Vestis Corp banner hangs at NYSE.
NYSE
Company: Vestis Corp (VSTS)
Business: Vestis is a provider of uniform and work gear rental services throughout the United States and Canada. In addition to uniforms, the company also provides carpets, towels, bed sheets and toiletries. Vestis’ customer base is engaged in a variety of industries and serves customers ranging from small family-owned operations with a single location to national corporations and franchises with multiple locations.
Stock market value: $1.65 billion ($12.52 per share)
Vestis annual performance
Operator: Corvex Management LP
Ownership ratio: 12.62%
Average costs: $12.47
Comments from activists: Corvex is established in 2010 by Keith Meister, a former deputy to Carl Icahn who served as CEO and vice chairman of Icahn Enterprises. Corvex is a highly focused, fundamental-oriented hedge fund that uses activism as a tool rather than the primary strategy. The company’s priority is not to be an activist, with a proxy fight as a last resort. It wants to be invited in a friendly way across the board.
What’s happening
On May 8, Corvex filed 13D with the U.S. Securities and Exchange Commission, revealing a 12.62% position in Vestis.
Behind the scene
Vestis is a uniform rental and workplace supplies business that was spun off from Aramark in 2019 October 2023. The company generates the majority of its revenue from its recurring rental business in the United States. At its analyst day in September 2023, the new company sought to impress the market, promising a 5% to 7% organic annual revenue growth rate and adjusted earnings before interest Loans, taxes, depreciation and amortization are 18% to 20% over 5 years. time horizon. The company was on track to report strong fiscal year-end earnings in November.
However, the party quickly ended about two weeks before Vestis reported its fiscal Q2 2024 earnings. The company cited issues related to pricing and customer retention, leading to the downward revision to 2024 revenue growth and revised EBITDA margin outlook. On May 2, the stock plummeted 45% following the news and is still trading 30% below its pre-report price. Clearly, Vestis has been aggressive on pricing in pursuit of its analyst day targets, resulting in customer retention rates in 4Q23 falling from the low 90s to 85 ,8%. While this has since recovered to its 1990s lows, the fact that it was not disclosed sooner is certainly part of the reason for the sharp decline in the stock.
Corvex acquired about 25% of its position at a price as high as $19.39 a share before the stock dropped, and the company accelerated its purchases after its 2Q24 results. If Corvex thinks the company company is undervalued at $19 per share, then the company would certainly prefer it at $12 per share, especially since capital retention problems are the main cause of the decline that has been reported. fix. What has not been completely overcome is the communication problem and the loss of investor confidence because of it. That’s where an investor like Corvex can be extremely helpful.
As a business run for many years as a non-core division of Aramark, Vestis has not received the focus that its peers would have. It is now an independent company, and its board and management team include a number of talented and experienced executives. Chairman Phillip Holloman is the former president and COO of Cintas, and director Tracy Jokinen is CFO of G&K Services, an established uniform services company. was acquired by Cintas in 2017. In the field of uniform rental and workplace supplies, Cintas is the gold standard. For a company and industry that may not be at the forefront of public attention, Cintas has delivered a total shareholder return of more than 1,200% over the past decade and has a market capitalization of nearly $70 billion. Currently, Cintas has more than three times the revenue of Vestis and more than six times the EBITDA, but almost 25 times the enterprise value. The goal here is to turn Vestis into Cintas, but just getting halfway there would be incredible for shareholders, and Holloman is uniquely positioned to make it happen.
Corvex Management does not take active operational positions to be the operator or micromanager of day-to-day business operations. And fortunately, that’s not what’s needed here with this board and management team. But Corvex excels where Vestis lacks: market communications and capital allocation. These are problems that a lot of companies face, especially newer companies that haven’t been public for long. Simply put, Corvex thinks and acts like a public markets owner and will be a great partner to this management team in making Vestis the best public company it can be.
This is not a short-term, opportunistic investment for Corvex. By exceeding 10%, the company is signaling that it will continue to do so over the long term. Therefore, we expect that Corvex will want some board seats and we encourage the board to welcome company representatives. This is truly a collaborative, symbiotic effort, where all parties roll up their sleeves and work together to do what each party does best to create value for shareholders.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of 13D Activist Fund, a mutual investment in the activist’s 13D portfolio. Vestis is owned in the fund.
