By  on August 25, 2014

NEW YORK — Activist investors Engine Capital LP and Red Alder LLC went public with their push for Ann Inc. to engage in a sale or other transaction Monday and investors picked it up from there.

Shares of the New York-based operator of the Ann Taylor and Loft nameplates increased $2.42, or 6.5 percent, to close at $39.94, the second-best performance of the 100 equities tracked by the WWD Global Stock Tracker.

In a sharply worded letter to Ronald Hovsepian, non-executive chairman of Ann Inc., and the other independent members of the board, Engine, headed by Arnaud Ajdler as managing partner, said it had held private talks with Ann’s management but had decided to make public its ideas “given the lack of progress and the importance to act with urgency” at a time of “unusually favorable credit markets.”

The two firms noted that Ann has been trading at about 5.5 times earnings before interest, taxes, depreciation and amortization, below the eight- and nine-time multiples involving other specialty retailers, and that an acquisition by a private equity player could generate between $50 and $55 a share, a premium of about 40 percent to recent valuation.

The two investors said they own “in excess of 1 percent” of Ann’s outstanding stock. In March, Golden Gate Capital paid $156.2 million for a 9.5 percent stake in the company but didn’t press for changes in its disclosure of its holdings.

“Ann Inc. welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value,” the company said. “Our board and management team are committed to creating value for all Ann Inc. shareholders and we will continue to take actions to accomplish this goal and position the company for growth and success.”

As an alternative to a possible sale, Engine and Red Alder said Ann could consider a “leveraged recapitalization” in which it could “easily borrow” $600 million, about two times its EBITDA, and repurchase a third of its shares outstanding through a tender offer at $40 a share.

The two firms pressed Ann Inc. to form a special committee of only independent directors to explore options and retain a “nationally recognized investment bank” to explore options.

Details of the Engine communiqué were first reported in The Wall Street Journal.

Engine noted that much of the board has been involved in selling, rather than acquiring, shares of the company.

“If the board concluded a sale of the company not to be in the best interest of the shareholders at this time because it would undervalue the company, we would expect as a sign of confidence that all board members buy in the market a significant number of shares of Ann (such as twice his or her annual board compensation),” the letter said. “It is easier to take risks with other people’s money, but the board members should be willing to take risks with their own money.”

Susan Anderson, analyst at FBR Capital Markets, said in a research note that she considered a recapitalization more likely than a sale, “but the [buyback] program would likely would be smaller than [approximately] $600 million. We believe a sale is a lower probability, particularly given that Ann’s management team is highly regarded and taking the correct actions to set the business on course for continued profitability and shareholder returns.”

Ann Inc. on Friday reported an 8.1 percent dip in second-quarter net income, to $32.7 million or 70 cents a diluted share, on a 1.6 percent increase in sales to $648.7 million.

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