rent-A-Center CEO Mark Speese. Instead, Glass Lewis said Engaged's dissident nominee Jeffrey Brown has "finance and transnational experience that could likely be of value to the board as it considers opportunities to maximize shareholder value."

A move by shareholders to elect Hetrick and Brown would likely send a message that investors want to see Rent-A-Center consider a sale. A board with Brown and Hetrick would focus on seeing if a sale made sense as an alternative to the company's turnaround plan. That means strategic M&A could be on the horizon.

The activist fund has been pushing for Rent-A-Center to consider all strategic alternatives, including a sale of the entire company, as its stock has been declining for several years. Welling was recently joined by another well-known activist, Marcato Capital Management's Mick McGuire, who also wants to see Rent-A-Center sold. Together, Engaged and Marcato own about 20% of Rent-A-Center's shares, about 16.9% for Welling and about 4.9% for McGuire. Welling's Engaged Capital owns a 20.5% economic stake, including shares and swaps. The activist fund had originally sought to nominate five directors to the company's board but later cut back on the number of its nominations.

There are at least two U.S.-based strategic buyers interested in Rent-A-Center-rival rent-to-own operator, Aarons   (AAN)   and private equity firm Vintage Capital Management LLC, a majority owner of a smaller rent-to-own competitor, Buddy's Home Furnishings, according to people familiar with the situation.

Also, incumbent directors may be over-tenured and potentially easy targets for replacement. According to relationship mapping service BoardEx, a service of The Street, incumbent directors Jeffery Jackson and Leonard Roberts, have served on the company's board for 10 and 11 years respectively. Governance experts are typically wary of directors that serve more than ten years, in part, because they can become too cozy with the CEO and not provide adequate oversight.

ISS backed Rent-A-Center's CEO Speese, who is also up for election to the board, over Engaged's third nominee. The firm said that Speese's "deep understanding" of the rent-to-own space makes him a "valuable contributor to the turnaround plan." In a statement, Rent-a-Center said it was pleased that ISS backed Speese, who was installed recently first as interim CEO and then later as its permanent chief executive. Speese was one of the company's founders and a former CEO, between 2001 and 2014, overseeing a period of general share-price improvement at the company.

 In response to the activist campaign, Rent-A-Center in April announced some initiatives to spur share-price value improvement, including an expansion of the AcceptanceNOW operation, a virtual rental business that partners with some furniture and appliance retailers, including Ashley Furniture Industries Inc. and Rooms TO Go.

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