Corvex could take an amicable approach to help create value at Vestis

Business: Vestis is a provider of uniform rentals and workplace supplies across the United States and Canada. In addition to uniforms, the company provides mats, towels, linens and restroom supplies. Vestis’ customer base participates in a variety of industries, and it serves customers ranging from small, family-owned operations with a single location to corporations and national franchises with multiple locations.

Activist Commentary: Corvex was founded in 2010 by Keith Meister, Carl Icahn’s former lieutenant who served as CEO and vice chairman of Icahn Enterprises. Corvex is a highly concentrated, fundamentally driven hedge fund that uses activism as a tool, but not as a primary strategy. The firm’s preference is not to be an activist, with a proxy fight being a last resort. It would prefer to amicably be invited on boards.

On May 8, Corvex filed a 13D with the U.S. Securities and Exchange Commission, disclosing a 12.62% position in Vestis.

Vestis is the uniform rentals and workplace supplies business that was spun off from Aramark in October 2023. The company generates most of its revenue from its recurring rental business in the United States. At its September 2023 analyst day, the new company sought to wow the market, promising 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. The company got off on the right foot, reporting strong fiscal year-end earnings in November.

However, the party quickly ended about two weeks ago when Vestis reported its fiscal second-quarter 2024 earnings. The company cited issues related to pricing and customer retention, which led to a downward revision to its 2024 revenue growth and adjusted EBITDA margin outlook. On May 2, the stock plummeted 45% on the news and is still trading more than 30% below its pre-reporting price. Apparently, 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. 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 business that was run for many years as a non-core part of Aramark, Vestis did not get the focus that its pure-play peers would get. Now that it’s a standalone company, the board and management team are comprised of some talented and experienced operators. Chairman Phillip Holloman is the former president and COO of Cintas, and director Tracy Jokinen was the CFO of G&K Services, a uniform services company that was acquired by Cintas in 2017. In the uniform rental and workplace supplies space, Cintas is the gold standard. For a company and industry that may not be at the forefront of the public’s mind, Cintas has delivered a total shareholder return of over 1,200% in the past decade and has a market capitalization of nearly $70 billion. Presently, Cintas has just over three times the revenue of Vestis and just over six times the EBITDA, but almost 25 times the enterprise value. The goal here would be to make Vestis into Cintas, but just getting halfway there would be incredible for shareholders and Holloman is uniquely positioned to deliver on that.

Corvex Management does not take activist positions to be operators or micro-managers of the day-to-day business. And thankfully that is not what is needed here with this board and management team. But where Corvex does excel is in the area where Vestis is lacking: market communication and capital allocation. These are issues that a lot of companies have, but particularly newer companies that have not been public very long. Simply put, Corvex thinks and acts like an owner in the public markets and would be a great partner with this management team in making Vestis the best public company it can be.

This is not an opportunistic, short-term investment for Corvex. By going over 10%, the firm is signaling that it’s in this for the long term. As such, we would expect that Corvex would want some board seats, and we would encourage the board to welcome the firm’s representatives. This is truly a collaborative, symbiotic effort in which all sides roll up their sleeves and work together at what each does best to create value for 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. Vestis is owned in the fund.