Criteo's share price could be lifted with the help of Activist Petrus Advisers, as outlined in their plan.

Company: Criteo SA (CRTO)

Criteo SA is a French company that specializes in digital marketing. Its solution includes the Criteo Engine, data assets, inventory access, and advertiser and publisher platforms. The Criteo Engine uses machine learning algorithms such as prediction, recommendation, bidding, and creative algorithms to deliver advertisements through various marketing channels and formats, including display advertising banners, native advertising banners, and email marketing messages. Criteo operates in over 90 countries through a network of over 30 international offices in Europe, the Americas, and the Asia-Pacific region.

Stock Market Value: $1.84B ($33.39 per share)

Activist: Petrus Advisers

Percentage Ownership:  5.60%

Average Cost: n/a

Petrus Advisers, a Europe-based activist investor founded in 2009, specializes in investing in public companies in European countries where it can act like a local and within industries in which it has expertise. The firm's approach involves developing a deep understanding of the companies it invests in and actively engaging with them both publicly and privately.

What's happening

Petrus wrote a letter to Rachel Picard and Megan Clarken, the chair and CEO of Criteo, respectively, on Feb. 22. In the letter, he called for the following actions: (i) an investor day to explain the company's retail media strategy and a new mid-term plan, (ii) acceleration of the existing share buyback through a substantial self-tender of up to $150 million, (iii) a comprehensive strategic review no later than Q4 2024, and (iv) refreshing the company's board by adding independent candidates whom Petrus will propose.

Behind the scenes

Criteo SA is a French advertising technology company with a primary American depositary receipt listing on the Nasdaq. The company uses commerce data and artificial intelligence to connect brands, retailers, and customers through their ad platform. Criteo operates in three segments, but generates 83% of its $1.95 billion revenue in 2023 from the marketing solutions segment. Despite being a market leader and having access to top technical talent, Criteo has experienced top-line contraction from $2.3 billion to $1.95 billion since 2018, and its stock price has fallen from $44 to $33 in 2021.

Historically, Criteo's marketing solutions segment has relied heavily on cookie data-based applications for digital advertising. However, Alphabet's Google announced last year that it plans to phase out the use of cookies in Chrome users by Q3 2024, which has caused uncertainty for Criteo's largest segment. Despite this, Criteo believes it has the technical capabilities and product suite in AI ad-tech to replace 60% to 70% of the revenue loss associated with the end of cookies. Additionally, the company's retail media segment is a growing business that uses software as a service for e-commerce companies.

In 2022, Criteo presented a 2025 net revenue target of $1.4 billion and a plan to triple its retail media business, with retail media net revenue projected to grow at a CAGR of 45% to 50% between 2022 and 2025. However, a year later, on November 2, 2023, Criteo stated that the ambition to achieve $1.4 billion in net revenue was "not expected to materialize within the 2025 time frame," causing the stock to drop nearly 12%. A quarter later, the company disclosed upbeat results of total net revenue growth of 10% year over year and retail media growth of 29%, sending shares higher. The volatility in this stock is influenced by a management team that could improve its communication with the market. This not only creates unnecessary volatility but also a lack of investor confidence in management guidance, which can have a significant impact on a stock, particularly when Criteo's largest segment is at an inflection point, and investors need to believe management when they say they can replace 60% to

This circumstance evokes memories of a tale from renowned basketball coach Frank Layden, who posed a question to a gifted but underperforming athlete: "Son, what is it about you? Is it a lack of knowledge or indifference?" The player responded, "I'm not sure, and I don't care."

The biggest issue facing this company is communication, which can be resolved by adding experienced directors to the board with capital market knowledge, as proposed by Petrus. Additionally, better capital allocation can create additional value. Criteo has over $400 million in net cash and $150 million in earnings before interest, taxes, depreciation, and amortization. Petrus is urging Criteo to take four key actions: (i) refresh the board by adding independent candidates, (ii) hold an investor day to explain the retail media strategy and a new mid-term plan, (iii) accelerate the existing share buyback by means of a substantial self-tender of up to $150 million, and (iv) initiate a comprehensive strategic review no later than Q4 2024.

Petrus is unlikely to nominate insiders to the board as they rarely propose outside directors. Instead, Petrus prefers to work with management to create shareholder value. However, the management team has not shown a great willingness to collaborate with others. In a rational world, this issue would be resolved quickly. If it is not, Petrus has demonstrated that they are willing to take a proxy fight to a vote. Fortunately, both Petrus and Criteo have a relatively easy time determining their positions in a potential proxy fight. The top ten shareholders, including Petrus, own 68.48% of the stock. These shareholders are not typical index fund owners but rather investors like Neuberger Berman, AllianceBernstein, and Cadian Capital Management, who are more likely to support a shareholder on the board.

Petrus is calling for a comprehensive strategic review no later than Q4 2024, not because they are a short-term minded shareholder looking for a quick bump on a sale, but because they believe in the company and the CEO. If management cannot reinvigorate the equity story, they need to find a suitor. Reports suggest that suitors are interested, with Bloomberg reporting in February 2021 that Criteo is "attracting takeover interest from strategic and financial investors." In February 2023, Reuters reported that Criteo is "making a new attempt to sell itself" and hired Evercore to assist in that endeavor. However, on a Feb. 8, 2023 conference call, management dismissed the Reuters article as speculation, leaving some to question whether management is genuinely exploring strategic alternatives or not.

Ken Squire is both 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.