July 7, 2014 / 1:25 PM / 3 years ago

UPDATE 1-PetSmart evaluating changes to capital structure

(Adds details, analysts' comments)

July 7 (Reuters) - PetSmart Inc said it is reviewing potential changes in its capital structure, days after activist hedge fund Jana Partners LLC said it planned to ask the pet products retailer to explore a sale.

The company said on Monday it was evaluating changes, with a focus on returning capital to shareholders. (1.usa.gov/1jYNsk6)

Jana Partners, PetSmart's largest shareholder with a 9.9 percent stake, also said on Thursday it would discuss the company's capital structure, including returns to shareholders, with the management and board, shareholders and other interested parties.

Jana Partners was not immediately available for comment on Monday.

PetSmart's sales have suffered due to its aging store base and growing competition from online retailers. The company reported its first drop in quarterly same store sales in seven years for the quarter ended May 4.

PetSmart's shares rose as much as 2 percent at $68.59 in premarket trading.

Morningstar analyst Liang Feng said PetSmart would have to take on debt to return capital to shareholders but added that the company was unlikely to do so as it was already repurchasing shares and providing decent returns.

PetSmart announced a $535-million share repurchase plan in September.

Morgan Stanley upgraded the stock to "equal-weight" from "underweight" on Monday, saying a potential merger with privately held Petco represented "the greatest source of upside".

Petco itself was taken private by Leonard Green & Partners and Texas Pacific Group for $1.68 billion in 2006. (Reporting by Sruthi Ramakrishnan and Siddharth Cavale in Bangalore; Editing by Saumyadeb Chakrabarty)

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