Scopia Capital pushes for strategic review at Verra Mobility. Here’s why it’s an unusual request
Company: Verra Mobility (VRRM)
Business: Verra Mobility operates through three segments: (i) Commercial Services ("CS"): the market-leading provider of automated toll and violations management, as well as title and registration solutions to rental car companies, fleet management companies, municipalities, school districts and violation issuing authorities; (ii) Government Solutions ("GS"): a unit that works with local government agencies to help make cities and roadways safer for everyone through automated safety solutions, namely road safeway cameras that detect and process traffic violations for red-light, speed, school bus, and city bus lanes; and (iii) Parking Solutions (PS): a North American leader of end-to-end commercial parking management solutions, which was established following the company's acquisition of T2 in Q4 2021. The CS segment comprised 47.4% of revenue in 2021, has 90%+ market share, high barriers to entry and 60%+ earnings before interest, taxes, depreciation, and amortization margins. The GS segment comprised 51.4% of revenue in 2021, has significant market share and had 38% EBITDA margins in 2021. PS is a new segment that accounted for 1.2% or revenue in 2021 for the post-acquisition period of Dec. 7 to Dec. 31, 2021.
Stock Market Value: about $2.6B ($16.49 per share)
Activist
Activist: Scopia Capital Management
Percentage Ownership: 5.31%
Average Cost: $11.87
Activist Commentary: Scopia is not historically an activist investor. However, activist investor Jerome Lande (of Coppersmith Capital and prior to that, MMI Investments) folded his operations into Scopia for the purpose of operating an activist portfolio within Scopia and giving activist advice and support on Scopia's larger portfolio, which is a traditional long-short fund. Of Scopia's eight prior 13D filings, three were on companies in the Information Technology sector, and they had an average return of 79.65% for those situations versus 40.87% for the S&P 500 over the same period.
What's Happening?
On July 14, Scopia sent a letter to the company's board expressing its belief that it may be necessary for Verra to commence a strategic review process. Scopia expressed its frustration with the company's valuation, which they believe understates its intrinsic value and its stock price.
Behind the Scenes
This is a somewhat confusing, short term, unnecessary activist campaign. It is confusing because Scopia's letter for the most part reads like a company marketing piece, discussing in detail how great Scopia thinks Verra's business is. Scopia notes that the company has a strong financial profile with over 90% recurring revenue, a roughly 20% 5-year organic service revenue CAGR, approximately 45% to 50% EBITDA margins, durable competitive moats, low capital intensity and strong free cash flow generation. They detail several underlying secular trends, which should support revenue growth in the commercial services segment over the medium term including increased cashless tolling, increased toll road demand, congestion pricing, a shift toward personal vehicles from public transportation and increased transponder take rates. Within the government solutions segment, Scopia points out the geographic expansion opportunities and an increasing focus on school speed zones and school bus cameras that should generate more than the company's low-to-mid single digit growth targets – the business is currently running 119% above its 2019 revenue levels with additional upside opportunities. Additionally, they see upside growth potential for the government solutions segment that can come from the federal infrastructure bill that allocated $2.7 billion to increase traffic safety and New York City's instillation of additional automated enforcement cameras. That alone is odd for an activist letter, but it gets more confusing when they assert that the Verra trades at a huge discount but offer no reasons why or identify any chronic issues with the company. It is completely void of any operational review or suggestions, and their only solution to close the valuation gap is to sell the company.
It is short term not only because they offer a short-term catalyst, but because in their own words, Scopia is not showing any patience or giving management any real time to execute their business plan ("We are not alone in our view that 2022 is a' put-up-or-shut-up' year for the Company..." Lande said in the letter. He later added, "We are halfway through the year and the Company has not made meaningful progress in closing the valuation gap...").
There are three reasons why this is unnecessary. First, Verra has not underperformed the markets. Second, Scopia is up 29% on its investment in two years. Finally, since the beginning of this year (only 7.5 months), Verra has had an activist investor on its board – Sarah Farrell of Inclusive Capital – who has made some of the same suggestions that Scopia mentions, like expanding into Europe. Apparently, Scopia is not content with the longer-term governance-oriented activism for which Inclusive is known.
In our opinion, this is more of a letter to potential acquirers than it is a constructive letter to management. Scopia is hoping to get a bump on their return in the form of an acquisition as opposed to taking a seat on the board and creating value over the long term like Inclusive is in the process of doing.
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.