Home MarketsStocks Carl Icahn snaps up shares of canning giant Crown. Here’s how he may build value

Carl Icahn snaps up shares of canning giant Crown. Here’s how he may build value

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Company name: Crown Holdings (CCK)

Activist: Carl Icahn

Percentage of ownership: 8.5%

Average cost: $79.80

Activist comments: Carl Icahn is the grandfather of shareholder activism and a true pioneer of this strategy. Although he hasn’t slowed down at all, he has agreed to rejoin the company as eventual successor with his son Brett Icahn. I plan to take my father’s favored approach, but I’m not ruling out friendly bets either. This isn’t a departure from a strategy Carl has used successfully for many years. He can be friendly (e.g. Apple, Netflix) or confrontational (e.g. Forest Labs, Biogen), often depending on how management reacts. Brett is an impressive activist investor in his own right, not because he’s Karl’s son, but because he has a long track record of highly successful activist investing. Sargon, of which he was co-head at his Icahn, his portfolio totaled approximately $7 billion and included highly profitable investments in companies such as Netflix Inc. and his Apple Inc. It was The Sargon portfolio has significantly outperformed the market with an annualized return of 27%. Before that, though, Brett said he joined Icahn as an analyst in 2002, then Hain Celestial (280.3% return vs. 46.7% of the S&P500), Take-Two Interactive (81.5% vs. 64.5% of the S&P500). ) and other campaigns. He is Mentor Graphics (106.4% vs. his 79.4% on the S&P500).

what’s happening?

behind the scenes

Crown operates in a consolidated global market with only four large players globally and high barriers to entry. Regional exclusivity due to transportation costs, long-term contracts, training and experience in running a factory. Accelerating growth profile catalyzed by sustainability trends and changing consumer preferences. About 75% of new products today are canned, compared to about 30% in 2014.

Crown grew EBITDA during the pandemic, when demand for aluminum cans surged as restaurants and bars were forced to close and consumers bought canned cocktails and beer to consume at home. The company underperforms its peers, including main competitor Ball. Last week, the stock plummeted from $85.01 on Oct. 24 to $70.69 on Oct. 25. Latest financial results announcementThey attribute inflation, high interest rates and unfavorable currency conversions to the declining financial outlook. The downturn was also due to a shaken demand for canned beverages that exploded during the pandemic, resulting in overstocking.

The opportunity to create shareholder value here is relatively simple. Sell ​​non-core businesses, buy back shares, and focus on pure beverages.Company announced the acquisition It acquired transit packaging business Signode for $3.9 billion in 2017, but may now be reluctant to sell for less. However, there is a lot of value in selling that business, the least of which is the amount of proceeds they receive (within reason). There is more value in how they use those earnings (i.e. buying back shares in undervalued and growing businesses). There’s also a lot of value in freeing up management to focus on their core business, and in being a pure business and bringing the market several times closer to their dedicated peers, Ball. Management should therefore not focus so much on what you get with Signode as on what the sale will do in the future. Crown also operates an aerosol and food packaging business that manufactures cans for household goods and snacks, and owns a minority stake in the European food can business. Icahn believes the company should sell all of these non-core assets and focus on its beverage can business, which has long-term tailwinds and is undervalued compared to its pure peers. By using cash flow to strengthen the balance sheet and buy back shares in advance, Crown will be able to fill this valuation gap and improve shareholder returns.

Icahn is not the only activist to hold the position of Crown. Impactive Capital first disclosed an investment in Crown in his 13F filing in Q1 2020, advocating pursuing the same opportunities Icahn has put forward. Sales of non-core assets and share buybacks. Shortly after Impactive assumed the position, Crown announced a strategic review of its portfolio and capital allocation priorities. This will result in the sale of his 80% of the company’s European food can business in 2021. Impactive always has environmental, social and governance themes in its investments, looking for situations where ESG improvements can add value. This situation is no exception. Focusing on the growing aluminum can market as an alternative to plastic and glass is good not only for Crown, but also for the environment. The can is he 100% recyclable, as the inherent properties of aluminum do not change with use or recycling.

It’s important to note that there is a lot of value here, regardless of who is on the management team. I don’t think Icahn or Impactive want management changes here. But it’s always a possibility if the manager isn’t up to the task. “I don’t want to say it caught me off guard, but I really think it did,” Crown CEO Timothy Donoghue said on a recent conference call. If you’re a CEO caught off guard, you’d most hate to see Carl Icahn show up in your stock.

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 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 his ESG practices in portfolio companies.

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