Activist Investor Takes Issue With Dillard's; Signs Indicate Upcoming Proxy Battle

by Mark Friedman  on Monday, Mar. 3, 2008 12:00 am  

Mitarotonda watched the stock price fall. Since reaching $40.56 on May 21, the stock price has slid to around $16.50 as of last week.

Mitarotonda accused Dillard of ruining the business after taking over from his father, William Dillard, who started the company in 1938.

Since William Dillard II received the keys to the company in 1998 from his father, Dillard's market capitalization has fallen from $3.8 billion to $1.9 billion in August 2007, Mitarotonda wrote in the Aug. 30 letter to the board.

Mitarotonda, however, still couldn't get any reaction.

"We believe that the vast value potential of the Company is not being realized," Mitarotonda wrote in his Jan. 29 letter to the board. "In our opinion, if the Company were more effectively managed it would be worth substantially more than its current stock price."

Mitarotonda noted a November 2007 Deutsche Bank report that estimates Dillard's net asset value before taxes to be $59 per share because of its real estate portfolio. Dillard's owns about 75 percent of its 331 stores.

Mitarotonda said Dillard's could improve the value of the real estate by closing unprofitable stores or selling some of its property. Mitarotonda also was unhappy with Dillard's latest two quarters, in which it posted losses of $24.5 million and $6.5 million.


"The disappointing financial performance of Dillard's must be addressed," Mitarotonda wrote. "Unfortunately, the past few quarters are but a continuation of Dillard's history of chronic underperformance."

'Value Investors on Steroids' 

While it's not known exactly what move Mitarotonda will make next, whatever he does might be successful. In the last couple of years, hedge funds managers have been successful between 50 and 75 percent of the time in getting what they were seeking, said McGurn of RiskMetrics.

He said hedge funds are looking for board representation to argue for changes in the company.



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