Carl Icahn buys shares in canning giant Crown. Here’s how it can create value
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Company: Crown Holdings (CCK)
Company: Crown assets is a world leader in the design, manufacture and sale of packaging products for consumer goods and industrial products. They operate in three segments: beverages, which accounts for approximately 70% of earnings before interest, taxes, depreciation and amortization; Transit Packaging and Food, which together account for approximately 30% of EBITDA. Their consumer packaging solutions primarily support the beverage and food industries through the sale of aluminum and steel cans. Their packaging for industrial products includes steel and plastic consumables and equipment, paper-based protective packaging, and plastic film consumables and equipment, which are sold in the metal, food and beverage industries, construction, agriculture, corrugated and general.
Market value: $8.8 billion ($73.75 per share)
Activist: Carl Icahn
Percentage of ownership: 8.5%
Average cost: $79.80
Activist Comment: Carl Icahn is the grandfather of shareholder activism and a true pioneer of strategy. Although he’s not slowing down at all, he has made a deal with his son, Brett Icahn, to join the company as an eventual successor. Brett plans to use his father’s favorite approach of pushing companies to make changes intended to boost their stock prices, though he hasn’t ruled out friendly bets either. This is no departure from the strategy Carl has been successful with for many years. It can be friendly (eg Apple, Netflix) or it can be confrontational (eg Forest Labs, Biogen), often depending on management response. Brett is an impressive activist investor in his own right, not because he is Carl’s son, but because he has demonstrated a long track record of extremely successful activist investing. The Sargon portfolio he co-managed at Icahn totaled approximately $7 billion and included hugely profitable investments in companies such as Netflix Inc. and Apple Inc. The Sargon portfolio significantly outperformed the market with an annualized return of 27 %. However, before that, Brett started in 2002 with Icahn as an analyst and later was responsible for campaigns like Hain Celestial (280.3% return vs. 46.7% for the S&P500), Take-Two Interactive (81 .5% vs. 64.5% for the S&P500) and Mentor Graphics (106.4% vs. 79.4% for the S&P500).
What is happening?
In the wings
Crown operates in a consolidated global market with only four players globally and high barriers to entry – regional monopolies due to shipping costs, long-term contracts and training and experience to operate factories. Their growth profile is accelerating, driven by sustainability trends and shifting consumer preferences: around 75% of new products are canned today, up from around 30% in 2014. They also benefit downside protection for a non-cyclical product.
Crown boosted EBITDA during the pandemic, when demand for aluminum cans increased as restaurants and bars were forced to close and consumers bought canned cocktails and beer to consume at home. The company underperformed its peers, including its main competitor Ball. Last week, they saw a sharp decline in the share price from $85.01 on Oct. 24 to $70.69 on Oct. 25, following their latest earnings release. They attributed their weaker financial outlook to inflation, high interest rates and unfavorable currency translation. This underperformance is also due to a hesitant demand for canned drinks which has exploded during the pandemic, leading to excess inventory.
The opportunity to create shareholder value here is relatively straightforward: sell non-core businesses, buy back shares, and focus on the pure-play beverage business. The company announced its acquisition of Signode, a transit packaging company, for $3.9 billion in 2017, and may be hesitant to sell it for less now. However, there is a lot of value in selling this business, not the least of which is the amount of proceeds they receive (within reason). There is more value in how they use these products (i.e. buying back shares in an undervalued and growing company). There’s also tremendous value in freeing up management to focus on the core business, and there’s value in being a pure play company and bringing a market multiple closer to its pure play counterpart, Ball. Thus, management should not focus so much on what they can get for Signode as on what a sale allows them to do in the future. Crown also runs an aerosol and food packaging business that makes boxes for household products and snacks and still has a minority stake in the European food box business. Icahn believes the company should sell off all those non-core assets and focus on the beverage can business which has secular tailwinds and is undervalued compared to its pure-play counterpart. Using cash flow to strengthen the balance sheet and repurchase shares before that would improve returns for shareholders as Crown closes that valuation gap.
Icahn isn’t the only activist to hold a position at Crown. Impactive Capital first disclosed a stake in Crown in its Q1 2020 13F filing and argued for the company to pursue the same opportunities that Icahn advocated – disposal of non-core assets and share buybacks. Shortly after Impactive’s statement, Crown announced a strategic review of its portfolio and capital allocation priorities. This resulted in the divestment of 80% of the company’s European food box business in 2021. But there is clearly more portfolio simplification that can be done here. Impactive always has an environmental, social and governance thesis in its investments and looks for situations where positive ESG improvements can generate value. This situation is no exception. Focusing on the growing market for aluminum cans as a replacement for plastic and glass is not only good for Crown, but also good for the environment. Because the inherent properties of aluminum do not change during use or recycling, the cans are 100% recyclable repeatedly.
It’s important to note that there’s a ton of value here regardless of who’s on the leadership team. I wouldn’t assume Icahn or Impactive want to see a change of direction here. But if the steering isn’t up to snuff, it’s always a possibility. On a recent conference call, Crown CEO Timothy Donahue said, “You never like to say, we’re caught off guard, but I think we really were.” When you’re a CEO who’s been caught off guard, the last thing you want to see is Carl Icahn appearing in your stock.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.