Cars.com pressured to perform, shake up management or sell

NEW YORK — Starboard Value is calling on Cars.com Inc. to improve its performance or consider selling itself or making management changes, about nine months after the activist hedge fund reached a settlement agreement with the online auto-dealing platform.

"If shareholders do not see progress soon, then we believe it would be incumbent upon the board to take more substantive actions," Starboard CEO Jeff Smith said Monday in a letter to the company that was obtained by Bloomberg. "We believe Cars.com would be highly attractive to a wide variety of both strategic and financial buyers."

Cars.com responded in a statement that it has had a constructive dialogue with Starboard over the past year.

"We are committed to steadfastly executing our strategic plan as we seek to achieve sustainable market leadership in our sector," the company said in the statement. It added that, as planned, it wold provide long-term financial guidance on or before Feb. 28.

Cars.com fell 1.4 percent to $23.93 Monday in New York trading, giving the Chicago-based company a market value of about $1.6 billion. Its shares are down about 17 percent this year.

Starboard, which says it owns slightly less than 10 percent of the company, reached a settlement with Cars.com in March that called for three new directors to be appointed to an expanded board. Two of those directors — Michael Kelly and Bryan Wiener — have since joined the board while the parties have yet to reach an agreement on a third director.

As part of the agreement, Cars.com was required to announce revenue and margin targets for each of the next three years by Feb. 28, 2019. It must also set the deadline for nominating directors at the 2019 annual general meeting at least 30 days after those targets are announced.

Smith said he expected the company to honor its agreement to find a third board member and to set targets that would address the discount Cars.com trades at to peers. He also wants the company to explain how and why it will be able to meet its new goals, having missed targets in the past.

He said there was a "long list" of opportunities for Cars.com to grow revenue, reduce operating expenses and improve capital allocation. The company could potentially generate $4 a share in free cash flow by the end of 2020, he said.

Starboard hasn't seen an improvement in the company's financial results, despite several meetings, calls and private letters to the board outlining these opportunities, Smith said.

"If you believe that the company's true earnings potential is not achievable because recent execution issues will continue in the future, then it is the board's duty to address the source of the problem by making management changes," Smith said.