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Potential Proxy Fight Looms at e.l.f.

By Alexandra Garfinkle

Marathon Partners Equity Management LLC is considering a director contest at e.l.f. Beauty Inc. (ELF), according to a person familiar with the situation.

A proxy fight used to be off the table for Mario Cibelli-led Marathon, but a move by major e.l.f. shareholder TPG Capital LP to half its stake in the company may improve the insurgent’s chances at influencing change. TPG decreased its stake in e.l.f. from nearly 30% to 14%, according to FactSet Research Systems Inc.

TPG decreasing its stake also opens the door for a massive reshuffling of e.l.f.’s board, which currently includes at least two TPG-affiliated directors, even after the departure of former TPG partner William McGlashan in response to his Operation Varsity Blues indictment. Likewise, e.l.f. director Richard Wolford served as a director at San Francisco-based TPG before 1987, according to BoardEx, a sister company of The Deal.

The timeline is unclear for a possible campaign — there isn’t a deadline set for nominating directors and the date for the 2020 annual meeting is unannounced, as e.l.f. pushed its fiscal year back to March, per a December 2018 announcement.

At the time, the company explained that it was shifting its fiscal year to better assess the performance of its products on the cosmetic shelves of Walmart Inc. (WMT) and Target Corp. (TGT).

An e.l.f. spokesperson elaborated, stating that the company “moved its fiscal year to begin on April 1 in order to better align with shelving cycles of our largest customers… [as] large retailers reset cosmetic shelves in February and March of each year, the fiscal year change allows the Company to better assess initial performance of our shelf resets.”

Based on previous securities filings, The Deal has calculated that Oakland, Calif.-based e.l.f.’s 2020 annual meeting will likely be held in July or August, and that the deadline to nominate directors would likely be in April or May.

Cibelli initiated his campaign at e.l.f. in August 2018, when the activist first suggested that the makeup company sell itself. Per a recent 13D filing with the Securities and Exchange Commission, New York City-based Marathon’s stake in e.l.f. is 8.67%, down from more than 9% previously.

A slew of multi-brand operators could be potential buyers for e.l.f. were an auction process to ensue, said the person familiar with the situation, including Sao Paulo, Brazil-based Natura Cosmeticos SA. To that end, Natura’s been on an acquisition kick of sorts, as it snagged Avon Products Inc. (AVP) in a May 22 deal that gave the target an enterprise value of $3.7 billion.

Additionally in a Nov. 12 note, Oliver Chen of Cowen & Co. LLC wrote that e.l.f. could feasibly be a target for L’Oreal SA or Japan’s Shiseido Co. Ltd., which last month acquired beauty products supplier Drunk Elephant Holdings LLC from Man Repeller LLC and VMG Partners for $845 million.

A prospective price for e.l.f., per the person familiar with the situation, may be between $23 and $28 a share, or between $1.15 billion and $1.4 billion, based on shares outstanding. D.A. Davidson & Co. analyst Linda Bolton Weiser suggested the cosmetics company could be worth as much as $33 a share, or $1.65 billion, in a Nov. 12 note, however.

TPG declined comment for this article.