Jana Partners To Nominate Four Highly Qualified Directors To Freshpet Board
$FRPT
Dear Fellow Shareholders:
JANA, along with our affiliates and partners, owns 9.3% of Freshpet, making us the Company’s largest shareholder. Freshpet has consistently struggled to execute and failed to achieve its potential, leading to a 74% decline in its stock price in the year prior to our involvement in the Company.
We believe Freshpet’s pattern of missteps stems directly from a Board that has disregarded its most basic duties to shareholders. While recent management changes are a step in the right direction, we have observed a Board that has, over multiple years, failed to properly supervise management as performance worsened, liquidity deteriorated and shareholder value plummeted. Worse still, these problems unfolded while more than half of Freshpet’s independent directors pursued outside interests with corporate resources and key members of management.
Freshpet Board’s Repeated Dereliction of Duty
We believe the Board has failed in its duty to shareholders, including by:
•Recklessly deploying capital, including rubber stamping management’s $1+ billion CapEx program without articulating a credible plan to fund it, while at the same time investing tens of millions of dollars of shareholder capital in an unrelated money-losing venture;
•Creating liquidity problems by failing to secure adequate capital for its budgeted CapEx program and then allowing the Company to fall out of compliance with its debt covenants;
•Choosing – after months of discussing a capital raise – a highly fragile moment in the capital markets, only days after the chaotic collapses of Silicon Valley Bank and Signature Bank, to raise needed capital through an equity-linked convertible bond, in the process reneging on its commitment not to raise equity;1
•Allowing Freshpet management to repeatedly overpromise and underdeliver, highlighted by management consistently missing profitability guidance, reducing long-term margin targets and overseeing gross margin declines for five consecutive years, including a cumulative 1,300+ bps decline in gross margin and 600+ bps decline in EBITDA margin from 2019 to 2022;
•Installing a misaligned management compensation program that has resulted in incentive compensation struck at ~$143 per share (more than 100% above the current stock price);
•Allowing key members of Freshpet leadership – the Company’s President & COO and its Vice Chairman – to found, hold executive roles and devote time and Company resources to another company, Hive Brands (“Hive”), which offers competing products;2
•Permitting two Board members – David Basto and Olu Beck – to benefit from Hive’s success by serving as a director and a formal advisor, respectively, and appearing in Hive fundraising / marketing materials;
•Allowing director David Basto, a Partner at Carlyle, to also serve on the board of Compana Pet Brands, a Carlyle portfolio company that offers competing products; and
•Allowing long-time Freshpet directors – newly promoted Chairman Walter George, retiring Chairman Charles Norris and Compensation Committee Chairman Daryl Brewster – to utilize Freshpet’s Vice Chairman as the Chief Financial Officer of a blank check company they registered to launch (on top of allowing him to simultaneously serve as Chief Financial Officer of Hive).3
Freshpet Board’s Extraordinary Efforts to Avoid Accountability
JANA invested in Freshpet in September 2022 to help address the Company’s underperformance, capital allocation and governance, prompting Cowen research to note that “Jana's position potentially invites a much-needed narrative shift for the stock”4 and leading to a 16% one-day increase in Freshpet’s stock price. Indeed, following JANA’s investment, Freshpet’s share price saw a sustained and dramatic reversal of its downward trajectory, with the stock significantly appreciating in the month following our involvement and its price rising more than 70% to $67.35 per share in the eight months since.5
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1 “[W]e believe investors were blindsided again on a capital raise.” (Oppenheimer, 3/14/23).
2 https://nypost.com/2022/10/16/freshpet-investors-howl-as-execs-work-for-rival-pet-food-seller.
3 https://www.sec.gov/Archives/edgar/data/1842311/000121390021015215/fs12021_transformational.htm.
4 Cowen, 9/22/22.
5 “FRPT shares are down 64% over the last 12 months but recovered 36% in the last month as activist Jana Partners announced a 10% stake on 9/22.” (Jefferies, 10/20/22).
Unfortunately, rather than acknowledge the core governance issues and undertake remediation actions, including our suggested addition of new directors not hand-picked by the Board, Freshpet is instead attempting to avoid shareholder accountability by taking actions to entrench the Board, including:
•Abruptly scheduling the Annual Meeting in July, more than two months earlier than prior years, in a thinly veiled effort to compromise the ability of shareholders to nominate directors and pursue Board change;
•Improperly reducing the number of Board seats up for election in 2023 by removing one director slot from the 2023 Board class;
•Appointing as Chairman Walter George, the head of Freshpet’s Nominating and Governance Committee who directly oversaw the Company’s litany of governance failures;
•Appointing a new director who, while a highly capable supply chain executive, is insufficient to address Freshpet’s governance and capital allocation issues, having never served on a public company board and who comes with an overlapping private board with the new Chairman;
•Undermining Freshpet’s claim to be ‘de-classifying’ the Board beginning in 2023 by appointing the newly added director to the 2024 class; and
•Taking action directly at odds with the Company’s prior declarations that it “recognizes the benefit of providing stockholders an annual opportunity to express their satisfaction or dissatisfaction with the actions of the Board” and that “the Board believes it is important for it to maintain stockholder confidence by demonstrating that it is responsive and accountable to stockholders.” 6
JANA’s Director Nominees Bring Much Needed Change
To address the damage Freshpet’s Board has already inflicted on shareholders and help the Company achieve its full potential, we are nominating Diane Dietz, Timothy McLevish, Scott Ostfeld and Kurt Schmidt to Freshpet’s Board at the Annual Meeting. We believe these four highly qualified director candidates are far better equipped to oversee management, governance and capital allocation, address conflicts of interest by putting a stop to corporate resources being diverted toward management and Board member pet projects, and evaluate potential buyer interest in the Company.
Sincerely,
Barry Rosenstein
Managing Partner & Portfolio Manager
JANA Partners
Scott Ostfeld
Managing Partner & Portfolio Manager
JANA Partners
Source:
https://www.sec.gov/Archives/edgar/data/1159159/000090266423003263/p23-1632sc13da.htm