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Firm: Crown Holdings (CCK)
Enterprise: Crown Holding is a global leader in the design, manufacture and sale of packaging for consumer goods and industrial products. It operates in three divisions: beverages, which account for approximately 70% of EBITDA; Packaging and food packaging, both of which together make up the other 30% of EBITDA. Their consumer packaging solutions primarily support the beverage and food industries by selling aluminum and steel cans. Their packaging for industrial products includes steel and plastic consumables and equipment, paper protective packaging, and plastic film consumables and equipment, which are sold to the metallurgical, food and beverage, construction, agricultural, corrugated and general industries.
stock market value: $8.8 billion ($73.75 per share)
ownership percentage: 8.5%
average price: USD 79.80
Activist comment: Carl Icahn is the grandfather of contributor activity and a true pioneer of strategy. While he’s not slowing down at all, he does come to terms with his son, Brett Icahn, to join the company as eventual successor. Brett plans to use his father’s preferred approach to getting companies to make changes designed to boost their stock prices, though he hasn’t ruled out friendly bets either. This is not a departure from the strategy with which Karl has succeeded for many years. It can be friendly (eg, Apple, Netflix) or it can be confrontational (eg, Forest Labs, Biogen), often depending on the response of the management. Brett is an impressive activist investor in his own right, not because he is Karl’s son, but because he has demonstrated a long track record of highly successful activist investing. The Sargon Portfolio he co-chaired at Icahn totaled about $7 billion and included highly profitable investments in companies like Netflix Inc. And Apple Inc.. Sargon’s portfolio significantly outperformed the market with an annual return of 27%. However, prior to that, Brett started in 2002 with Icahn as an analyst and was later responsible for campaigns such as Hain Celestial (280.3% return vs. 46.7% for the S&P500), Take-Two Interactive (81.5% vs. 64.5% for the S&P500) and Mentor Graphics (106.4% versus 79.4% for the S&P500).
Crown operates in a single global market with only four globally tiered players and high barriers to entry – regional monopolies due to shipping costs, long-term contracts, training and expertise to operate factories. They have an exponential growth profile, which is stimulated by sustainability trends and changing consumer preference: about 75% of new products are used in cans today versus nearly 30% in 2014. They also have the passive protection of a non-cyclic product.
Crown has successfully increased EBITDA during the pandemic, when demand for aluminum cans has surged since restaurants and bars have been forced to close and consumers are buying up canned cocktails and beer for home consumption. The company’s performance was below that of its peers, including its main competitor Ball. Last week, they witnessed a sharp drop in the stock price from $85.01 on October 24 to $70.69 on October 25, after Earning latest release. They attributed their low monetary expectations to inflation, excessive rates of interest and unfavorable foreign money translation. This poor efficiency can also be attributed to faltering demand for canned drinks that has exploded in the course of the pandemic, resulting in overstocking.
The chance to create shareholder worth right here is comparatively easy: promote the non-core enterprise, purchase again inventory, and deal with the pure beverage enterprise. firm announced its acquisition Signode, a transit packaging firm, bought for $3.9 billion in 2017, and is perhaps hesitant to promote it for any much less now. Nonetheless, there’s numerous worth to promoting this enterprise, the least of which is the quantity of income they obtain (inside motive). There may be extra worth in how they use that proceeds (for instance, purchase again shares in an undervalued enterprise). There’s additionally super worth in liberating up administration to deal with core enterprise, and there is worth in being a pure enterprise and bringing a multi-market nearer to its pure counterpart, the ball. Due to this fact, administration shouldn’t be as targeted on what they’ll get from Signode as on what the sale will enable them to do sooner or later. Crown additionally operates an aerosol and meals packaging firm that makes cans for family merchandise and snacks and nonetheless holds a minority stake within the European meals can enterprise. Icahn believes that the corporate ought to promote all these non-core property and deal with the beverage trade that has a secular tailwind and is undervalued in comparison with its purely counterpart. Utilizing money movement to strengthen the steadiness sheet and purchase again stock earlier than that may enhance shareholder returns as Crown closes this valuation hole.
Icahn is not the one operative holding a place at Crown. Impactive Capital first disclosed its stake in Crown in its 13F submitting for the primary quarter of 2020, and referred to as on the corporate to pursue the identical alternatives Icahn advocates — divestitures of non-core property and share buybacks. Shortly after Impactive took workplace, Crown introduced a strategic overview of its portfolio and capital allocation priorities. This resulted in 80% of the corporate’s European can commerce being liquidated in 2021. However there’s clearly extra portfolio simplification that may be performed right here. Impactive all the time has an environmental, social and administration thesis in its investments and appears for conditions the place constructive enhancements in ESG can enhance worth. This example is not any exception. Specializing in the rising aluminum market as a substitute for plastic and glass just isn’t solely good for the crown however good for the setting. As a result of the inherent properties of aluminum don’t change by use or recycling, cans are 100% recyclable steadily.
You will need to notice that there’s a lot of worth right here, no matter who’s on the administration workforce. I do not suppose Icahn or Impactive wish to see a change in administration right here. But when administration is less than the duty, that is all the time a risk. On a current convention name, Crown CEO Timothy Donahue stated, “You by no means wish to say, ‘We have been stunned,’ however I feel we actually have been.” While you’re a CEO and also you’re stunned, the very last thing you wish to see is Carl Icahn displaying up in your stock.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder exercise, and is the founder and portfolio supervisor of 13D Activist Fund, a mutual fund that invests within the 13D Lively Investments portfolio. Sq. can also be the innovator of the funding class AESG™, an lively funding model targeted on bettering ESG practices for portfolio firms.
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