By David Benoit
An activism fight is developing at Shutterfly Inc.
Marathon Partners Equity Management LLC, a New York hedge fund,
is planning to nominate three directors to the board of the online
photography service, citing concerns about the company's
acquisition strategy and compensation, according to people familiar
with Marathon.
The push to shake up the board comes after Shutterfly shopped
itself but failed to strike a deal last year, according to other
people familiar with the matter. The Redwood City, Calif., company,
which has a market capitalization of about $1.8 billion, held talks
with private equity bidders Bain Capital LLC and Silver Lake, but
the discussions didn't result in a deal, the people said. The talks
were reported widely and sent the stock climbing, but the share
price has since receded.
Marathon isn't directly pushing a sale of the company, though it
wouldn't be opposed to a deal at the right price, people familiar
with the matter said. Marathon, with about 5.5% of the company's
stock, is a longtime holder in Shutterfly and in July first said it
was in talks with the board and management over its ideas for the
company.
A spokeswoman for Shutterfly declined to comment Thursday.
In November, Shutterfly struck its own acquisition, spending
$14.5 million to buy GrooveBook, a service that sends subscribers
monthly books of photos on their phone and was featured on the
television show about startups, "Shark Tank."
That deal, the 10th acquisition made by Shutterfly since the
start of 2012 according to S&P Capital IQ, concerned Marathon,
which believes the series of purchases is distracting the company
from its core business, the people said.
When announcing the deal, Shutterfly said the GrooveBook
purchase was meant to expand its mobile offerings.
In its fourth-quarter results, announced two weeks ago,
Shutterfly reported an 18% increase in revenue, to $483 million,
and a 16% increase to its adjusted profit figure. Analysts
questioned executives on a conference call about the company's
forecast for gross margin in 2015, and the stock fell 4.5% the
following day. The stock is down 9% over the past 12 months and up
about 15% over the past 24 months.
Along with earnings, the company also announced a $300 million
share buyback program.
Marathon also has told the board that it has become increasingly
frustrated with the company's executive compensation, the people
said. Marathon was particularly upset with the award of nearly $7
million in restricted stock units to Chief Executive Jeffrey
Housenbold last November, the people said. The company doesn't
typically make its compensation awards in November, filings
indicate.
Shareholders have broadly signaled disapproval of the company's
compensation with low support for the annual resolution advising
the executive pay plan at the annual meeting the past two years.
Last year, support for the resolution fell short of 50% of shares
voted, and in 2013 it was just over 50%. Proxy adviser
Institutional Shareholder Services Inc. has recommended a "no" vote
on the nonbinding measure three years in a row, though it said in
May that Shutterfly had "demonstrated some responsiveness" to
shareholder concerns.
Marathon has about $300 million in assets and is run by Mario
Cibelli. It has run activist campaigns against smaller companies
including Dover Motorsports Inc., an operator of Nascar racetracks.
It has held a position in Shutterfly for nearly seven years, and
the stake is its own largest holding. It is the fifth-biggest
investor in the stock.
Mr. Cibelli is among the three nominees Marathon will nominate
for Shutterfly's nine-person board, the people said. The hedge fund
is also nominating Marwan Fawaz, a founder of boutique advisory
shop Sarepta Advisors LLC, and Thomas Hughes, a venture capitalist
and former executive at Flickr, Yahoo Inc.'s photo storage service,
the people said.
Write to David Benoit at david.benoit@wsj.com
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