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Company: Asbury Automotive Group Inc. (ABG)
Companies: Asbury Automotive Group is an automotive retailer in the United States. It offers a range of automotive products and services, including new and used cars; and vehicle repair and maintenance services, replacement parts and accident repair services. The company also provides financial and insurance products, including arranging vehicle finance for third parties; and aftermarket products, such as extended service agreements, guaranteed asset protection, debt relief, prepaid maintenance, and credit life and disability insurance. As of December 31, 2020, the company owned and operated 112 new vehicle franchises representing 31 automotive brands at 91 dealership locations and 25 collision centers across the United States.
Market value: $ 3.5 billion ($ 184.17 per share)
Activist: Impactive Capital
Percentage ownership: 5.02%
Average cost: $ 105.34
Comment from the activists: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar, both formerly Blue Harbor. In just three years they have made a name for themselves as ESG-focused activists – environmental, social and governance. Impactive will leverage all of the traditional operational, financial, and strategic tools that activists use, but will also implement ESG changes that they believe are essential to the business and increase company profitability and shareholder value.
Impactive Capital has reported a 5.02% stake in ABG for investment purposes.
This is one of Impactive’s first positions when they started the fund – they bought it in the 1960s and increased it further. The company has an attractive razor / blade model with recurring revenues, with sales of new and used cars being the “blade” and the parts and service business being the “blade”. The company has posted total earnings of over 25%, a free cash flow return of 10%, and there are plenty of opportunities for growth that enable it to continue to make more than 25% profit in the future.
First, Asbury Automotive implemented Clicklane to give it online e-commerce capabilities that would allow it to compete with Carvana and continue to grow. Second, there are opportunities for strategic acquisitions to increase sales and earnings, and the company has proven that they can be disciplined buyers of the right deals. For example, in December 2019, the company entered into an agreement to acquire the Park Place business for about $ 1 billion and negotiated a very cheap termination right of $ 10 million, which they eventually paid upon termination of the agreement. Six months later, the company again engaged with Park Place at lower prices and more flexible financing terms for a new purchase price of $ 889.9 million. Third, the company’s parts and service business has underperformed due to pandemic-induced slowdowns and labor shortages that are preventing it from even remotely operating capacity.
Impactive has an impressive track record of providing solutions to operational problems like this that also encourage ESG considerations. For example, to address the problem of labor shortages, the company has reached out to women-run companies to bring more women mechanics to the collision centers. To achieve this, they introduced two shifts a day to better accommodate childcare, built separate changing rooms and toilets for women and men, and became the first publicly traded car dealer to offer maternity leave. While 98% of mechanics are male, ABG can solve their work problem by hiring a significant portion of the other two percent and hopefully increasing the proportion of female mechanics in the workplace. If this ratio were to go from 98/2 to 90/10 it would add a tremendous amount of work to the pool of mechanics. These workforce changes could help accelerate growth in its most profitable business area – parts and labor – from the mid to high single digits where it is today to double digits. This is a perfect example of Impactive’s investment thesis – using ESG to drive value creation and profitability.
Impactive Capital has owned this stock for years, but very quietly. While they enjoy taking corporate board seats, they likely won’t do so here for a number of reasons. First, the company has an outstanding management team that has operated it impressively over the years and has generated significant value for shareholders. Second, the board has shown that it is conscientious and disciplined in its focus on shareholder value – the negotiations and renegotiations of the Park Place acquisition are evidence of this. And third, Impactive appears to have a good relationship with the board and management, who have shown they are willing to consider sensible suggestions from shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. The Asbury Automotive Group is owned by the fund.