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Activist investor gets 2 Fred’s board seats

May 2, 2017

The yellow sign near the corner of Summer Avenue and White Station reads: Fred’s Pharmacy. It’s a physical representation of the Memphis-based discount retailer repositioning itself away from its retail legacy and doubling down on its health care-related and pharmacy offerings.

Fred’s reached a deal last week with an activist investor that had been dissatisfied with the company’s performance. The agreement included the addition of two directors to Fred’s board.

(Daily News File/Andrew J. Breig)

 

What’s less visible is all the backstage decision-making and boardroom drama that have accompanied that shift for Fred’s, the newest example of which is an agreement reached this week with an activist investor that had been pushing for fresh blood on Fred’s board.

Among other pressing concerns, meanwhile, the company is still working to secure regulatory approval from the Federal Trade Commission of Fred’s plan to acquire hundreds of Rite Aid stores as part of a merger between Rite Aid and Walgreens. There’s still no word on when that approval will come, though, with Fred’s CFO Rick Hans telling The Daily News, “Unfortunately we do not have insight into the timing of the decision by the FTC.”

The company, though, isn’t sitting still. Fred’s this week reached a deal with activist investor Alden Global Capital – which took a 25 percent stake in Fred’s late last year – to add two directors to its board.

Those new directors are Steven Rossi, CEO of Digital First Media, and Timothy Barton, former CEO of Freightquote.com. Digital First Media is a newspaper management company, and Freightquote is a freight services provider.

Fred’s CEO Mike Bloom praised the addition of Rossi and Barton to the board. He said the company now has “the right team in place” to advance the health care-focused strategy he says is critical to the company’s future success.

Alden president Heath Freeman likewise praised the appointments, noting in a statement that Alden has been working closely with Fred’s for months now. Moreover, Freeman said that he has “great confidence in the future of the business” in light of the Fred’s turnaround strategy focused on health care.

That’s a dramatic shift, though, from his public critique in March after word of Fred’s board appointments that month, when Freeman blasted “Fred’s abysmal business decision-making and country club environment in the executive suite and boardroom.”

For more than two months, he said, Alden has tried to work with Fred’s to “reconstitute” the board. His firm wasn’t happy with additions to the board Fred’s made in March, which appeared to be “seeking to protect the destructive status quo.”

“Fred’s business has persistently underperformed as evidenced by poor comparable store traffic, declining comparable store sales, suboptimal gross margins and bloated SG&A,” Freeman said in March. “Given the company’s lackluster operating performance, it is not surprising that Fred’s total shareholder return significantly lags behind its dollar store and pharmacy peers.”

The agreement with Alden on board representation this week marked a move past that disagreement, for now. Among other highlights of the agreement reached with Alden, per a regulatory filing – both Fred’s and Alden have agreed to not to disparage the other party; both parties have agreed not to sue each other, subject to certain exceptions; and Alden is entering into a confidentiality agreement with Fred’s.

The agreement also stipulates that one of Alden’s designees will resign from the board if Alden’s ownership of Fred’s shares ever falls below 10 percent. The other designee will resign if Alden’s ownership falls below 5 percent.

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