- Engaged Capital has lost confidence in
RCII Board’s willingness to fulfill its fiduciary duty and
independently identify the optimal risk-adjusted strategy to
restore value to RCII shareholders.
- Reiterates call for RCII Board to hire
a financial advisor and immediately initiate a strategic
alternatives process to evaluate a sale of the entire Company.
- Engaged Capital is concerned that the
current board and management may take actions that would materially
harm shareholders.
- Formally nominates Mitchell E. Fadel
(former President and COO of RCII), William K. (Ken) Butler (former
COO of AAN), Jeffrey J. Brown, Carol A. McFate and Christopher B.
Hetrick at the upcoming 2017 annual meeting.
Engaged Capital, LLC, an investment firm specializing in
enhancing the value of small and mid-cap North American equities,
today sent a letter to the Board of Directors (the “Board”) of
Rent-A-Center, Inc. (“RCII”) (NASDAQ:RCII) formally nominating five
highly qualified candidates for election to the Board at the
Company’s upcoming 2017 Annual Meeting of Stockholders.
Glenn W. Welling, Managing Member of Engaged Capital, LLC
commented, “It is time for change at RCII. The current Board has
presided over years of declining operating performance,
deteriorating financial results, and a decimation of shareholder
value. Despite years of underperformance, these same directors
refuse to act with a sense of urgency to explore all alternatives
to create value for the owners of the Company. As one of the
Company’s largest shareholders, we felt we had no choice but to
present shareholders with an alternative slate of directors –
directors who can help stabilize the business while also evaluating
all strategic options available to the Company. We are pleased that
we were able to attract two of the most experienced operators in
the industry to our slate: Mitch Fadel, the former President and
COO of RCII and Ken Butler, the former COO of AAN, both of whom are
highly qualified to replace Mark Speese, RCII’s Chairman, interim
CEO and co-founder, who is up for election at this year's meeting.
Both have the capabilities and hands-on experience that is sorely
missing in RCII’s boardroom today. In addition, Carol McFate, Jeff
Brown, and Chris Hetrick bring decades of financial and transaction
experience to the Board that is paramount to assessing and taking
action on the highest value option for the Company’s future. We
believe it is time shareholders have directors who exhibit an
understanding that their job is to act as the fiduciaries of all
the Company’s shareholders and not just those shares represented in
the boardroom.”
The full text of the letter follows:
February 23, 2017
Board of DirectorsRent-A-Center, Inc.5501 Headquarters
DrivePlano, Texas 75024
Members of the Board:
Engaged Capital, LLC (together with its affiliates, “Engaged
Capital”) has a 12.9% economic interest in Rent-A-Center, Inc.
(“RCII” or the “Company”), making us one of the Company’s largest
shareholders. As we have expressed numerous times, we believe the
RCII Board of Directors (the “Board”) should immediately hire a
financial advisor and initiate a strategic alternatives process to
evaluate a sale of the entire Company before attempting to pursue a
risky public turnaround strategy. The Company’s over 75% decline in
share price from its value above $35 a little over two years ago is
a stark reminder of the need to benchmark the risk-adjusted
alternatives available to the Company. As we highlighted in our
December 7, 2016 letter, we believe the Company could command a
significant equity premium given the capital structure of the
business. For example, based on yesterday’s closing price of $8.40,
an acquisition price of $16 per share would represent a
90% premium for shareholders
yet only a 38% premium to the Company’s enterprise value. Based on
our industry research, we are confident there are numerous parties,
both strategic and financial, that would have serious interest in
acquiring the Company. Given the history of shareholder value
destruction, poor operational execution, weak corporate governance
and reactive management change, stubbornly committing to a
standalone strategy when other options remain unexplored is simply
unacceptable.
While we appreciate the open dialogue we have had to date with
the Board, we are extremely disappointed by the Company’s apparent
refusal to address our concerns. We believe the recent 100,000
share open market purchase by Mark Speese, RCII’s Chairman, interim
CEO and co-founder, signals that the Board is unlikely to
proactively commence a strategic alternatives process in the near
future. As a consequence of this inaction, we have lost confidence
in the willingness of the Board to fulfill its fiduciary duty and
independently identify the optimal risk-adjusted strategy to
restore value to RCII shareholders.
Our interactions with the Board thus far suggest its behavior as
a whole may reflect a personal loyalty to Mr. Speese, who owns only
2.3% of the Company, at the expense of RCII shareholders. This is
particularly concerning because we believe Mr. Speese has a
significant conflict of interest that could prevent RCII from
maximizing value for its shareholders. By pursuing a risky
turnaround strategy that allows him to retain control of the
Company he co-founded and to maintain his leadership position, Mr.
