It seems that Big 5 Sporting Goods Corporation (NASDAQ:BGFV) and Alexander Medina Seaver‘s Stadium Capital Management, are at an impasse. A series of letters sent between the representatives of both sides continues to display their recent inability to find common ground concerning the governance of the sporting goods retailer’s board. Stadium Capital is Big 5’s largest shareholder among institutional investors, with ownership of 11.3% of their Common Shares; 2.51 million to be precise.
Stadium Capital is a small hedge fund with offices in Bend, Oregon and New Canaan, Connecticut, which manages a number of client-focused equity portfolios. The fund was founded in 1997 by Seaver, who has both a BA in Economics from Harvard and an MBA from Stanford. The fund’s equity portfolio was valued at $315 million as of September 30, with Big 5 representing the sixth most valuable position in it at $23.5 million, 7.46% of the portfolio’s total value.
We reported on the escalating war of words on January 22, one day after Stadium Capital’s Dominic Demarco, who was elected to the board of Big 5 in October 2011, sent a scathing letter to Big 5’s Chairman Steven Miller. In it, he criticized both the board’s decision to create a “Super Committee” that would have the full power of board, while excluding only Demarco, as well as their justification for doing so, which claimed he had a conflict of interest with other non-management stockholders. Demarco flatly denied those allegations, calling them “absurd”.
On January 30, Miller sent Demarco a response, speaking on behalf of the entire Board of Directors. In it, he expressed surprise at Demarco’s chagrin over the “Super Committee”, claiming it was in fact a means for the board to consider the various proposals made by Stadium and to better coordinate with them. He further went on to state that the “Super Committee” was formed as a result of Stadium’s own aggressive actions, in which they tried to bypass the natural review process under which Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’s board would have reviewed the three proposals submitted by Stadium in October, 2014, by filing a Rule 14a-8 stockholder proposal in December.
Miller again claimed that Demarco’s interests were not for the benefit of all shareholders, but only to Staidum Capital and its investors. He added that the fact Demarco was sharing confidential board matters with the public only reinforced their need for a special committee that excludes him.
Demarco responded to the most recent letter on February 4, saying it was “profoundly troubling” to him. He expressed shock at Miller’s continued “willful ignorance” of what constitutes a conflict between members of the board, saying their objective to increase shareholder value is to the benefit of all shareholders, and that their proposals would give all shareholders a greater say in how the company is governed. He also dismissed the insinuation that Stadium’s proposals reflected a short-term agenda, pointing out that Stadium has been a shareholder of Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’s for nine years.
Demarco added that in its nearly two decades of operations, and with investments in hundreds of companies, Stadium has only publicly aired grievances with a company three times, one of which we reported on last year, involving Insperity Inc (NYSE:NSP). Demarco added that when he took his board seat at Big 5 in 2011, it was the first seat Stadium had ever taken on a company’s board, owing to how concerned they were with the company’s governance, which has not changed in the more than three years since.
Interestingly, Miller noted in his letter that not one other shareholder followed Stadium’s lead after Stadium publicly called on other shareholders to file the same Rule 14a-8 stockholder proposal they did in December, which would have bypassed the potentially long reform process involving their proposals, one of which was to declassify the board. It certainly makes one wonder what the other shareholders are thinking, as Stadium certainly seems to have a strong case for their position.
Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has returned negative value to shareholders over five and ten year periods, and is down 15.65% year-to-date, with their most recent quarterly results coming in below expectations. In the midst of the lengthy, poor results are clear conflicts on their board, including entrenched, hand-picked directors with limited or no ownership of the company, who benefit from the insulation of the current lack of accountability of the board’s directors, as well as a director who is partner to a law firm that received substantial legal fees from Big 5.
Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has no other major shareholders with a minimum 5% stake in the company. Several of the funds we track do have smaller positions in Big 5 however, including Brett Hendrickson’s Nokomis Capital with 486,061 shares, Mario Gabelli’s GAMCO Investors with 395,000 shares, and Michael Price’s MFP Investors with 157,138 shares (all figures of September 30).
The results of this deepening battle between Stadium Capital and Big 5 will likely have a major impact on the company’s future governance and its prospects for shareholders, and we’ll continue to monitor it closely.
