Activist Irenic takes a stake in Atkore, urges company to consider a sale
Company: Atkore (ATKR)
Business: Atkorea It is a manufacturer of electrical products for the construction and renovation markets and security and infrastructure products for the construction and industrial markets. The company’s divisions include electrical, security and infrastructure. The electrical division manufactures products used in the construction of electrical power systems, including pipes, cables and installation accessories. This segment serves contractors in partnership with the electricity wholesale channel. The security and infrastructure segment designs and manufactures solutions for the protection and reliability of critical infrastructure, including metal framing, mechanical conduit, perimeter security and cable management. These solutions are marketed to contractors, OEMs and end users. It manufactures products in 42 facilities and covers a total of 8.5 million square feet of production and distribution space in eight countries.
Stock Market Value: $2.09 billion ($61.97 per share)
Activist: Irenic Capital Management
Ownership: 2.5%
Average Cost: no
Activist Comment: Irenic Capital was founded in October 2021 by Adam Katz, former portfolio manager at Elliott Investment Management, and Andy Dodge, former investment partner at Indaba Capital Management. Irenic invests in publicly traded companies and works collaboratively with firm leaders. Their activism so far has focused on strategic activism, recommending spinoffs and sales of companies.
what’s going on
On September 30, Irenic announced that they had acquired a 2.5% stake in Atkore and called on the company to pursue a potential sale process.
behind the scenes
Atkore is a manufacturer of electrical products for the construction and renovation markets and safety and infrastructure products for the construction and industrial markets. The electrical division produces pipes, cables and installation accessories for electrical power systems. The security and infrastructure segment produces solutions that include metal framing, mechanical conduit, perimeter security and cable management systems. For years, Atkore operated as part of a stable oligopoly. hubbell, Eaton And nVentilation is among other major domestic players.
The pandemic has led to an increase in construction and a corresponding increase in demand for Atkore’s electrical products, which are important in cabling processes. As a result, the company has been aggressive in pricing, and as of the 2019-2022 fiscal year, its revenue has increased from $1.9 billion to $3.9 billion, and EBITDA has increased from $300 million to $1.3 billion. But as we have seen for many companies, in the wake of Covid demand eventually normalized and revenue growth stalled. Worse still, Atkore’s aggressive pricing strategy backfired by inviting import competition into a market long protected by high freight costs and distributor preference for local supply. By increasing prices too sharply, they effectively undermined their own market position. As a result, revenue fell to $2.9 billion and EBITDA fell to $462 million.
Moreover, despite a $1 billion drop in revenue, SG&A increased and the company’s headcount increased by over 40%. On top of this there is misallocation of capital. Instead of using the unexpected opportunities of the Covid era to invest in core electricity business, management pursued non-core initiatives such as water infrastructure and a fiber pipeline for rural broadband, many of which were never implemented. Now, a company that was trading at the top of the market around $190 per share in early 2024 has fallen to as low as $60 per share; and amid this underperformance, in late August CEO Bill Waltz unexpectedly announced that he would retire without a successor.
All this led Irenic Capital Management to announce a 2.5% position in Atkore. With the absence of a CEO, operational and capital challenges and weak market sentiment, Atkore is now at a critical juncture where the board will make the biggest decision it will ever make that will determine the outcome for shareholders.
The most important thing a board does is to appoint and retain a CEO, and that’s where Atkore is right now. But when a company faces problems like Atkore’s and is on the verge of a major restructuring, the board must make another decision about whether the company will remain independent before hiring a new CEO. We would expect Irenic to want one or two new directors identified by them on the board, possibly independent directors with relevant experience, to participate in this analysis and decision.
Atkore currently trades at around 6.5x EBITDA but presents clear cost reduction and divestiture opportunities that private equity can execute more effectively. Therefore, it’s fair to assume an outflow of potentially 8 to 10 times EBITDA at multiple returns above the company’s current valuation. If a review of strategic alternatives concludes that an acquisition would occur within this range, the board will need to use this as a reference against an independent plan.
The first step of an independent plan will be to identify the right CEO who will be tasked with realigning the company’s operational and capital focus on its core electrical businesses, divesting non-core assets, reducing costs and enforcing pricing discipline. As Rocco tells Michael Corleone, this would be difficult, but not impossible. There is certainly at least $100 million in costs that could be cut from SG&A, and the negatives that caused the decline in revenue have now reversed; pricing was low enough to once again deter importers even before the tariffs were issued; This was a negative development for Atkore.
But it’s worth repeating that none of this would be possible without the right CEO, and it’s important to have the best possible board to make that decision, and that board gives shareholders the right to worry. Currently, both the company’s chairman and former CEO come from the water industry, likely contributing to the strategic drift away from the company’s core.
Atkore also recently announced a strategic review focusing on non-core asset sales, including its water pipe business. While this was the right decision, launching a strategic review without a permanent CEO seems rushed and poorly timed; It’s even more confusing to conduct such a review at this time without fully weighing the possibility of a sale. A board refresh and sales analysis that brings relevant power industry expertise that can guide the CEO succession process will be an important first step.
Irenic has significant experience in strategic activism, identifying struggling companies in public markets, and assisting businesses with spinoffs and sales. The nomination window for directors opened on October 2, and we don’t think it’s a coincidence that Irenic made his campaign public the day before the nomination window opened. We expect them to discuss the board structure with the company. Ideally, shareholders will benefit most from the addition of several new independent directors with relevant experience and supporting Irenic as an active shareholder in the board’s analysis.
Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.
