Scopia Capital drives strategic review at Verra Mobility. This is why it is an unusual request

Electronic cameras at the Golden Gate Bridge toll station record all the number plates of passing vehicles. Toll booths are now fully automated.

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Company: Verra Mobility (VRRM)

Business: Verra Mobility operates through three segments: (i) Commercial Services (“CS”): a market-leading provider of automated toll and breach management, as well as subscription and subscription solutions for rental car companies, fleet management companies, cities, school districts and regulatory violations; (ii) Government Solutions (“GS”): a unit that works with local government agencies to help make cities and roads safer for everyone through safety solutions automatically, namely the dash cam on the road to detect and handle traffic violations when running red lights, speeding, school bus lanes and city buses; and (iii) Parking Solutions (PS): a North American leader in end-to-end commercial parking management solutions, founded after the company acquired T2 in the fourth quarter of 2021. CS segment accounts for 47.4% of revenue in 2021, accounts for 90% + market share, has high barriers to entry and 60% + earnings before interest, tax, depreciation and amortization margin. The GS segment accounts for 51.4% of revenue in 2021, has a substantial market share, and has an EBITDA margin of 38% in 2021. PS is a new segment accounting for 1.2% or revenue in 2021 for post-acquisition period from December 7 to December 31, 2021.

Stock market value: about $2.6 billion ($16.49 per share)


Activist: Capital Management Scopia

Ownership rate: 5.31%

Average costs: $11.87

Activist comments: Scopia is not an active investor historically. However, activist investor Jerome Lande (of Coppersmith Capital and before that MMI Investments) has moved his operations to Scopia for the purpose of running a portfolio of activists in Scopia and making a profit. advises and supports activists on Scopia’s larger portfolio, which is a traditional portfolio of short-term funds. Of Scopia’s eight previous 13D filings, three belonged to companies in the Information Technology sector, and they had an average return of 79.65% for those scenarios compared with 40.87% for those scenarios. S&P 500 during the same period.

What is happening?

On July 14, Scopia sent a letter to the company’s board of directors express its beliefs that it may be necessary for Verra to begin the strategy review process. Scopia expressed its disappointment with the company’s valuation, which it believes underestimates its intrinsic value and share price.

Behind the scene

This is a short-term, somewhat confusing, unnecessary campaign. It’s confusing because Scopia’s letter largely reads like a corporate marketing piece, discussing in detail how great Scopia thinks Verra’s business is. Scopia notes that the company has a strong financial record with over 90% of recurring revenue, CAGR of around 20% organic services revenue over 5 years, approximately 45% to 50% EBITDA margin, competitive sustainable competition, low capital intensity and strong free cash flow generation. They detail a number of fundamental secular trends that will support revenue growth in the commercial services segment over the medium term including increased cashless toll fees, increased road toll demand, higher prices, and more. congestion, diverting private vehicle use from public transport, and increasing transponder toll rates. In the government solutions segment, Scopia points to geographic expansion opportunities and the growing focus on school speed zones and school bus cameras that will generate more growth targets. a low-to-medium number for the company – the business is currently over 119% of its 2019 revenue with additional upside opportunities. Additionally, they see growth potential for the government solutions segment that could come from the federal infrastructure bill that allocated $2.7 billion to enhance city and traffic safety. New York deploys more automated enforcement cameras. That’s odd for a letter from activists, but all the more confusing when they claim that Verra trades at a huge discount but don’t give a reason why or identify any issues. any history with the company. Any proposal or performance review is completely void and their only solution to close the valuation gap is to sell the company.

It’s short-term not only because they provide a short-term catalyst, but because, in their words, Scopia doesn’t show any patience or give management any real time to execute. implementing their business plan (“We are not alone in our view that 2022 is a ‘closed-down’ year for the Company…” Lande said in the letter. He later added , “We are half a year away and the Company has not made meaningful progress toward closing the gap valuation…”).

There are three reasons why this is not necessary. First, Verra hasn’t underperformed in the market. Second, Scopia raised 29% of its investment in two years. Finally, since this early year (just 7.5 months), Verra already has an active investor on its board – Sarah Farrell of Inclusive Capital – who has made some of the same proposals Scopia mentioned, like expanding into Europe. Europe. Clearly, Scopia is not content with the long-term governance-oriented activism that Inclusive is known for.

In our view, this is more of a letter to potential acquirers than a constructive letter to management. Scopia is hoping to get their comeback in the form of an acquisition instead of taking a board seat and creating lasting value like Inclusive is in the process of doing.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder performance, and he is the founder and portfolio manager of 13D Activity Fund, a mutual fund. invest in a 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.

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