Not often do you see a company's stock jump when its single largest stakeholder sells an enormous number of shares. But that's exactly what happened on Friday, when Chip Wilson, the founder of lululemon athletica (NASDAQ:LULU), announced he will soon sell 50% of his ownership in the yoga apparel company to private equity firm Advent International for approximately $845 million. For perspective, that equates to roughly 13.85% of lululemon's outstanding shares.
So why did lululemon stock jump as much as 3.5% on the news? First, note that the transaction values lululemon at around $6.1 billion, or a roughly 7% premium to its market cap as of Thursday's close. But, even more important, the sale effectively marks a truce in a nearly two-month battle between Wilson and lululemon's board.
Around this time in early June, Wilson lamented a "palpable imbalance" caused by an outsized focus on short-term results by lululemon's current chairman, Michael Casey, and director RoAnn Costin. Wilson proceeded to use his 27.7% stake to vote against their re-election. He did not carry the vote and they were re-elected. Then, shortly afterward, Wilson enlisted the help of Goldman Sachs to explore his options for partnering with private equity firms for a potential buyout, or to shake up lululemon's board.
And shake up the board he did. Under the agreement announced Friday -- which lululemon notes "has received the full support of the lululemon board of directors" -- Advent Managing Partner David Mussafer and Managing Director Steven Collins will both be appointed to lululemon's board of directors, expanding the board from 10 to 12 members. Specifically, Mussafer will serve alongside Casey as co-chairman of lululemon's board, while Collins will serve on its compensation committee. Also of note: Both Collins and Mussafer previously served on lululemon's board from 2005 through 2009 and 2010, respectively, as Advent held a significant investment in lululemon from 2005 through mid-2009.
Casey even elaborated in the lululemon press release: "The lululemon board is pleased that Chip and Advent are partnering in this transaction. We welcome the opportunity to work with David and Steven, who have significant specialty retail experience and are deeply familiar with lululemon's unique culture ..."
In addition, lululemon will call on an "independent expert" to evaluate the board's committees, policies, and procedures during the 90 days following the completion of Advent's stock purchase. This should appease Wilson's thirst for ensuring best practice corporate governance.
Finally -- and perhaps in exchange -- Wilson and Advent have agreed to standstill provisions for lululemon's 2015 and 2016 annual shareholder meetings, which effectively prevent them from waging a proxy war, or exploring a hostile takeover bid during that time.
All things considered, this frees up lululemon to focus on executing its compelling long-term vision for driving sustainable, profitable growth on a global basis. For now, that primarily involves building a sustainable base, and resolving supply chain and quality issues, which have plagued lululemon since the beginning of last year. Over the longer term, I'd love to see lululemon prove it's not merely just a yoga company by continuing to expand its product assortment, as well as growing the influence of its men's and children's lines.
In any case, with this distraction finally resolved, lululemon is now in a much better position to be able to reward weary investors for their patience.