PetSmart, Inc. (NASDAQ:PETM) is now under Jana Partners’ microscope, according to a filing with the Securities and Exchange Commission. In a 13D filing today, the firm disclosed a 9.9% stake in the pet care retailer, which amounts to more than 9.8 million shares. That includes options to buy more than 4.7 million shares.

PetSmart

Jana Partners seeks to improve shareholder value

In the filing, Jana Partners states that it thinks PetSmart, Inc. (NASDAQ:PETM) stock is undervalued and “represents an attractive investment opportunity.” The firm said it will engage with the retail chain’s board of directors and management about reviewing strategic alternatives. One of the options it plans to discuss with PetSmart is a sale. Other possibilities include making improvements in operating performance and the company’s capital structure.

Jana Partners said it wants to provide a “significant” capital return to shareholders and improve PetSmart’s capital allocation policy. In addition, the firm wants to improve the pet care chain’s disclosure procedures to shareholders and change the composition of its board. In addition to speaking with the company’s management and board, it will also engage with shareholders and “other interested parties relating to such matters.”

Exclusions in PetSmart activism

The firm also indicated in the filing that it “may also take other steps” to improve value to shareholders and “pursue other plans or proposals that relate to or would result in” any of the possibilities listed above. Jana says the possibilities exclude acquiring a controlling stake in PetSmart or acquiring a “material amount” of the retail chain’s assets. Other exclusions include grouping with others to acquire a controlling stake, “engaging in an extraordinary transaction” like a merger with PetSmart, or grouping with any other parties to complete such a transaction.

Jana Partners also states that it will not seek to “exert negative control” over PetSmart, Inc. (NASDAQ:PETM)’s “important corporate actions” or unite with others to do so. However, the firm said it could try to influence these actions “through customary means.” Those include sharing its views with management and PetSmart’s board, as well as shareholders and “other interested parties.” The firm states it might also exercise its shareholder rights if necessary, including the right to nominate new board members.

PetSmart possibilities

The firm said its view will depend on a number of different factors, like PetSmart, Inc. (NASDAQ:PETM)’s financial position and strategic direction, as well as the outcome of any discussions it has with the company, actions taken by the board, the stock’s price levels and other investment opportunities available to Jana Partners. Other factors include market, economic, and industry conditions. The firm could add or subtract from its stake, sell some shares short, or hedge its transactions, depending on these factors.