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Company: Crown Holdings (CCK)
Business: Crown Holdings is a worldwide leader in the design, manufacture and sale of packaging products for consumer goods and industrial products. They operate in three segments: Beverages, which account for about 70% of earnings before interest, taxes, depreciation and amortization; Packaging and Food in Transit, both of which account for about 30% of the remaining EBITDA. Their consumer packaging solutions primarily support the beverage and food industries through the sale of aluminum and steel cans. Their packaging for industrial products includes steel and plastic equipment and consumables, paper protective packaging and plastic film equipment and consumables, marketed to the metal, food and beverage industries. food and beverage, construction, agriculture, corrugated iron and general industries.
Stock market value: $8.8 billion ($73.75 per share)
Activist: Carl Icahn
Ownership rate: 8.5%
Average costs: $79.80
Activist comments: Carl Icahn is the forefather of shareholder activism and a true pioneer of strategy. While not slowing down, he reached an agreement with his son, Brett Icahn, to rejoin the company as his eventual successor. Brett plans to take his father’s preferred approach to pushing companies to make changes to boost their stock prices, though he also hasn’t ruled out friendly bets. This is not a departure from the strategy that Carl has succeeded in for many years. He can be friendly (eg Apple, Netflix) or he can be confrontational (eg, Forest Labs, Biogen), often it depends on management’s response. Brett is an impressive activist investor in his own right, not because he is Carl’s son, but because he has proven a long track record in extremely activist investing. successful. The Sargon Portfolio he co-led at Icahn was at one time worth around $7 billion and included hugely profitable investments in companies like Netflix Inc. and Apple Inc. However, before that Brett started in 2002 with Icahn as an analyst and was later responsible for campaigns like Hain Celestial (280.3% profit vs 46.7% for S& P500), Take-Two Interactive (81.5% vs 64.5% for S&P500) and Graphic Advisor (106.4 % vs 79.4% for S&P500).
What is happening?
Behind the scene
Crown operates in a consolidated global market with only four large global players and high barriers to entry – regional oligopolies due to transportation costs, long-term contracts, mining create and experience to operate factories. They have a record of rapid growth, catalyzed by sustainable trends and changing consumer preferences: About 75% of new products are canned today compared to about 30% in 2014. They also enjoy the upside protection of a non-cyclical product.
Crown raised EBITDA during the pandemic, as demand for aluminum cans skyrocketed as restaurants and bars were forced to close and consumers were buying cocktails and canned beer for home consumption. The company has underperformed its peers, including its main competitor, Ball. Last week, they saw the stock price plummet from $85.01 on October 24 to $70.69 on October 25, after most recent earnings announcement. They attribute their declining financial outlook to inflation, high interest rates and unfavorable currency movements. This underperformance is also due to the boom in demand for canned drinks during the pandemic, leading to an oversupply of inventory.
The opportunity to create shareholder value here is relatively simple: sell off the non-core businesses, buy back shares, and focus on the pure beverage business. Company announced its acquisition of Signode, a shipping packaging business, for $3.9 billion in 2017 and may be reluctant to sell it for less now. However, selling that business has a lot of value, the least of which is the money they get (within reason). There’s more value in the way they use the proceeds (i.e. buyback shares of a growing, undervalued business). There is also great value in freeing up management to focus on the core business, and there is value in being a pure play business and bringing more markets closer to fellow players. Their purest, Ball. Therefore, management should not focus on what they can get for Signode nor what they can do in the future. Crown also operates a food packaging and aerosol business, makes cans for household products and snacks, and still owns a minority stake in the European canned food business. Icahn believes the company should sell all of these non-core assets and focus on the beverage business that can be rotated and undervalued compared to its peers. Using cash flow to strengthen the balance sheet and buying back shares ahead of time will enhance shareholder returns as Crown closes this valuation gap.
Icahn is not the only activist with a position at Crown. Impactive Capital first disclosed Crown’s stake in their first-quarter 13F filing in 2020 and has backed the company to pursue the same opportunities Icahn is advocating – divesting non-core assets and share repurchases. Shortly after Impactive took office, Crown announced a review of its portfolio strategy and capital allocation priorities. This results in 80% of the company’s European food business being in business by 2021. But it is clear that more portfolio simplification can be made here. Impactive always takes an environmental, social and governance perspective in their investments and looks for situations where positive ESG improvements can drive value. This situation is no exception. Focusing on the growing aluminum can market to replace plastic and glass is not only good for Crown but also good for the environment. Because aluminum’s inherent properties do not change through use or recycling, the cans can be 100% recycled over and over again.
It’s important to note that there’s a lot of value here, no matter who’s on the management team. I wouldn’t assume Icahn or Impactive would like to see a change in management here. But if the leadership doesn’t get the job done, that’s always a possibility. On a recent conference call, Crown CEO Timothy Donahue said: “You never want to say, we were caught off guard, but I think we were.” When you’re a CEO caught off guard, the last thing you want to see is Carl Icahn in your inventory.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder performance, and he is the founder and portfolio manager of 13D Activity Fund, a mutual fund. invest in a portfolio of 13D activists. Squire is also the creator of the AESG™ portfolio, an active investment style that focuses on improving the ESG practices of portfolio companies.
