Activist investor collaborates with firm to spice up income, enhance working circumstances for ladies

Enterprise: Asbury Automotive Group is an automotive retailer in america. It gives a variety of automotive services, together with new and used automobiles; and automobile restore and upkeep companies, substitute components, and collision restore companies. The corporate additionally supplies finance and insurance coverage merchandise, together with arranging automobile financing via third events; and aftermarket merchandise, akin to prolonged service contracts, assured asset safety debt cancellation, pay as you go upkeep, and credit score life and incapacity insurance coverage. As of Dec. 31, 2020, the corporate owned and operated 112 new automobile franchises representing 31 manufacturers of vehicles at 91 dealership areas and 25 collision facilities in america.

Inventory Market Worth: $3.5B ($184.17 per share)

Share Possession:  5.02%

Common Value: $105.34

Activist Commentary: Impactive Capital is an activist hedge fund based in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar, each previously of Blue Harbour. In simply three years, they’ve made fairly a reputation for themselves as ESG — environmental, social and governance — oriented activists. Impactive will use all the conventional operational, monetary and strategic instruments that activists use, however may also implement ESG change that they imagine is materials to the enterprise and drives profitability of the Firm and shareholder worth.

Impactive Capital has reported a 5.02% curiosity in ABG for funding functions.   

That is considered one of Impactive’s first positions after they began the fund – they purchased it within the $60’s and saved including to it. The corporate has a sexy recurring income razor/blade mannequin, with the sale of recent and used automobiles being the “razor”  and the components and companies enterprise being the “blade”. The corporate has compounded earnings larger than 25%, has a 10% free money circulation yield, and there are various alternatives for development to permit it to proceed to compound earnings at 25%+ properly into the longer term.

First, Asbury Automotive carried out Clicklane to present it on-line e-commerce capabilities, which may enable it to compete with Carvana, additional driving development. Second, there are alternatives for strategic acquisitions to develop income and earnings, and the corporate has proven that they are often disciplined acquirers of the appropriate companies. For instance, in December 2019, the corporate entered into an settlement to accumulate the Park Place enterprise for about $1 billion, negotiating a really favorable $10 million termination proper, which they ended up paying after they terminated the settlement. Six months later, the corporate reengaged with Park Place beneath extra favorable pricing and extra versatile financing phrases for a brand new buy worth of $889.9 million. Third, the corporate’s components and companies enterprise has been underearning due to pandemic associated slowdowns and labor shortages stopping it from working wherever close to capability.

Impactive has a formidable observe report of offering options for operational issues like this that additionally additional ESG issues. For instance, to treatment the issue of labor shortages, the corporate has been reaching out to female-led firms to carry extra ladies mechanics within the collision facilities. To perform this, they’ve carried out two shifts per day to higher accommodate for youngster care, constructed separate locker rooms and bogs for ladies and men and have become the primary publicly-listed auto seller to supply maternity go away. Whereas 98% of mechanics are male, ABG can resolve their labor downside by hiring a good portion of the opposite two p.c and hopefully develop the proportion of feminine mechanics within the office. If that ratio went from 98/2 to 90/10, it could add an enormous quantity of labor to the mechanic pool. These modifications to its labor drive may assist speed up development in its most worthwhile enterprise phase – components and labor – from the mid-to-high single digits the place it’s right this moment to double digits. It is a excellent instance of Impactive’s funding thesis – utilizing ESG to drive worth creation and profitability.

Impactive Capital has been house owners of this inventory for years, however very quietly. Whereas they prefer to take board seats at firms, that isn’t more likely to occur right here for a number of causes. First, the corporate has a stellar administration workforce that has been working it impressively through the years producing vital worth for shareholders. Second, the board has proven that it’s diligent and disciplined in specializing in shareholder worth – the negotiation and renegotiation of the Park Place acquisition is proof of that. And third, Impactive appears to get pleasure from an important relationship with the board and administration who’ve proven that they’re receptive to contemplating affordable recommendations from shareholders. 

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Asbury Automotive Group is owned within the fund.