By  on December 24, 2008

Charlotte Russe Holding Corp. shareholder B. Riley & Co. threatened on Tuesday to force a proxy fight with the junior retailer if it doesn’t pursue a takeover bid that was rejected last month.

In a letter to the Charlotte Russe board, B. Riley also called recent management changes, including the hiring of former Mervyns chief executive officer John Goodman as ceo, “a debacle” and characterized recent merchandising decisions as “misguided.”

In rejecting the bid by KarpReilly Capital Partners LP and H.I.G. Capital LLC, the San Diego-based retailer said it was an “opportunistic proposal” that was coming in the early stages of the company’s “transformation” amid “unprecedented general macroeconomic turmoil.”

Karp and H.I.G.’s move to acquire and take Charlotte Russe private valued the company at between $188.1 million and $198.6 million, or $9 to $9.50 a share, which represented a 31 to 38 percent premium over its closing stock price the day before the offer. On Tuesday, shares closed at $6.16, down 36 cents or 5.5 percent, which would elevate the premium to between 46 and 54 percent.

But B. Riley said in its letter that it found Charlotte Russe’s decision “extremely difficult to rationalize” and asked the retailer to explain why it nixed negotiations with Karp, a company that has a 5.4 percent stake in the retailer. B. Riley said it would monitor Charlotte Russe’s actions and “review all of our available options, including nominating a slate of directors.”

B. Riley’s stake in Charlotte Russe wasn’t disclosed. Charlotte Russe didn’t return calls seeking comment.

“We are deeply troubled by the recent actions taken by directors and members of management,” B. Riley chairman Bryant Riley said in the letter, “including the corporate governance missteps and strategic and operational direction of the company.”

Some concerns raised by the investment firm involved the “seemingly forced” retirement of former ceo Mark Hoffman and the company’s implementation of a shareholder rights, or poison pill, plan that makes a hostile takeover more difficult for the buyer. In August, the specialty retailer emphasized that the introduction of a poison pill provision was not in response to a specific proposal.

KarpReilly pursued an acquisition of Charlotte Russe in 2007. Allan Karp, a partner at KarpReilly, served as a director of the retailer for 11 years and was a principal of SKM Investment Fund, an original Charlotte Russe investor that sold its stake in September 2006.

Charlotte Russe’s new management — which includes Goodman as well as former Guess Inc. chief financial officer Fred Silny as cfo and chief merchandising officer Emilia Fabricant, former chief merchant of babystyle and president of recently bankrupt eStyle Inc. — lacks “meaningful junior fast-fashion experience,” according to B. Riley. Goodman was ceo of Mervyns when it filed Chapter 11 in July and opted to liquidate in October.

The company added that Charlotte Russe’s turnaround strategy, which will include higher-priced merchandise, is “misguided” and “speculative at best.”

“We believe that embarking on a new, higher price point strategy at a time when consumers are growing increasingly frugal is illogical and devoid of economic sense,” B. Riley said.

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