Dog Bite

PetSmart Inc., the largest pet store in the country, is about to be washed and groomed by hedge fund tycoon Barry Rosenstein, the founder and managing partner of multibillion-dollar activist investment firm Jana Partners LLC.

Jana bought nearly 10 percent of PetSmart in July, making it the company’s largest stockholder, and shortly thereafter issued a letter detailing how and why PetSmart has been driven into the ground. Among the shortcomings, according to Jana, are weak e-commerce, lack of product innovation and inadequate cost management.

“We believe that the board bears ultimate responsibility for these failures,” Rosenstein concludes in a July 29 letter to the board.

What needs to happen, Rosenstein said, is that PetSmart needs to be sold, a move that “likely offers the highest-possible risk-adjusted return for shareholders.”

Understandably, PetSmart’s board of directors wasn’t exactly receptive to Rosenstein’s posturing. So what does Rosenstein do? In a November filing with the Securities and Exchange Commission, Jana announced the nomination of five people for election to PetSmart’s board of directors at the company’s annual meeting next year. Surely the new board will want to play fetch with Rosenstein.

The PetSmart takeover unfolds amid the backdrop of Rosenstein’s amazing, if at times controversial, career in big-city financing. The Wharton grad, former corporate raider and Wall Street icon, has leveraged his position as a shareholder to trigger blockbuster deals with energy producer Kerr-McGee Corp., grocery chain Safeway Inc., and publisher McGraw-Hill, among others. Rosenstein also has an ongoing stake in rental car company Hertz Global Holdings.

In plain speak, if Rosenstein is involved, something big is going to happen. The latest talk is that PetSmart will eventually merge with its nearest competitor, Petco Animal Supplies. Together, the two companies have 17 stores in Arkansas, and four of those are in Fayetteville and Rogers.

Beware the dog.