Sandell Nominates Board Slate, Begins Proxy Battle With Ethan Allen Interiors

Sep 15 2015 | 2:15pm ET

Tom Sandell’s Sandell Asset Management has ramping up its activist push against furniture maker Ethan Allen Industries, nominating six candidates for the company’s board of directors and describing the company’s chief, Farooq Kathwari, as an “imperial CEO.” 

Sandell, though various affiliates, is the beneficial owner of approximately 1.6 million Ethan Allen shares, or around 5.5% of the company. The activist hedge fund has been locked in an occasionally terse discussion with Ethan Allen management about improving shareholder returns at the company, culminating most recently in public letters from Tom Sandell in which he accused management of pursuing an “astonishingly unsophisticated” fiscal policy and moving the company’s annual meeting up so as to deliberately limit the amount of time Sandell (or any other investor) had available to meet proxy submission deadlines. 

Ethan Allen subsequently moved the date back to its traditional time frame of late November. Sandell’s slate consists of six executives for the eight-person board, as follows: 

  • Edward Glickman – Former President of Pennsylvania REIT
  • Kathy Herbert – Former Executive Vice President of Human Resources at Albertson’s
  • Richard Mansouri – Managing Director at Sandell Asset Management Corp.
  • Annelise Osborne – Senior Vice President at Moody’s Investor Service
  • Ken Pilot – Former President of ABC Carpet & Home
  • Alex Wolf – Former Partner/Managing Director at Cerberus Capital Management

In unveiling the slate, Sandell repeated many of his previous issues with the company and its management, including years of equity underperformance against both the market and the company’s peers, “anemic” comparative revenue growth, and inefficient allocation of capital. 

Sandell believes the root cause of these problems lie with a number of governance issues at the firm, including an entrenched board. The activist minced no words in describing these concerns in the slate’s press release, writing “It is our belief that these underlying issues can be traced to one root cause, namely poor corporate governance. We believe that Ethan Allen is a company rife with poor governance practices in the form of a stale and entrenched board led by what in our opinion is the prototypical 'Imperial CEO.'"

Sandell also takes issue with a relatively unique aspect of Ethan Allen’s capital structure, in which a “dead hand” provision, put in place when the firm returned to public markets in 1993, prevents any director other than the three there at the time (or those chosen by them) to vote on any transaction suggested by a 5%+shareholder. To Sandell, this provision is the epitome of an entrenched board.

“Taken to its logical extreme,” the Sandell statement reads, “Even if every single shareholder wanted to engage in any number of business transactions, only Farooq Kathwari, along with certain long-standing board members and their chosen colleagues, would have the authority to approve any transaction resulting from the actions taken by a shareholder owning more than 5% of the company."

Over the course of the past year, Sandell has repeatedly written open letters to Ethan Allen’s board containing suggestions on how the firm could increase shareholder value, such as selling itself to a private equity firm or otherwise monetizing its considerable real estate assets. In July 2015, Sandell described Ethan Allen as his single best idea, citing Ethan Allen’s 70 stores, eight manufacturing plants, 200-room hotel and 18 acres of land in Connecticut as anchoring the nearly debt-free company’s market capitalization of approximately $900 million. 

Sandell contends the intrinsic value of Ethan Allen is upwards of $41 per share, or roughly 34% above the stock’s current levels near $30.50.

In his previous letters, the most recent of which came on August 28, Sandell also stressed his desire to avoid a costly and protracted proxy battle. The nomination of the director slate, however, suggests that Ethan Allen has rebuffed such an approach, as do statements in August by Kathwari in which he defended Ethan Allen’s “strong returns” and financial strength.

Sandell Asset Management was formed in 1998 and generally pursues an event-driven and special situations strategy. It has approximately $1 billion in assets under management, and recently won a battle with PartnerRe over its merger plans. It has led notable campaigns against Bob Evans Farms, where it won four board seats in a proxy battle, TransCanada Corporation and Brookdale Senior Living.

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