Road construction machinery on the construction of highway S6, Koszalin, Poland
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Company: Ritchie Bros. Auctioneers (RBA)
Business: Ritchie Bros. Auctioneers is a Canada-based asset management and disposition company that sells industrial equipment and other durable assets through its unreserved auctions, online marketplaces, listing services and private brokerage services. They have facilities all over the world, mostly concentrated in North America. Since the Covid pandemic, most of their auctions happen online.
Stock Market Value: $6.9B ($62.35 per share)
Activist: Starboard Value
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Percentage Ownership: ~7.0%
Average Cost: n/a
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has made 109 prior 13D filings and has an average return of 29.28% versus 11.65% for the S&P 500 over the same period. Only 12 of these 13D filings were on companies in the Industrials sector, but among those 13D’s, Starboard has a return of 61.36% versus 3.47% for the S&P 500 over the same period.
What’s Happening?
Behind the Scenes
This is not a typical Starboard investment. Starboard typically seeks out underperforming companies that are in need of operational and margin improvement. Ritchie is a good quality, high multiple, stable business that is well run by a strong management team. However, the company caught Starboard’s attention in November 2022, when Ritchie entered into a merger agreement to acquire IAA. Starboard is well acquainted with IAA from its 2019 engagement at KAR Auction Services (KAR), which spun out IAA in June 2019. IAA is an auto part auction company that operates an online marketplace. It’s a good quality business that has not been run very well and has been losing market share to competitor Copart. Starboard knows this business very well. The firm liked this business a lot when it was a part of KAR and supported the spinoff.
IAA and Ritchie are ripe with synergies, both selling goods on an online auction marketplace. Additionally, both Ritchie CEO Ann Fandozzi and COO Jim Kessler know the automotive business very well, having served at ABRA Auto Body and Glass, as CEO and COO, respectively. If Fandozzi were not the CEO of Ritchie, she would be an excellent candidate to be the CEO of IAA. Now, in addition to operational synergies through the merger, IAA gets a top management team with experience in the industry who would be an excellent team to oversee the turnaround and integration of IAA.
However, the proposed IAA deal has been fraught with opposition since the initial announcement. Ritchie’s stock declined 17% on Nov. 7, the day the agreement was revealed. Many Ritchie shareholders have grown accustomed to owning a simple, stable company, and the perception is that the IAA deal did not make sense and would complicate the business. They are also scarred from Ritchie’s 2017 acquisition of auction company IronPlanet, which has proven to be a poor investment. Starboard sees it differently. The firm sees IAA as a company that needs restructuring and a perfect company to combine with Ritchie due to the Ritchie management team and the ability to restructure it as a part of a larger company as opposed to a standalone entity. Also, the IronPlanet acquisition was done by a previous management team, so they do not have the same concerns that other shareholders might have had. Some of the Ritchie shareholders who did not sell on the announcement thought the transaction was too dilutive with so much stock being issued at $60 per share. Many IAA shareholders opposed the deal because they wanted a larger cash component and more certainty to close. Enter Starboard and their $500 million strategic investment in Ritchie.
Starboard has agreed to make an investment consisting of $485 million in convertible preferred equity and $15 million of common shares, which would entitle Jeff Smith to a board seat on the combined company. This capital infusion will alleviate many Ritchie shareholders by allowing the company to issue less $60 stock, pay a slightly lower deal price and pay Ritchie shareholders a pre-merger dividend. It will also appease many IAA shareholders by increasing the cash component of the merger consideration. For example, Ancora Advisors (~4% of IAA), who was a vocal opponent of the deal has now agreed to support the amended merger.
Strategic activism has generally taken the form of advocating for management to sell the company or a subsidiary they were not intending to sell or blocking a sale approved by management because shareholders were not receiving fair consideration. In this situation, we have an activist supporting management to complete a strategic transaction that management wants to do and that they believe will be good for shareholders. This is the type of amicable activism in which activists are in a unique position to assist and that goes under-reported.
On the other hand, some bloggers have incorrectly compared Starboard’s preferred stock purchase to the preferred stock of Box purchased by KKR to help Box management thwart a Starboard proxy fight. This could not be more wrong. KKR’s preferred stock, when issued, obligated them to vote their shares in support of incumbent management – a clear entrenchment device. Starboard’s preferred stock specifically precludes them from voting on the merger so as to not alter the will of the shareholders. Starboard could have legally required that the preferred stock had voting rights on the merger on an as-converted basis and, in fact, this would have been beneficial to Starboard and management. But Starboard specifically refused this solely in the name of good corporate governance – the exact opposite of the KKR/Box transaction.
Even after the deal was restructured with the benefit of the Starboard investment, Ritchie shareholder Luxor Capital (3.6%) whose president was a managing director in charge of marketing at Starboard from 2012 through August 2021, is publicly opposing the deal. However, we expect the deal to receive the required vote of both Ritchie and IAA shareholders nonetheless. At that time, the combined company will have an improved management team running the IAA business. It will also have Jeff Smith as a director who knows the IAA business very well and has extensive experience as a director who supports management in executing their plan, but holds them accountable if they cannot.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.
