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UPDATE 1-Hedge fund Marcato demands that Rent-A-Center sell itself

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BOSTON, July 25 (Reuters) - Marcato Capital Management LP demanded on Tuesday that Rent-A-Center Inc start the process of selling itself or the activist hedge fund threatened to work to throw out board members up for re-election at next year's annual meeting.

The San Francisco-based investment firm, fresh off a victory at Buffalo Wild Wings Inc, is now throwing its weight behind hedge fund Engaged Capital, which for months has been urging Rent-A-Center to sell itself, arguing that an overhaul of the company could be best achieved in the hands of private owners.

In a sharply worded letter, dated Tuesday, Marcato said at least one unidentified party interested in buying Rent-A-Center might raise its offer if management was ready to negotiate and warned directors not to stall.

"Unless Rent-A-Center promptly commences a full sale process, Marcato plans to initiate and/or support efforts to remove all incumbent directors who are up for election at the 2018 annual meeting," read the letter, signed by partner Shawn Badlani. It was seen by Reuters.

In June Engaged Capital won a proxy contest and now has three board seats at Rent-A-Center, but the company is still "brazenly ignoring the will of the shareholders," Marcato wrote in the letter.

Rent-A-Center has rebuffed takeover interest from private firms HIG Capital and Lone Star Funds and turned down an offer of $800 million from buyout company Vintage Capital this month.

Marcato believes Vintage could pay more for the company if management negotiated, and that its $15 per share offer was an "opening offer, not Vintage's best and final offer," according to the letter.

The stock was up 2.5 percent to $12.68 on Tuesday.

While Rent-A-Center's strategic plan is showing some early results, Marcato warned that it is "laden with risks."

Shareholders want the board to explore strategic alternatives, Marcato said, adding that failure to listen could "constitute a breach of your duty as fiduciaries."

"We hope each of you has contemplated the personal, legal and financial consequences of this behavior," the letter said.

Marcato's Encore Fund, which owns the Rent-A-Center stake, has gained 19.5 percent through the middle of July, making it one of the industry's best-performing hedge funds.

In June Marcato won a bitter proxy contest at Buffalo Wild Wings, forcing the CEO to retire and winning board seats. (Additional reporting by Michael Flaherty; Editing by Jonathan Oatis and Jeffrey Benkoe)