Company: Atkore (ATKR)
Business: lawyer is a manufacturer of electrical products for the construction and renovation market as well as security and infrastructure products for the construction and industrial markets. The Company's segments include Electrical Engineering and Security and Infrastructure. The Electrical segment manufactures products used in the construction of electrical power systems, including wires, cables and installation accessories. This segment serves contractors in collaboration with electrical wholesalers. The Security and Infrastructure segment designs and manufactures solutions such as metal frames, mechanical pipes, perimeter security and cable management for the protection and reliability of critical infrastructure. These solutions are marketed to contractors, OEMs and end users. The company manufactures products in 42 factories and has a total production and sales area of ​​over 8.5 million square meters in eight countries.
Market value: $2.09 billion ($61.97 per share)
Activist: Irenic Capital Management
Property: 2.5%
Average cost: n/a
Comment from activists: Irenic Capital was founded in October 2021 by Adam Katz, a former portfolio manager at Elliott Investment Management, and Andy Dodge, a former investment partner at Indaba Capital Management. Irenic invests in listed companies and works with company management. Her activism to date has focused on strategic activism, recommending spinoffs and divestitures of companies.
What happens
On September 30, Irenic announced that it had acquired a 2.5 percent stake in Atkore and urged the company to pursue a possible sale process.
Behind the scenes
Atkore is a manufacturer of electrical products for the construction and renovation markets, as well as security and infrastructure products for the construction and industrial markets. The Electrical segment produces wires, cables and installation accessories for electrical energy systems. The Security and Infrastructure segment manufactures solutions including metal frames, mechanical pipes, perimeter security and cable management systems. Atkore operated for years as part of a stable oligopoly – Hubbell, Eaton And nVent is among the other major domestic players.
The pandemic triggered a surge in construction and with it demand for Atkore electrical products, which are essential to the wiring processes. As a result, the company became more aggressive in pricing and in fiscal 2019 to 2022, revenue increased from $1.9 billion to $3.9 billion, and EBITDA rose in parallel from $300 million to $1.3 billion. However, as we have seen with many companies, Corona demand eventually normalized and sales stopped growing. Making matters worse, Atkore's aggressive pricing strategy backfired as it attracted import competition into a market long protected by high freight costs and traders' preference for local supplies. By raising prices too much, they actually undermined their own market position. As a result, revenue fell to $2.9 billion and EBITDA fell to $462 million.
Additionally, despite a $1 billion decline in revenue, SG&A expenses have increased and the company's headcount has increased by over 40%. In addition, there is a misallocation of capital. Instead of taking advantage of Covid-era windfalls to invest in the core electricity business, management has pursued non-core ventures like water infrastructure and fiber-optic lines for rural broadband, many of which projects never materialized. Now a company that was trading at about $190 per share at the top of the market in early 2024 has fallen to about $60 per share; And amid this poor performance, CEO Bill Waltz unexpectedly announced his resignation in late August, with no successor in place.
All of this has led Irenic Capital Management to announce a 2.5% stake in Atkore. With no CEO, no operational and financial challenges, and poor market perception, Atkore is now at a critical turning point where the board will make the biggest decision it will ever make and that will determine the outcome for shareholders.
The most important thing a board does is identify and retain a CEO, and Atkore is now at that point. However, when a company is facing problems similar to Atkore's and is facing a serious restructuring, the board has one more decision to make before hiring a new CEO – whether or not the company should remain independent. We understand that Irenic will want one or two new directors it appoints to the board to participate in this analysis and decision, likely independent directors with relevant experience.
Atkore currently trades at around 6.5x EBITDA, but offers significant cost reduction and divestment opportunities that private equity may be able to execute more effectively. Therefore, it's fair to expect earnings to be several turns higher than the company's current valuation, perhaps 8-10 times EBITDA. If a review of strategic alternatives concludes that an acquisition would occur in this area, the board would need to use this as a benchmark for a stand-alone plan.
The first step in a standalone plan would be to identify the right CEO who would be tasked with aligning the company's operational and capital focus on its core electrical business, divesting non-core assets, reducing costs and implementing pricing discipline. As Rocco tells Michael Corleone, this would be difficult but not impossible. There is definitely at least $100 million in costs that could be saved in SG&A costs, and the headwinds that caused the sales decline have now reversed, with prices low enough to deter importers again even before tariffs are imposed, giving Atkore a tailwind.
But it's worth repeating that none of this is possible without the right CEO and it's important to have the best possible board to make this decision, and this board has given shareholders the right to worry. Currently, both the company's chairman and former CEO have a background in the water industry, which likely contributed to the strategic departure from the company's core.
In addition, Atkore recently announced a strategic review focused on selling non-core assets, including its water pipeline business. While this may be the right decision, initiating a strategic review without a permanent CEO appears to have been rushed and ill-timed, and conducting such a review at this time without weighing the possibility of an outright sale is even more confusing. A refreshed board with directors who bring relevant electrical industry expertise that can guide the CEO succession process and sales analysis would be an essential first step.
Irenic has extensive experience in strategic activism, identifying companies struggling in the public markets, and implementing spinoffs and corporate divestitures. The director nomination window opened on October 2nd and we do not believe it is a coincidence that Irenic went public with her campaign the day before the nomination window opened. We assume that they will talk to the company about the composition of the board. Ideally, shareholders would benefit most from the addition of a few new independent directors with relevant experience and Irenic being available as an active shareholder to assist the board in its analysis.
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 assets.