Arnaud Ajdler, “Investing in Change”

By Travis Johnson, Stock Gumshoe, April 4, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Arnaud Ajdler runs a new special situations hedge fund called Engine Capital (he’s been at Crescendo for a decade and is an experienced activist investor, but moved to start this new fund), and is focused on companies that are going through change — looking for catalysts that will close the value gap. He think that improves your odds of avoiding value traps.

Different kinds of change: Proactive, where his firm is the activist investor trying to make them change; Anticipatory, seeing changed management incentives or changing trends or M&A likelihoods, or maybe other activist investors; Reactive, where the management is already changing or announcing changes but it hasn’t gotten into the stock price yet.

There is good opportunity now, because he says change is coming — companies are under pressure to unlock value and use their cash, there’s pent up demand from private equity, and the sentiment toward activist shareholders is much better now.

What kinds of changes does he look for?

Operational — sales growth, margin improvements, management change
Allocation — return of cash to shareholders, acquisition, capex changes
Capital Structure — refinancing, optimizing balance sheet
Strategy — Separating assets, spinoffs, sale of company or assets, changes in industry (consolidation, etc.)

They’ve been involved so far with Imvescor, Stewart (title insurance), Vitran, LSB Industries, Baker, FTD.com, Starteck, Entrec. Some still active, some have been sold or recently settled. They sometimes do it publicly to pressure companies, sometimes send private letters or communicate informally and get enough reaction that way.

They look for high free cash flow yield
They want multiple ways to win — margins too low, balance sheet lazy, conglomerate discount, takeout candidates, bad capital allocation.
And they want to understand up front what the mechanism of change iwll be.

Examples:

Hill International (HIL)
Global project management firm. 100 offices globally. Family run and 30% family owned, transitioning CEO from father to son.
Consulting revenue growth about 14% annualized since 2011 (including guidance of $575-600 million for this year). They have good visibility into next year’s revenue, and the backlog is around $1 billion at the beginning of 2014.

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