Road construction machinery on construction of highway S6, Koszalin, Poland
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Company: Ritchie Brothers Auctioneers (RBA)
Business: Ritchie Brothers Auctioneers is a Canada-based asset management and settlement company that sells industrial equipment and other durable assets through its unreserved auctions, online marketplace, 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 are online.
stock market value: $6.9B ($62.35 per share)
Activists: Starboard Values
Related Investment News
Percentage Ownership: ~7.0%
average cost: Not Applicable
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has 109 prior 13D filings and has given an average return of 29.28% as against 11.65%. S&P 500 at the same time. Only 12 of these 13D filings were on companies in the industrial sector, but of those 13Ds, Starboard’s return was 61.36% compared to 3.47% for the S&P 500 over the same period.
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behind the scenes
This is not a typical Starboard investment. Starboard typically looks for underperforming companies that need operational and margin improvement. Richie is a good quality, high multiple, stable business which is well run by a strong management team. However, the company attracted Starboard’s attention in November 2022, when Ritchie entered into a merger agreement to acquire IAA. Starboard is well aware of the IAA’s involvement in its 2019 association with KAR Auction Services (KAR), which spun off from the IAA in June 2019. IAA is an auto parts auction company that operates an online marketplace. It’s a good quality business that isn’t being run very well and is losing market share to competitor Copart. Starboard knows this business all too well. The firm really liked this business when it was part of KAR and supported the spinoff.
The IAA and Richie have matured into synergy, both selling goods on an online auction marketplace. Additionally, Ritchie’s CEO Ann Fandozzi and COO Jim Kessler both know the automotive business very well, having served as CEO and COO at ABRA Auto Body and Glass, respectively. Had Fandozzi not been Ritchie’s CEO, he would have been an excellent candidate to be CEO of the IAA. Now, in addition to operational synergies through the merger, IAA gains a top management team with industry experience who will be an excellent team to oversee IAA’s transition and integration.
However, the proposed IAA deal has been met with opposition since its initial announcement. Ritchie’s stock dropped 17% on November 7, the day the agreement was disclosed. Many Ritchie shareholders have grown accustomed to owning a simple, stable company, and the perception is that the IAA deal didn’t make sense and would complicate the business. They are also horrified by Ritchie’s 2017 acquisition of auction company IronPlanet, which turned out to be a bad investment. Starboard sees it differently. The firm sees IAA as a company that needs restructuring and an ideal company to align with Ritchie due to the Ritchie management team and restructure it as part of a larger company as opposed to a standalone entity. has the ability. Furthermore, IronPlanet was acquired by the previous management team, so they do not have the same concerns that other shareholders may have. Some of Ritchie’s shareholders, who did not sell upon the announcement, thought the transaction was undervalued, so much so that the stock was being issued at $60 per share. Many IAA shareholders opposed the deal because they wanted a larger cash component and greater certainty for closing. Enter Starboard and their $500 million strategic investment in Ritchie.
Starboard has agreed to invest $485 million in convertible preferred equity and $15 million in common shares, which will entitle Jeff Smith to a board seat in the combined company. This capital investment would reduce many Ritchie shareholders by allowing them to issue less $60 stock, paying a slightly lower deal price, and allowing Ritchie shareholders to be paid a pre-merger dividend. It would also please many IAA shareholders by increasing the cash component of the merger idea. For example, Ancora Advisors (~4% of IAA), which had been a vocal opponent of the deal, has now agreed to support the amended merger.
Strategic activism has typically taken the form of advocating for management to sell a company or subsidiary they did not intend to sell or blocking a sale approved by management because shareholders were not receiving fair consideration. In this situation, we have an activist assisting management to complete a strategic transaction that management wants to make and that they believe will be good for shareholders. It is a type of benign activism in which workers are in a unique position to help and which is under-reported.
On the other hand, some bloggers have compared Starboard’s preferred stock purchase to Box’s purchase of preferred stock by KKR to help Box management thwart the Starboard proxy fight. It couldn’t be more wrong. KKR’s preferred stock, when issued, entitles them to vote their shares in favor of existing management – an explicit entry tool. Starboard’s preferred stock specifically barred them from voting on the merger so that shareholders’ wishes would not change. Starboard could have legally required that the preferred stock have voting rights on the merger on a converted basis and, in fact, it would have been beneficial to Starboard and management. But Starboard specifically rejected this outright in the name of good corporate governance – quite the opposite of the KKR/Box transaction.
Even after restructuring the deal with the benefit of Starboard Investments, Ritchie shareholder Luxor Capital (3.6%) whose chairman was the managing director in charge of marketing at Starboard from 2012 to August 2021, is publicly opposing the deal. However, we expect the deal will nevertheless receive the necessary votes from both Ritchie and IAA shareholders. At that time, the combined company will have a better management team running the IAA business. It will also feature 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 if they cannot If so, then hold them accountable.
Ken Squires 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. Square is also the creator of the AESG™ investment portfolio, an active investment style focused on improving the ESG practices of portfolio companies.
