Marcato Capital Letter To Rent-A-Center $RCII
Funds managed by MCM Encore IM LLC ("Marcato") are currently the beneficial owners of 4.9% of the outstanding shares of Rent-A-Center, Inc. ("Rent-A-Center" or the "Company"). In light of the Company's announcement this morning, we are writing to remind you of your duty to represent the best interests of shareholders, and to outline what we believe is the value-maximizing path forward for Rent-A-Center.
We strongly urge the Board to immediately commence a process to review all strategic alternatives including a sale of the entire Company.
The Company's total shareholder returns have been terrible under the existing Board of Directors, with a total shareholder return of approximately negative 72% between the end of 2014 and March 31, 2017. In fact, over a 1-, 3-, 5- and 10-year period, Rent-A-Center's total shareholder return has trailed that of its closest peer, Aaron's, as well as every relevant equity index or benchmark.
We believe it is clear that this share price performance is a direct result of multiple years of operational and strategic missteps at Rent-A-Center. This has led to the situation in which the Company currently finds itself: facing a multi-year turnaround that requires the successful execution of a wide array of initiatives and doing so with a management team in transition.
Despite the Company's announcement of Mark Speese as CEO, our discussions with Mr. Speese have made clear to us that he does not intend or desire to be the CEO for the long term and that the search for a permanent CEO and CFO could take 12 to 18 months. We encourage the Board to be conservative with its expectations for the pace and magnitude of operational improvement in light of the ongoing management transition. Based on the current share price, it seems clear to us that shareholders have lost confidence the Company can reverse course.
We agree that Rent-A-Center has a valuable franchise in the enduring rent-to-own industry, and we do believe that the Company can be fixed through better management and execution, which will create equity value for its owners over time. The key point to consider is simply whether existing shareholders can receive a greater risk-adjusted return by selling the Company to a buyer who is willing to pay for a high percentage of that available value today. We believe it is the Board's duty to explore the availability of this scenario now.
In this case, our view is that a sale very likely offers the highest possible risk-adjusted return for shareholders. Rent-A-Center is likely to be valued much more highly by private market participants than by public market investors. This is because a buyer is likely to pay shareholders based upon its confidence in its ability to execute, a confidence which is justifiably absent among public market investors.
The turnaround the Company is facing is also likely more easily achieved in a private context. The improvement plan announced today is ambitious, complicated and fraught with risk. These steps will likely necessitate accounting and cash restructuring charges and may temporarily disrupt business operations, creating volatility and a lack of earnings visibility that public markets often have a difficult time tolerating. A new owner can more easily underwrite the path of improvement and will be willing to pay shareholders today based upon its confidence in its ability to execute.
For all of these reasons, Rent-A-Center must begin a full strategic review now which includes engaging with potential buyers.
As mentioned, we believe Rent-A-Center has a valuable franchise, but is undervalued due to the Board's lack of credibility among public market investors, a lack of credibility which is deserved due to a history of mismanagement. Given the extended tenure of the incumbent Board members with the Company, we worry about complacency and whether the Company is being managed with appropriate urgency and focus. Even with the Company's stated turnaround plan, the Board should still authorize its advisors to solicit offers for the Company that could deliver greater and more certain value for shareholders.
Based on the Company's announcement this morning, our own dialogue with you to date, as well as public statements made by Engaged Capital, LLC ("Engaged"), it appears to us that the Board is not currently inclined to explore a sale. If the Board continues to resist a process to review strategic alternatives now, Marcato plans to vote for Engaged's director nominees at the upcoming annual meeting.