Speese clearly benefits in ways that shareholders, whose primary
interest is the Company’s value, do not benefit. Thus, it is
imperative for the Board to not let the personal interests of one
director stand in the way of value creation. As we see no evidence
that the incumbent Board is willing to prioritize the interest of
shareholders, we believe the Board must be reconstituted with new
directors who will maintain an unquestionable allegiance to the
true owners of the Company – the shareholders.
Furthermore, we are extremely concerned that Mr. Speese, under
the cover provided by a group of long-tenured and apparently
conflicted incumbent directors, may materially harm shareholders if
he acts to ensure his continued control of the Company at any cost.
These actions include, but are not limited to:
1) Failing to respond to incoming
communications from parties expressing an interest in acquiring the
Company. It is our understanding that Mr. Speese may be employing
this strategy so that he can either legitimately tell the Board he
has not received meaningful approaches from interested parties or
to limit his interactions to parties that are in his personal best
interest.
2) Failing to inform all members of the Board
of such inbound communications.
3) Restructuring the Company’s debt in a way
that transfers value from equity holders to debt holders,
effectively acting as an implicit poison pill (e.g. onerous
prepayment penalties) for would-be acquirers. Mr. Speese is having
discussions with lenders on refinancing alternatives which we are
concerned could make RCII less valuable to an acquirer or make an
acquisition of the Company more difficult.
4) Selling a piece of the Company while
refusing to evaluate a sale of the entire Company, ultimately
damaging the value of the remaining business.
5) Diluting current shareholders by placing
equity or convertible debt with a “friendly” party to protect the
status quo.
6) Negotiating a sale of the entire Company
to a “friendly” party as opposed to running a full and fair
process.
7) Delaying a formal consideration of
strategic alternatives to provide interim management more time to
operate the business, which, despite their best efforts, and based
upon recent performance, could result in a continued worsening of
operational performance and a further decline in equity value.
We are hereby putting each and every director on notice. We will
use any and all resources at our
disposal to ensure that the approximately 98% of shares outstanding
not owned by Mr. Speese are protected from further value
destruction. More specifically, we call on RCII’s six independent
directors (Michael J. Gade, Rishi Garg, Jeffrey Jackson, J.V.
Lentell, Leonard H. Roberts and Stephen L. Pepper) to act
objectively in these deliberations and to hold Mr. Speese
accountable. You are being closely watched by us and the rest of
RCII’s shareholder base. To be clear, we intend to hold each of you
personally liable to the fullest extent permitted by law should you
continue down a value destructive path and fail to act in the best
interests of the Company’s shareholders. We believe that if you
choose to do what is right for the Company’s shareholders, as is
your duty, the potential exists to create a significant amount of
shareholder value by capturing a large percentage of the “fixed”
value of RCII in a sale of the Company.
Given our interactions with the Company thus far, and the
concerns highlighted above in this letter, we feel we have been
left with no choice but to seek significant Board change. Given
that five of seven incumbent directors have served on the Board for
over ten years and two of such directors (including Mr. Speese)
have served on the Board for over twenty years, we believe this
Board is stale and needs to be refreshed with new directors. We are
formally providing the Board notice of our nomination of five
highly qualified candidates for election to the Board at the
Company’s upcoming 2017 Annual Meeting of Stockholders; provided,
however, that we intend to withdraw two of our nominees to the
extent that only three seats remain up for election at the meeting.
We believe these individuals possess the financial, operational and
strategic acumen the Board urgently needs. Our nominees are:
Mitchell E. Fadel is currently self-employed after most
recently serving as President – U.S. Pawn for EZCORP, Inc.
(NASDAQ:EZPW), a leading provider of pawn loans in the United
States and Mexico, from September 2015 to December 2016. Prior to
that, Mr. Fadel served as RCII’s President (beginning in July 2000)
and Chief Operating Officer (beginning in December 2002) each until
August 2015, where he also served as a director from December 2000
to November 2013. From 1992 until 2000, Mr. Fadel served as
President and Chief Executive Officer of RCII’s subsidiary
ColorTyme, Inc., the largest all franchise rent-to-own brand in the
country. Mr. Fadel’s professional experience with RCII also
includes previously serving as a Regional Director and a District
Manager.
