(Bloomberg) -- Activist investor Marcato Capital Management issued an ultimatum that Uggs-maker Deckers Outdoor Corp. sell itself at an attractive valuation or face a fight to replace its entire board and install a new management team.
Marcato, which said it owns 6 percent of the footwear company, said it was aware that at least six other shareholders have demanded that the board pursue a sale.
“While we typically seek to work constructively with boards to implement change, we view this situation differently,” Marcato Managing Partner Mick McGuire said in a letter to the board Tuesday. “If, for any reason, the process fails to produce a desirable outcome, we believe a new management team led by a new board of directors will be much more likely to succeed in achieving the revenue and expense opportunities at Deckers.”
Despite its profitable Ugg brand boots, the company has failed to achieve growth in earnings and stockholder value, McGuire said. Investor recommendations for corrective actions have been “consistently ignored,” he said.
For two years Red Mountain Capital Partners, an activist fund that owns 3.3 percent of Deckers, urged management to rationalize its store network, streamline its brand portfolio and cut costs. Red Mountain said in March that it was pushing the company to explore a sale.
In April, the company said it would review a broad range of strategic alternatives, which might include a sale or other transaction. Deckers referred to that review in a statement Tuesday.
“We appreciate the views of our stockholders,” the Goleta, California-based company said. “Our board of directors will continue to take actions that are in the best interests of the company and all stockholders.”
Transparency, Missteps
Deckers' fortunes have fallen as its flagship sheepskin Ugg boots and slippers fell out of favor with consumers, said Laurent Vasilescu, an analyst with Macquarie Capital USA Inc. This month, Deckers pushed back its annual general meeting to the latter half of the fourth quarter while it conducts the review.
“What it means is basically that they don't want to deal with Marcato and Red Mountain," Vasilescu said in an interview. "The management didn't make the right decisions. They're unfortunately, dependent on the same classic boot."
San-Francisco-based Marcato said in its letter that it was concerned about what it called a series of missteps and the lack of transparency about the strategic review at Deckers. McGuire said the company's target of reducing expenses by $100 million is only half of the costs that could be cut.
M&A Inexperience
Marcato said it was also concerned about the lack of shareholder representation on the board, as well as its directors' lack of experience in mergers and acquisitions. McGuire said the company refused to consider Marcato's proposal for “limited representation” on the board in a timely fashion.”
McGuire questioned whether the company's chairman, Angel Martinez, would be distracted by his campaign to become mayor of Santa Barbara.
Deckers has undercut the value of its Ugg brand by widening distribution through retailers including Macy's Inc. and Amazon.com Inc., said Sam Poser, a senior analyst at Susquehanna Financial Group. The Ugg business accounts for about 80 percent of the company's sales, he said.
"Ugg started as an accessible luxury brand, and now the brand has become much more accessible and much less luxurious," Poser said.
He doubted the company would fetch a sale price that would satisfy shareholders.
Blackstone, Ackman
Deckers Outdoor rose as much as 1.9 percent, closing up 1.2 percent at $67.72 in trading in New York.
McGuire founded Marcato in 2010 with startup capital from Blackstone Group LP after leaving Bill Ackman's firm, Pershing Square Capital Management. The fund primarily invests in small and midsize public companies and looks for ways to make them more valuable.
It most recently ran a successful campaign at Buffalo Wild Wings Inc. that resulted in Chief Executive Officer Sally Smith agreeing this month to step down.
To contact the reporter on this story: Scott Deveau in Toronto at sdeveau2@bloomberg.net.
To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha, Nick Turner
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