Pacer International And Becker Darpkin [case study]
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Courtesy of the Alternative Activist. Becker Drapkin’s average return was a ridiculous 120% on its activist targets at the time of the Pacer investment, and the fund made a big bet, as PACR became its second largest activist investment. While PACR was its only Industrial-related investment, the Company’s historic underperformance, low valuation and clean balance sheet fit right in with Becker Drapkin’s deep value strategy. The market cap range of $200-300 million has staggering relative results, though my favorite stat is 53% of targeted companies within the range have been acquired–often at a juicy premium. The activist has a reputation of aggressively pushing for changes to realize shareholder value and PACR felt like an obvious acquisition target.
- Pacer was the third largest provider of intermodal services, behind competitors with significantly more scale (J.B. Hunt and Schneider National). The Company had attractive inroads to Mexico and intermodal was considered one of the fastest growing areas of transportation logistics.
- Its clean balance sheet with no debt and cash representing 13% of its market cap provided some comfort as well as its profitable operations and free cash flow (albeit at razor thin margins).
- Its revenue multiple couldn’t get any lower and its peers traded at materially higher valuations as they bested Pacer in just about every operating metric.
Pacer had attractive assets, though its annual revenue declines and margin profile relative to peers screamed in need of a fresh board and management perspective. Insiders had little incentive, with insider ownership at just 2%. The bet was that Becker Drapkin would prove to be just the incentive to push the company into action and the higher valuations of peers provided upside potential should Pacer be able to improve its operations.
Outcome: After due diligence, The Alternative Activist invested near the time 13D filing, and as the price lingered around $6.00 through the fall, doubled down soon after Becker Drapkin invested another $2M+. XPO Logistics had been on an acquisition tear, seeking to aggressively scale its business and optimize the freight industry, and in January 2014 announced its acquisition of Pacer only 7 months after the 13D filing, resulting in a return of 53%!