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Company: Verra Mobility (VRRM)
Business: Verra Mobility operates through two segments: (i) Business Services: the market leading provider of automated toll and violation management and title and registration solutions for car rental companies, fleet management companies , municipalities, school districts and offense issuing authorities; and (ii) Government Solutions: works with local government agencies to help make cities and roads safer for everyone through automated security solutions, namely cameras that detect and address traffic violations to red lights, speed, school buses and city bus lanes.
Market value: $2.2 billion ($14.03 per share)
Activist: Inclusive Capital Partners
Percentage of ownership: 6.66%
Average cost: $14.11
Activist Comment: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting good environmental, social and governance practices. It was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its people. As an active and pioneering ESG investor (“AESG™”), Inclusive seeks long-term shareholder value through active partnerships with companies whose core businesses provide solutions to this pursuit. Inclusive is a return-driven fund focused on environmental and social investing. The company is primarily focused on creating environmental and social value, which in turn creates shareholder value. Inclusive is so focused on environmental value that it has created a new metric to screen and evaluate businesses: business value versus reduced carbon emissions.
What is happening?
Sarah Farrell, a partner at Inclusive Capital, was appointed to Verra’s board of directors on December 30, 2021, just four months after Inclusive Capital filed a 13D, noting her position in the firm.
In the wings
Verra Mobility operates through two segments: (i) Commercial Services (“CS”) and (ii) Government Solutions (“GS”). The CS business has transformed what was a major headache and administrative cost for car rental companies into a 100% margin ancillary revenue stream. The company takes part of the daily service fee and part of the toll. The company maintains relationships with toll authorities nationwide, processes 250 million transactions per year, and is truly the only national toll management provider across the country. GS activity generates revenue for local governments and helps them increase their road safety mandates and identify problem areas.
The CS segment represents approximately 60% of company revenue and has EBITDA margins of 63% at the segment level and the GS segment represents approximately 40% of company revenue with EBITDA margins of 40% at the segment level. Both companies are #1 in market share, with the CS business covering 95% of US toll roads and the GS business having 70% market share in the US. This results in a very high margin business with maintenance investments of only 6% of turnover and a return on invested capital of approximately 50%.
Despite all of this, the company is undervalued as investors don’t give it credit for the Covid recovery, even though the CS segment accounts for 98% of 2019 revenue and the GS segment topped 2019 revenue. Moreover, from 2015 to 2019, it grew its EBITDA by 19% per year and is expected to grow its EBITDA by more than 25% per year in 2021 and 2022. This will result in internally generated cash flow of $500 million which can be used strategically or for share buybacks representing approximately 20% of its current market capitalization.
Additionally, there could be future benefits in three areas. First, the company could have a huge opportunity to replicate what it currently has in the US in Europe. Europe has even more tolls. If the company could find a way to manage tolls for the European branches of US car rental agencies, there could be a $300-350 million market opportunity, compared to the $230 million in revenue CS generates. in the United States in 2019. , there are exciting opportunities for strategic mergers and acquisitions. The company’s management has shown that it can be disciplined when it comes to acquisitions. The most recent acquisition, Redflex, is in the process of full integration. Third, there are capital allocation opportunities, as the company has already announced a $100 million share buyback plan.
As is customary with inclusive investing, there is also a very strong ESG component to this business. Within CS, the company allows for greater diversity in infrastructure financing. Most infrastructure costs are currently funded by gasoline taxes. However, with cars becoming more fuel efficient and the rise of electric vehicles, spending on gasoline is down secularly, which is good for the environment. An increase in the amount of tolls collected will offset this decrease to the benefit of the environment while increasing VRRM’s CS revenues.
In the GS segment, the ESG benefits are much clearer. Motor vehicle crashes are the third leading cause of death in the United States for people ages 1 to 44, after drug overdoses and suicides. In 2019, motor vehicle crashes accounted for 36,000 fatalities in the United States, and speeding and intersection-related crashes accounted for 55% of those fatalities. The GS activity directly targets this problem. The Insurance Institute for Highway Safety found that red light cameras reduce road deaths by 21% in the United States and speed cameras reduce road deaths by up to 39%. The higher the penetration of the GS business, the more profitable the business becomes, but equally clear, the more lives are saved on American roads each year.
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.