William K. (Ken) Butler has served as the President,
Chief Executive Officer and a director of ATL Leasing Inc., where
he manages over 70 Buddy’s Home Furnishings rent-to-own stores in
the Southeast, since September 2015. He has also served as
President and Chief Executive Officer of Pro Carts, Inc. (d/b/a All
Pro Carts), a family owned and operated golf cart sales, service
and rental business, since September 2013. Prior to that, Mr.
Butler held various leadership positions with Aaron’s, Inc.
(NYSE:AAN) (“Aaron’s”), a leading omnichannel provider of
lease-purchase solutions, from 1974 to May 2013, where he also
served as a director from 2000 until May 2013. Mr. Butler’s most
recent executive positions with Aaron’s include serving as its
Chief Operating Officer from 2008 to May 2013 and President of its
Sales & Lease Ownership Division from 1995 to 2008, a division
he served as Vice President of from 1986 to 1995. Mr. Butler
previously served as a director of The McPherson Family Trust
(d/b/a RE/MAX of Kentucky/Tennessee, Inc., RE/MAX of Georgia, Inc.
and RE/MAX of Southern Ohio, Inc.) from 2002 until its sale in
December 2016. Mr. Butler was the 2012 recipient of the Ernie
Talley Lifetime Achievement Award presented by the Association of
Progressive Rental Organizations (APRO), the rent-to-own industry
trade group.
Carol A. McFate has served as the Chief Investment
Officer of Xerox Corporation (NYSE:XRX), a multinational document
provider of multifunction document management systems and services,
where she manages retirement investment assets for North American
and U.K. plans, since 2006. Previously, Ms. McFate served as
Executive Vice President & Global Treasurer for XL Global
Services, Inc., a US-based subsidiary of XL Capital, Ltd.
(NYSE:XLC), a leading Bermuda-based global insurance and
reinsurance company, from 2003 to 2006. From 1994 to 2003, Ms.
McFate held various positions with American International Group
Inc. (NYSE:AIG), an American multinational property & casualty,
life insurance, and financial services provider, including Vice
President & Treasurer from 1998-2002. From 1988 to 1994, Ms.
McFate held various positions with The Prudential Insurance Company
of America (NYSE:PRU), an American Fortune Global 500 and Fortune
500 company whose subsidiaries provide insurance, investment
management, and other financial products and services to both
retail and institutional customers throughout the United States and
in over 30 other countries, including Senior Vice President,
Financial Restructuring Group, Senior Vice President, Prudential
Capital Group and Vice President, Corporate Finance Group. Ms.
McFate has been recognized throughout her career for her service,
including receiving a Corporate Plan Sponsor Industry Innovation
Award from Chief Investment Officer Magazine in 2012 and Chief
Investment Officer Power 100 from Chief Investment Officer Magazine
from 2011 to 2016. Ms. McFate has also been honored by
Institutional Investor, winning two awards in 2014: the Investor
Intelligence Network Thought Leadership Award and the Small
Corporate Plan Sponsor Award.
Jeffrey J. Brown is the Chief Executive Officer and
founding member of Brown Equity Partners, LLC (“BEP”), which
provides capital to management teams and companies needing equity
capital. Prior to founding BEP in 2007, Mr. Brown served as a
founding partner and primary deal originator of the venture capital
and private equity firm Forrest Binkley & Brown (“FBB”) from
1993 to 2007. In his 30 years in the investment business, Mr. Brown
has been on over 40 boards of directors, including service on 8
public companies. Since June 2015, Mr. Brown has served as the Lead
Director of Medifast, Inc. (NYSE:MED), a nutrition and weight loss
company, where he also serves as a member of each of the Audit and
Mergers & Acquisitions Committees. From April 2016 until the
completion of its sale in September 2016, Mr. Brown served as a
director of Outerwall Inc. (formerly NASDAQ:OUTR), a provider of
retail products and services to consumers via self-service
interactive kiosks. From February 2014 until May 2016, Mr. Brown
served as a director of RCS Capital Corporation (n/k/a Aretec
Group, Inc.), an investment firm. From 2011 until 2015, Mr. Brown
served as a director of Midatech Pharma PLC (LSE:MTPH), a
nano-medicine company. From 2012 until 2014, Mr. Brown served as a
director of Nordion, Inc. (NYSE:NDZ), a health science company.
From 2009 until 2011, Mr. Brown served as a director of Steadfast
Income REIT, Inc., a real estate investment trust. In the course of
his career, Mr. Brown has also worked at Hughes Aircraft Company,
Morgan Stanley & Company, Security Pacific Capital Corporation
and Bank of America Corporation.
