CSK Auto Corporation (NYSE:CAO) shares moved up $0.28, or 1.62%, to $17.54 today after Karsch Capital Management disclosed a 9.4% stake along with a letter in the company in a Schedule 13D/A filing with the SEC. The activist hedge fund said in a letter that it believes that the company's shares are undervalued at their current market level and believes that the company should actively pursue a sale once it has completed its pending restatement of certain of its past financial statements and becomes current with its SEC reporting obligations. Karsch had first insisted on hiring an investment banker back in October of last year and later attempted to add its own candidates to the company's upcoming proxy. However, CSK has since informed the SEC that it does not intend to voluntarily include Karsch Capital's stockholder proposal in its proxy materials for the next annual meeting of stockholders and has asked the SEC to confirm that it would take no action against the company if it does so.

Yesterday, the hedge fund sent another letter to the company asking when they would finish restating earnings to satisfy the SEC and asked that the company immediately put itself up for sale after the process was completed. According to their latest letter attached to their most recent Schedule 13D/A filing with the SEC:

Since our last letter to the Board dated October 23, 2006, we have received numerous inquiries about CSK Auto that lead us to believe that there is genuine interest from private equity firms in acquiring the Company and from investment banks in financing a transaction for a prospective buyer.  Now that the company has stated that it expects that it can file its financial statements no later than one month beyond the February 28, 2007 date set by the SEC, we have received numerous indications that potential acquirers would prefer to conduct their due diligence investigation of the Company now and thereby be in a position to make an acquisition proposal at or shortly after the date the Company files its financials.

Further, while we understand that the Board, for business reasons, may not wish to allow competitors and other potential strategic buyers access to sensitive business information, hiring a nationally-recognized investment bank to run an auction process appropriately mitigates such considerations and such considerations are not applicable to financial buyers.

The debt capital markets are very strong right now.  By putting the Company up for sale immediately, we believe the Board would increase the probability of a
transaction given these current robust capital markets.  We strongly feel that this would be the best course of action to maximize shareholder value.

Given the continued strength of the M&A market - particularly by private equity - along with the substantial discount that this company is trading at due to their restatements, a sale of CAO could come at a substantial premium to the current market price. If Karsch is not successful in convincing management to take this step on their own, they may be forced to attempt to take control via a proxy fight. While this process is somewhat uncertain and time consuming, CAO is definitely a stock that is worth watching over the next few months!

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