Activist Jana prepares to bring star nominees to Freshpet’s board. Here’s how it may create value

Enterprise: Freshpet manufactures and markets pure contemporary meals and treats for canine and cats in the US, Canada and Europe. The corporate sells its merchandise below the Freshpet model, together with Dognation and Canine Pleasure labels by way of varied lessons of retail, together with grocery, mass, membership, pet specialty and pure, in addition to on-line.

Inventory Market Worth: $2.3B ($50.09 per share)

Share Possession: 9.89%

Common Price: $42.76

Activist Commentary: Jana is a really skilled activist investor based in 2001 by Barry Rosenstein. They made their title taking deeply researched activist positions with well-conceived plans for long-term worth. Barry Rosenstein known as his activist technique “V cubed.” The three Vs had been” (i) worth: shopping for on the proper worth; (ii) votes: realizing whether or not you might have the votes earlier than commencing a proxy struggle; and (iii) number of methods to win: having a couple of technique to boost worth and exit an funding. Since 2008, they’ve steadily shifted that technique to 1 which we characterize as “the three Ss” (i) inventory worth – shopping for on the proper worth; (ii) strategic activism – sale of firm or spinoff of a enterprise; and (iii) star advisors/nominees – aligning with high trade executives to advise them and take board seats if obligatory. Jana has in depth expertise on this trade, with a profitable monitor report within the client retail house and their involvement has led to gross sales of Pinnacle Meals, PetSmart, Safeway, Complete Meals and ConAgra’s spinoff of its Lamb Weston enterprise.

Jana entered into nomination agreements, pursuant to which the next six nominees have agreed to change into members of a possible Jana director slate for election at Freshpet’s 2023 annual assembly: (i) Diane Dietz, an investor and advisor within the client and retail sector who served as president and CEO of Rodan & Fields, LLC, a premium skincare model, and CMO of Safeway, Inc., a meals and drug retailer; (ii) James Lillie, a personal investor who beforehand served as CEO of Jarden Company, a client merchandise firm; (iii) Timothy R. McLevish, managing companion of Strategic Advisory Companions LLC — he additionally beforehand served as CFO of Kraft Meals Inc. and Kraft Meals Group, CFO of Service World Company, an HVAC manufacturing firm, and CFO at Walgreens Boots Alliance — (iv) Dwyane Wade, CEO of Wade Enterprises, Inc., an proprietor of the Utah Jazz of the Nationwide Basketball Affiliation, and founding father of Wade Cellars who was beforehand an expert basketball participant for 16 years within the NBA; (v) Carsten Charles (“CC”) Sabathia, Jr., particular assistant to the MLB commissioner, board vp of The Gamers Alliance and host of R2C2 podcast, who was beforehand an expert pitcher for 19 years within the MLB; and (vi) Ginger Gorden, CEO of the GD Group, Inc., a enterprise administration companies firm. Moreover, Jana introduced that it intends to have discussions with Freshpet’s board and administration group concerning (a) evaluating the corporate’s strategic worth in a sale, capitalizing on curiosity within the class from considerably bigger gamers with decrease prices of capital, sturdy operational capabilities, world footprints and higher scale; (b) capital allocation, together with Freshpet’s capability enlargement initiatives; (c) operations, fill charges, prices, free money movement, model constructing and margin execution; (d) investor communication; (e) administration; (f) administration compensation and incentives; and (g) board composition and governance issues.

Freshpet is a producer of contemporary meals for canine and cats. It has an excellent product in a beautiful rising market, with large distribution and exclusivity offers that are exhausting to duplicate. The corporate owns 27,000 Freshpet fridges all through grocery and specialty shops. These are fridges that Freshpet buys, maintains and shares, which is a win-win for the corporate and the retailer. The corporate advantages as a result of it offers them an enormous moat to their enterprise and a aggressive benefit over friends. Retailers find it irresistible as a result of it doesn’t take up any of their present fridge house and since prospects shopping for contemporary pet meals are much less prone to replenish on the product, which takes up fridge house, and pulls the client again to the shop sooner.

Since late April 2021, Freshpet’s inventory has declined from about $184 per share to roughly $45 per share in late September, whereas income has elevated from $425 million to over $500 million prior to now yr and is constant to develop. The issue isn’t the highest line. The issue is that the enterprise has rapidly scaled to a degree the place the capabilities of the administration group should not adequate for the problem. We see this continuously in activist campaigns, reminiscent of Chipotle. This has led to points like a 70% fill fee on buyer orders, the place well-run friends typically function at a 95% to 100% fill fee.