Christopher B. Hetrick has been the Director of Research
at Engaged Capital, a California based investment firm and
registered advisor with the U.S. Securities and Exchange Commission
focused on investing in small and mid-cap North American equities,
since September 2012. Prior to joining Engaged Capital, Mr. Hetrick
worked at Relational Investors LLC ("Relational"), a $6 billion
activist equity fund, from January 2002 to August 2012. Mr. Hetrick
began his career with Relational as an associate analyst. He
eventually became the firm's senior consumer analyst overseeing
over $1 billion in consumer sector investments. Prior to his work
heading up the consumer research team, Mr. Hetrick was a generalist
covering major investments in the technology, financial, automotive
and food sectors.
As we have discussed with you, it is always our intention to
work collaboratively with the boards and management teams of our
portfolio companies and RCII is no exception. Rather than wasting
management’s time and shareholders’ capital on a campaign against
our highly qualified nominees, let us work together to bring new
perspectives into the boardroom and agree on a path that will
create value for all shareholders.
Sincerely,
Glenn W. WellingManaging Member
About Engaged Capital:
Engaged Capital, LLC (“Engaged Capital”) was established in 2012
by a group of professionals with significant experience in activist
investing in North America and was seeded by Grosvenor Capital
Management, L.P., one of the oldest and largest global alternative
investment managers. Engaged Capital is a limited liability company
owned by its principals and formed to create long-term shareholder
value by bringing an owner’s perspective to the managements and
boards of undervalued public companies. Engaged Capital’s efforts
and resources are dedicated to a single investment style,
“Constructive Activism” with a focus on delivering superior,
long-term, risk-adjusted returns for investors. Engaged Capital is
based in Newport Beach, California.
CERTAIN INFORMATION CONCERNING THE
PARTICIPANTS
Engaged Capital, LLC (“Engaged Capital”), together with the
other participants named herein, intends to file a preliminary
proxy statement and accompanying proxy card with the Securities and
Exchange Commission (“SEC”) to be used to solicit votes for the
election of its slate of highly-qualified director nominees at the
2017 annual meeting of stockholders of Rent-A-Center, Inc., a
Delaware corporation (the “Company”).
ENGAGED CAPITAL STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY
TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S
WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN
THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT
WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES
SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY SOLICITOR.
The participants in the proxy solicitation are Engaged Capital
Flagship Master Fund, LP (“Engaged Capital Flagship Master”),
Engaged Capital Co-Invest V, LP (“Engaged Capital Co-Invest V”),
Engaged Capital Flagship Fund, LP (“Engaged Capital Fund”), Engaged
Capital Flagship Fund, Ltd. (“Engaged Capital Offshore”), Engaged
Capital, Engaged Capital Holdings, LLC (“Engaged Holdings”), Glenn
W. Welling, Jeffrey J. Brown, William K. Butler, Mitchell E. Fadel,
Christopher B. Hetrick and Carol A. McFate.
As of the date hereof, Engaged Capital Flagship Master
beneficially owned 2,324,944 shares of common stock, $0.01 par
value per share (“Common Stock”). As of the date hereof, Engaged
Capital Co-Invest V beneficially owned 2,703,611 shares of Common
Stock. As of the date hereof, 259,821 shares of Common Stock were
held in an account managed by Engaged Capital (the “Engaged Capital
Account”). Each of Engaged Capital Fund and Engaged Capital
Offshore, as feeder funds of Engaged Capital Flagship Master, may
be deemed to beneficially own the 2,324,944 shares of Common Stock
owned by Engaged Capital Flagship Master. Engaged Capital, as the
general partner and investment adviser of Engaged Capital Flagship
Master and Engaged Capital Co-Invest V and the investment adviser
of the Engaged Capital Account, may be deemed to beneficially own
the 5,288,376 shares of Common Stock owned in the aggregate by
Engaged Capital Flagship Master and Engaged Capital Co-Invest V and
held in the Engaged Capital Account. Engaged Holdings, as the
managing member of Engaged Capital, may be deemed to beneficially
own the 5,288,376 shares of Common Stock owned in the aggregate by
Engaged Capital Flagship Master and Engaged Capital Co-Invest V and
held in the Engaged Capital Account. Mr. Welling, as the Founder
and Chief Investment Officer of Engaged Capital and sole member of
Engaged Holdings, may be deemed to beneficially own the 5,288,376
shares of Common Stock owned in the aggregate by Engaged Capital
Flagship Master and Engaged Capital Co-Invest V and held in the
Engaged Capital Account. As of the date hereof, Messrs. Brown,
Butler, Fadel and Hetrick and Ms. McFate did not beneficially own
any shares of Common Stock.
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