Vestis Corp’s flag flies on the New York Stock Exchange.
New York Stock Exchange
Company: Vestis Corp (VSTS)
Business: skirt is a provider of uniform rentals and workplace supplies in the United States and Canada. In addition to uniforms, the company also provides mats, towels, sheets and toilet supplies. Vestis’ client base spans multiple industries and serves clients ranging from small, single-location, family-owned businesses to multi-location corporations and national franchises.
Stock market capitalization:$1.65B ($12.52 per share)
Vestis year-to-date results
Activist: Corvex Management LP
Ownership percentage: 12.62%
average cost: $12.47
Activists commented: Corvex was founded 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, fundamentals-driven hedge fund that uses activism as a tool, but not as a primary strategy. The company prefers not to become activist and proxy fights are a last resort. It prefers a friendly invitation to join the board.
What happened
On May 8, Corvex filed a 13D with the U.S. Securities and Exchange Commission, revealing Vestis’ 12.62% stake.
Behind-the-scenes
Vestis is a uniform rental and workplace supplies company that spun off from Aramark in October 2023. At its analyst day in September 2023, the new company sought to wow the market, promising organic revenue compound annual growth rates of 5% to 7% and adjusted EBITDA of 18% to 20% over five years. %time limit. It’s been smooth sailing for the company, which reported strong fiscal year-end earnings in November.
However, the party ended quickly about two weeks ago when Vestis reported its fiscal second-quarter 2024 earnings. The company cited issues related to pricing and customer retention that led to a downward revision of its 2024 revenue growth and revised EBITDA margin outlook. On May 2, the stock plummeted 45% after the news broke and is still more than 30% below its pre-report price. Apparently, Vestis was very aggressive on pricing in order to hit its analyst day target, causing customer retention to drop from the high 90s to 85.8% in Q4’23. While the numbers have since recovered to the lows of the nineties, the fact that it wasn’t disclosed earlier is undoubtedly part of the reason for the sharp decline in the share price.
Corvex acquired a roughly 25% stake at $19.39 per share before the stock price fell, and accelerated its acquisitions after Q2’24 results. If Corvex thinks the company is undervalued at $19 a share, the company would love a price of $12 a share, especially since the retention issues that were the main reason for the share price decline are resolved. What has not yet been fully resolved are communication issues and a loss of investor confidence. This is where investors like Corvex can be of great help.
As a business that has operated for many years as a non-core part of Aramark, Vestis hasn’t garnered the same attention as its pure-play peers. It is now an independent company with a board of directors and management team composed of some talented and experienced operators. Chairman Phillip Holloman is the former president and operating officer of Cintas, and director Tracy Jokinen is the chief financial officer of G&K Services, a uniform services company acquired by Cintas in 2017. is the gold standard. For a company and industry that may receive little 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 slightly more than three times Vestis’ revenue and slightly more than six times EBITDA, but almost 25 times its enterprise value. Our goal is to build Vestis into Cintas, but to only get halfway there would be unbelievable for shareholders, and Holloman is uniquely positioned to achieve that goal.
Corvex Management does not take a proactive stance as an operator or micro-manager of the day-to-day business. Thankfully, that’s not what the board and management team want. But Corvex’s strength lies in areas where Vestis lacks: market communication and capital allocation. These are problems that exist for many companies, especially new companies that have not been on the market for a long time. In short, Corvex thinks and acts like a public market owner and will be an excellent partner to this management team in making Vestis the best public company it can be.
For Corvex, this is not an opportunistic short-term investment. By exceeding 10%, the company shows that it is committed to this space for the long term. Therefore, we expect Corvex will want some board seats, and we would encourage the board to welcome representatives from the company. This is truly a collaborative, symbiotic effort where all parties roll up their sleeves and work together to create value for shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in activist 13D portfolios. Vestis is the owner of the fund.