The primary alternative for worth creation right here is to average Freshpet’s enlargement plans and get the availability chain proper. With out this, the corporate may find yourself utilizing all of its money and steadiness sheet capability to fund its enlargement. It has already carried out three fairness choices to fund its development. These operational points are fixable however that will require a reconstituted board and administration group that’s targeted on effectively rising the enterprise. Sadly, senior administration doesn’t appear to be effectively positioned, or targeted, on rising the enterprise to maximise shareholder worth. Freshpet’s chairman, Charles Norris, has served on the board for about 16 years. Though the corporate introduced in a brand new CEO in 2016, the co-founder, Scott Morris, nonetheless holds the title of president and COO. If you wish to know the way targeted he’s on the corporate, all it is advisable to know is that in 2020 he co-founded a brand new firm, Hive Manufacturers, whereas presumably working full time as president and COO of Freshpet. Shockingly, the board had no concern with this.

The opposite alternative to create shareholder worth, is a sale of the corporate. Pet and Child merchandise are two of essentially the most enticing classes amongst client packaged items (“CPGs”) companies, which is a consolidating house as these companies are notoriously tough to develop organically. There would possible be important curiosity in Freshpet from bigger CPGs that have already got a pet meals enterprise or CPGs that need to begin a pet meals enterprise. These bigger firms have already got the administration group and infrastructure able to managing nearly any fee of development with 95%+ fill charges. This might be the a lot simpler choice with much less time and uncertainty and is one thing the corporate ought to positively discover. On this regard, that is similar to Jana’s 2017 marketing campaign at Complete Meals, which had related issues and dynamics to Freshpet and was rapidly offered to Amazon. Reaching both of those worth creation alternatives will rely upon Jana’s potential to both amicably or forcibly get board seats.

Like in lots of its previous activist conditions, Jana has teamed up with an all-star group of operators to help in growing its thesis, seek the advice of with and, if want be, probably be board nominees. The six people who’ve agreed to be potential Jana director nominees on the 2023 annual assembly embody former CEOs, CFOs and CMOs of enormous public firms and two people who we’re extra used to seeing on a court docket or a area than a boardroom: Dwyane Wade, previously of the Miami Warmth, and CC Sabathia, previously of the New York Yankees. Whereas Wade and Sabathia may not have apparent related expertise like former public firm executives, Wade does have entrepreneurial expertise because the founding father of Wade Cellars, they usually each have in depth expertise rising their very own manufacturers. Furthermore, to realize what they’ve in sports activities requires an excessive stage of labor ethic and focus: two issues the corporate appears to desperately want together with variety of expertise and perspective because the board is 90% white and 70% male. Though Jana has agreements with six potential nominees, there are solely 4 seats up for election subsequent yr so possible room for less than three of those six, as Jana traditionally contains certainly one of their very own executives on board slates. Accordingly, the slate that makes essentially the most sense could be a Jana nominee, two former executives and both Wade or Sabathia.

Freshpet’s 2022 annual shareholders assembly is on Oct. 3, so Jana is not going to have the chance to appoint administrators this yr. However at subsequent yr’s October assembly, the corporate’s long-tenured chairman Norris and the CEO William Cyr are each up for election. In the event that they get changed, there can be an actual energy shift on the firm, to not point out a shareholder mandate for change. Furthermore, there’s a excessive chance that this shareholder base will assist Jana primarily based on the extreme underperformance of Freshpet. Many giant shareholders, together with those that purchased within the Could 2022 inventory providing at $81 per share, are effectively below water on their funding and would possible assist Jana. These similar shareholders would additionally possible assist a sale of the corporate at a 40% premium regardless of that being far beneath the 2021 highs of roughly $184 per share. In contrast to many equally located firms, there may not be an excessive amount of resistance from administration to a sale. The president/co-founder has one foot out the door with the launch of his new firm. The chairman is up for election subsequent yr and would presumably fairly depart by promoting the corporate than by getting voted off the board. Lastly, the CEO, who can be up for election subsequent yr, would have related motivation, along with a possible giant payday on a sale.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and he’s the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Freshpet is a holding within the fund. Squire can be the creator of the AESG™ funding class, an activist funding model targeted on bettering ESG practices of portfolio firms.