Inti St Clair | Tetra Images | Getty ImagesCompany: Freshpet (FRPT)Business: Freshpet manufactures and markets natural fresh meals and treats for dogs and cats in the United States, Canada and Europe. The company sells its products under the Freshpet brand, along with Dognation and Dog Joy labels through various classes of retail, including grocery, mass, club, pet specialty and natural, as well as online.Stock Market Value: $2.3B ($50.09 per share)Activist: Jana PartnersPercentage Ownership: 9.89%Average Cost: $42.76Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. They made their name taking deeply researched activist positions with well-conceived plans for long-term value. Barry Rosenstein called his activist strategy “V cubed.” The three Vs were” (i) value: buying at the right price; (ii) votes: knowing whether you have the votes before commencing a proxy fight; and (iii) variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, they have gradually shifted that strategy to one which we characterize as “the three Ss” (i) stock price – buying at the right price; (ii) strategic activism – sale of company or spinoff of a business; and (iii) star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary. Jana has extensive experience in this industry, with a successful track record in the consumer retail space and their involvement has led to sales of Pinnacle Foods, PetSmart, Safeway, Whole Foods and ConAgra’s spinoff of its Lamb Weston business.What’s Happening?Jana entered into nomination agreements, pursuant to which the following six nominees have agreed to become members of a potential Jana director slate for election at Freshpet’s 2023 annual meeting: (i) Diane Dietz, an investor and advisor in the consumer and retail sector who served as president and CEO of Rodan & Fields, LLC, a premium skincare brand, and CMO of Safeway, Inc., a food and drug retailer; (ii) James Lillie, a private investor who previously served as CEO of Jarden Corporation, a consumer products company; (iii) Timothy R. McLevish, managing partner of Strategic Advisory Partners LLC — he also previously served as CFO of Kraft Foods Inc. and Kraft Foods Group, CFO of Carrier Global Corporation, an HVAC manufacturing company, and CFO at Walgreens Boots Alliance — (iv) Dwyane Wade, CEO of Wade Enterprises, Inc., an owner of the Utah Jazz of the National Basketball Association, and founder of Wade Cellars who was previously a professional basketball player for 16 years in the NBA; (v) Carsten Charles (“CC”) Sabathia, Jr., special assistant to the MLB commissioner, board vice president of The Players Alliance and host of R2C2 podcast, who was previously a professional pitcher for 19 years in the MLB; and (vi) Ginger Gorden, CEO of the GD Group, Inc., a business management services company. Additionally, Jana announced that it intends to have discussions with Freshpet’s board and management team regarding (a) evaluating the company’s strategic value in a sale, capitalizing on interest in the category from significantly larger players with lower costs of capital, strong operational capabilities, global footprints and greater scale; (b) capital allocation, including Freshpet’s capacity expansion initiatives; (c) operations, fill rates, costs, free cash flow, brand building and margin execution; (d) investor communication; (e) management; (f) management compensation and incentives; and (g) board composition and governance matters.Behind the ScenesFreshpet is a manufacturer of fresh food for dogs and cats. It has a great product in an attractive growing market, with huge distribution and exclusivity deals which are hard to replicate. The company owns 27,000 Freshpet refrigerators throughout grocery and specialty stores. These are refrigerators that Freshpet buys, maintains and stocks, which is a win-win for the company and the retailer. The company benefits because it gives them a huge moat to their business and a competitive advantage over peers. Retailers love it because it does not take up any of their existing refrigerator space and because customers buying fresh pet food are less likely to stock up on the product, which takes up refrigerator space, and pulls the customer back to the store sooner.Since late April 2021, Freshpet’s stock has declined from about $184 per share to roughly $45 per share in late September, while revenue has increased from $425 million to over $500 million in the past year and is continuing to grow. The problem is not the top line. The problem is that the business has quickly scaled to a point where the capabilities of the management team are not sufficient for the challenge. We see this frequently in activist campaigns, such as Chipotle. This has led to issues like a 70% fill rate on customer orders, where well-run peers generally operate at a 95% to 100% fill rate.The first opportunity for value creation here is to moderate Freshpet’s expansion plans and get the supply chain right. Without this, the company could end up using all of its cash and balance sheet capacity to fund its expansion. It has already done three equity offerings to fund its growth. These operational issues are fixable but that would require a reconstituted board and management team that is focused on efficiently growing the business. Unfortunately, senior management does not seem to be well positioned, or focused, on growing the business to maximize shareholder value. Freshpet’s chairman, Charles Norris, has served on the board for about 16 years. Although the company brought in a new CEO in 2016, the co-founder, Scott Morris, still holds the title of president and COO. If you want to know how focused he is on the company, all you need to know is that in 2020 he co-founded a new company, Hive Brands, while presumably working full time as president and COO of Freshpet. Shockingly, the board had no issue with this.The other opportunity to create shareholder value, is a sale of the company. Pet and Baby products are two of the most attractive categories among consumer packaged goods (“CPGs”) businesses, which is a consolidating space as these businesses are notoriously difficult to grow organically. There would likely be significant interest in Freshpet from larger CPGs that already have a pet food business or CPGs that want to start a pet food business. These larger companies already have the management team and infrastructure capable of managing almost any rate of growth with 95%+ fill rates. This would be the much easier option with less time and uncertainty and is something the company should definitely explore. In this regard, this is very similar to Jana’s 2017 campaign at Whole Foods, which had similar problems and dynamics to Freshpet and was quickly sold to Amazon. Achieving either of these value creation opportunities will depend on Jana’s ability to either amicably or forcibly get board seats.Like in many of its past activist situations, Jana has teamed up with an all-star group of operators to assist in developing its thesis, consult with and, if need be, potentially be board nominees. The six individuals who have agreed to be potential Jana director nominees at the 2023 annual meeting include former CEOs, CFOs and CMOs of large public companies and two individuals who we are more used to seeing on a court or a field than a boardroom: Dwyane Wade, formerly of the Miami Heat, and CC Sabathia, formerly of the New York Yankees. While Wade and Sabathia might not have obvious relevant experience like former public company executives, Wade does have entrepreneurial experience as the founder of Wade Cellars, and they both have extensive experience growing their own brands. Moreover, to achieve what they have in sports requires an extreme level of work ethic and focus: two things the company seems to desperately need along with diversity of experience and perspective as the board is 90% white and 70% male. Although Jana has agreements with six potential nominees, there are only four seats up for election next year so likely room for only three of these six, as Jana historically includes one of their own executives on board slates. Accordingly, the slate that makes the most sense would be a Jana nominee, two former executives and either Wade or Sabathia.Freshpet’s 2022 annual shareholders meeting is on Oct. 3, so Jana will not have the opportunity to nominate directors this year. But at next year’s October meeting, the company’s long-tenured chairman Norris and the CEO William Cyr are both up for election. If they get replaced, there will be a real power shift at the company, not to mention a shareholder mandate for change. Moreover, there is a high likelihood that this shareholder base will support Jana based on the severe underperformance of Freshpet. Many large shareholders, including those who bought in the May 2022 stock offering at $81 per share, are well under water on their investment and would likely support Jana. These same shareholders would also likely support a sale of the company at a 40% premium despite that being far below the 2021 highs of roughly $184 per share. Unlike many similarly situated companies, there might not be too much resistance from management to a sale. The president/co-founder has one foot out the door with the launch of his new company. The chairman is up for election next year and would presumably rather leave by selling the company than by getting voted off the board. Finally, the CEO, who is also up for election next year, would have similar motivation, in addition to a likely large payday on a sale.Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Freshpet is a holding in the fund. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.