A Little Sun Will Do Furniture Brands Some Good

By Glenn Curtis | April 02, 2008 AAA

The growing reluctance among consumers to spend their money on big-ticket items has hurt home sales and by extension home furnishings. This collateral damage is major reason why Furniture Brands (NYSE:FBN), a maker and retailer of home furnishings, has seen its stock drift lower over the past year. However, the stock now has the potential to pop given the recent actions of activist investor, Sun Capital Partners.

Sun Capital Prowling For Board Seats
Florida based investment firm, Sun Capital Partners has acquired a roughly 9.45% stake in the Furniture Brands. And according to a Reuters story the activist fund is pushing to obtain board seats, ostensibly to try to push its own agenda, and one might assume to help get the stock price moving again. Sun reportedly requested a shareholder list, which is often one of the first steps an activist will take when launching a proxy battle. (For more on the actions of these ruthless funds, check out Activist Hedge Funds.)

In response, Furniture Brands said that its "disappointed" with Sun Capital's move, and has referred to a potential proxy battle "disruptive and costly". There is an interesting twist to this story, in the press release Furniture Brands' current management said, "Sun Capital has a mixed record of performance in the home furnishings industry. A number of Sun Capital's furniture industry portfolio investments are currently in bankruptcy, and one of those entities is a debtor to Furniture Brands of more than $2 million."

In other words, investors should keep in mind is that Sun's touch may not necessarily be golden, and that although it's had its hands in successes, it hasn't always been smooth.

Furniture Brands' board might not be impressed, but I think Sun Capital's involvement is a positive for investors. Sun Capital owns the common stock so its goals will coincide with those of the other common shareholders. The stock has waned over the past year despite management's efforts to keep inventories in check and to boost margins. So, I think that something has to be done, and further that Sun could be the party to agitate for change. And finally, even if Sun is unsuccessful at grabbing board seats, it will be successful in holding management's feet to the fire and making sure that they find ways to get the stock price back up.

Sun Capital's Track Record
A quick look at Sun's website shows that it's been around the block a few times. Of particular interest are its investments in three companies: Labtec, Miles Kimball, and Nailite International.

Labtec: In 1997 Sun purchased a stake in the struggling computer peripheral company. It then worked with the company to spruce up its product line and helped it make two acquisitions. Within three years of Sun's involvement, sales rose roughly 70% and EBITDA more than tripled (To learn more about EBITDA, see EBITDA: Challenging The Calculation.)

Miles Kimball: In the 2000/2001 time frame Sun Capital became involved with the struggling mail-order retailer. And thanks to a change in the layout of its warehouse and the closure of a facility it was able to save big money. Sun Capital also worked to eliminate unprofitable catalogs and reduce debt. Long story short, the company's EBITDA rose from just $1.1 million in 2000 to over $9 million by the end of 2002.

Nailite International: In December 1997 a Sun affiliate took a position in the home siding maker. Sun Capital then assisted the company in finding new management. The company then bought new machinery, and upgraded computer systems. It also introduced a new product line. The result was that after Sun Capital's involvement sales of the new product and EBITDA soared.

All these cases show that Sun has the ability to get involved and really dig in and help a company with its operational problems. Sun Capital appears to be the kind of company that's in it for the duration, creating real turnarounds and not quick flips. Its history of resuscitating dying companies is one of the best ways to gauge its probability of future success.

Bottom Line
Furniture Brands is operating in a very difficult environment right now. If management wants to enhance shareholder value, I think it should work with Sun Capital rather than against the firm. In the long run, I suspect shareholders will be better off.

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