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Company: Verra Mobility (VRRM)
Business: Verra Mobility operates through two segments: (i) Commercial Services: a market leading provider of automated toll and breach management solutions as well as ownership and registration for car rental companies steam, fleet management companies, municipalities, school districts and agencies that issue violations; and (ii) Government Solutions: working with local government agencies to help make cities and roads safer for everyone through automated safety solutions, specifically cameras detect and handle traffic violations for red light lanes, speeding lanes, school buses and inner city buses.
Stock market value: $2.2 billion ($14.03 per share)
Activist: Capital partners include
Ownership rate: 6.66%
Average costs: $14.11
Activist comments: Inclusive Capital Partners is an investment firm based in San Francisco, focused on increasing shareholder value and promoting good environmental, social and governance practices. It was founded in 2020 by ValueAct founder Jeff Ubben to promote capitalism and governance in pursuit of a healthy planet and the health of its inhabitants. As a pioneering ESG (“AESG™”) investors, Inclusive seeks long-term shareholder value through active partnerships with companies whose core businesses contribute solutions to this pursuit. Inclusive is a profit-driven fund with an emphasis on environmental and social investments. The main focus of the company is to create environmental and social value, thereby creating value for shareholders. Inclusive is so focused on environmental value that it has created a new metric for screening and valuing companies: reduced business value relative to carbon emissions.
What is happening?
Sarah Farrell, a partner at Inclusive Capital, has appointed to the board of directors of Verra on December 30, 2021, just four months after Inclusive Capital filed for 13D, reporting its position in the company.
Behind the scene
Verra Mobility operates through two segments: (i) Commercial Services (“CS”) and (ii) Government Solutions (“GS”). The CS business has turned a huge headache and huge administrative cost for car rental companies into a side revenue stream with a 100% profit margin. The company will cut the daily service fee and part of the fee. The company has relationships with toll agencies nationwide, processes 250 million transactions per year and is truly the only national provider of toll management in the country. GS’s business is generating revenue for local governments and helping them enhance their road safety missions and identify problem areas.
The CS segment accounts for about 60% of the company’s revenue and has an EBITDA margin of 63% at the segment level, and the GS segment accounts for about 40% of the company’s revenue with an EBITDA margin of 40% at the segment level. segment. Both of these enterprises are number 1 in terms of market share with CS company accounting for 95% of toll roads in the US and GS business having 70% market share in the US. This results in a very profitable business with a maintenance cost of only 6% of sales and a return on investment of approximately 50%.
Despite all this, the company is undervalued as investors don’t trust a recovery from Covid, even though the CS segment delivered 98% of 2019 revenue and the GS segment surpassed 2019 revenue. Furthermore, from 2015 to 2019, it has increased EBITDA at 19% annually and is expected to increase EBITDA by more than 25% annually in 2021 and 2022. This will result in internal cash flow being generated is $500 million that can be used strategically or for share buybacks representing about 20% of its current market capitalization.
In addition, there could be future growth from three areas. First, the company may have a big opportunity to replicate what it currently has in the US to Europe. Europe has even more tolls. If the company can figure out how to manage tolls on European weapons by U.S. rental car agencies, there could be a market opportunity of $300 million to $350 million, compared to sales. $230 million in revenue generated from CS in the US in 2019. Second, there are compelling opportunities for strategic mergers and acquisitions. Company management suggests they can be disciplined with acquisitions. The most recent buyback, Redflex, is in the process of full integration. Third, there are capital allocation opportunities with the announced company Stock buyback plan worth $100 million.
As usual with Comprehensive investments, this business also has a very strong ESG component. In CS, the company allows for more diversity in infrastructure funding. Most infrastructure costs are now financed by gas taxes. However, with cars becoming more fuel efficient and the rise of electric vehicles, spending on gas is dwindling, which is good for the environment. An increase in the amount of tolls will offset this decrease, benefit the environment while increasing VRRM’s CS revenue.
In the GS segment, the benefits of ESG are much more obvious. Motor vehicle crashes are the third leading cause of death in the United States among people aged 1-44, after drug overdose and suicide. As of 2019, motor vehicle accidents accounted for 36,000 deaths in the US, and speed and intersection-related accidents accounted for 55% of those deaths. GS Enterprises aim directly at that problem. The Insurance Institute for Highway Safety found that red light cameras reduce traffic deaths in the United States by 21%, and speed cameras reduce traffic deaths by 39%. The higher the penetration the GS business gets, the more profitable the business is for sure, but it’s clear that the more lives are saved on US roads each year.
Ken Squire is the founder and president of 13D Monitor, an institutional research service for shareholder activism, and he is the founder and portfolio manager of the 13D Activity Fund, a fund mutual investment in the portfolio of 13D activists. Squire is also the creator of the AESG™ portfolio, an active investment style focused on improving the ESG practices of portfolio companies.
