Could Activist Corvex adopt a friendly approach to contribute to the growth of Vestis?

Company: Vestis Corp (VSTS)

Vestis is a business that offers uniform rentals and workplace supplies throughout the United States and Canada. Apart from uniforms, the company provides mats, towels, linens, and restroom supplies. Vestis' customer base comprises businesses from various industries, ranging from small family-owned operations with a single location to corporations and national franchises with multiple locations.

Stock Market Value: $1.65B ($12.52 per share)

Activist: Corvex Management LP

Percentage Ownership: 12.62%

Average Cost: $12.47

Keith Meister founded Corvex in 2010, having previously served as CEO and vice chairman of Icahn Enterprises. Corvex is a hedge fund that utilizes activism as a tool, but not as its primary strategy. The fund prefers to avoid proxy fights and instead aims to be invited onto boards through amicable means.

What's happening

On May 8, Vestis disclosed that Corvex had filed a 13D with the U.S. Securities and Exchange Commission, revealing a 12.62% stake in the company.

Behind the scenes

In October 2023, Aramark spun off its uniform rentals and workplace supplies business, which is now known as Vestis. The majority of Vestis' revenue comes from its recurring rental business in the United States. During its September 2023 analyst day, Vestis aimed to impress the market by predicting a 5% to 7% organic revenue compound annual growth rate and 18% to 20% adjusted earnings before interest, taxes, depreciation and amortization margins on a five-year time horizon. Vestis started off strong, reporting strong fiscal year-end earnings in November.

Vestis's fiscal second-quarter 2024 earnings were reported, leading to a downward revision to its 2024 revenue growth and adjusted EBITDA margin outlook. The company cited pricing and customer retention issues. On May 2, the stock plummeted 45% on the news and is still trading more than 30% below its pre-reporting price. Vestis had been very aggressive on pricing in pursuit of its analyst day goals, leading to a Q4 '23 customer retention decline from the low nineties to 85.8%. While this has since recovered back to the low nineties, the fact that it was not disclosed sooner is certainly part of the reason for the huge stock drop.

Corvex acquired approximately 25% of its position at prices as high as $19.39 per share prior to the stock falling, and the firm accelerated its purchases in the aftermath of the Q2 '24 results. If Corvex thought that the company was undervalued at $19 per share, the firm must be loving it at $12 per share, particularly since the retention issue that was the primary cause of the decline has been fixed. However, what has not been completely remedied is the communication issue and the loss of investor confidence because of that. That is where an investor like Corvex could be incredibly helpful.

As a non-core business of Aramark for many years, Vestis did not receive the attention and focus that its pure-play peers did. Now that it is a standalone company, the board and management team are composed of experienced and skilled operators. Chairman Phillip Holloman was the former president and COO of Cintas, and director Tracy Jokinen was the CFO of G&K Services, a uniform services company acquired by Cintas in 2017. Cintas is the industry leader in uniform rental and workplace supplies, with a total shareholder return of over 1,200% in the past decade and a market capitalization of nearly $70 billion. Currently, Vestis has just over three times the revenue of Cintas and just over six times the EBITDA, but almost 25 times the enterprise value. The goal is to make Vestis into a Cintas-like company, and Holloman, with his unique position and experience, is well-positioned to deliver on that.

Corvex Management does not seek to be operators or micro-managers of day-to-day business operations. Instead, it excels in market communication and capital allocation, areas where Vestis is lacking. As a newer public company, Vestis often struggles with these issues. Corvex thinks and acts like an owner in the public markets and would be a valuable partner to Vestis' management team in improving its performance as a public company.

Corvex's decision to go over 10% indicates a long-term commitment to the company. As a result, we anticipate that the firm would want board seats and we urge the board to accept their representatives. This is a collaborative effort where each party contributes their strengths to benefit 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 a portfolio of activist 13D investments. The fund owns Vestis.