Activist investors don't always prevail. But in the case of Brink's ( BCO), they're celebrating a victory. Following a round of activist activity, on Wednesday the company authorized a "Dutch auction" self-tender offer for up to 10 million of its shares, or about 17% of its outstanding stock. In midday trading, shares rose 4% to $50. Brink's is up 44% from a year ago. "The announcement supports the stock, reduces the share count and increases the earning per share. It's a shareholder value proposal," says James Clement, an analyst with independent research firm Sidoti & Co. Clement has a buy on the stock and a $61 price target. The tender price range will be $47.50 to $52.50 per share. There are 58.7 million outstanding shares. Between now and April 6, investors will be given the opportunity to tender shares to the company at specific prices within the range. Brink's will buy back stock at the lowest price necessary to redeem 10 million shares. If Brink's bought back 10 million shares at the midpoint of the range, it would cost $500 million. A provision of the tender offer unveiled Wednesday will permit the company to do more repurchases in the open market after the tender offer closes, bringing the total outlay up to $600 million. Anyone wondering why the Richmond, Va.-based security services company is being so generous with its cash should look at what hedge fund activism has achieved over the past three months. Among Brink's 20 largest investors, half were hedge funds as of Dec. 31, according to Thomson One Analytics. Collectively, they own about a third of the shares. The names are an A-list of activism: Pirate Capital, Steel Partners, Och-Ziff Capital Management, S.A.C Capital Management, Owl Creek Asset Management and Highbridge Capital Management.
Interestingly, at the center of the agitation process is a lesser-known player, hedge fund activist Millbrook Capital Management, which with a 6.7% stake is the company's largest shareholder. Its founder, Clay Lifflander, has long argued that Brink's freight business, which he views as a noncore asset, is a drag on the stock. Last April, Lifflander wrote a letter to Michael Dan, Brink's chief executive and chairman, asking for the sale of BAX Global, Brink's freight transportation subsidiary. At the time, the stock -- at $31 -- was trading at a greater-than-30% discount to its publicly traded security peers on multiples of EBITDA, Lifflander said in his letter. "We believe that the main cause for BCO's poor valuation is its ownership of BAX. Furthermore, we believe that BCO's underfunded legacy liabilities remain an overhang on the stock. We believe that the sale of BAX can potentially resolve both these issues at once and that it's time for BCO to pursue this alternative aggressively." He got want he wanted and more. On Jan. 31, the company sold BAX to Deutsche Bahn, the German transportation company, receiving $1 billion in net proceeds. Additionally, Brink's authorized between $400 million and $600 million of share repurchases, subject to board approval. It is fair to say that none of this would have happened without the proceeds of the sale of BAX, a measure that was adopted as the result of hedge fund agitation. The divesture of BAX, as advocated by Millbrook, had other positive implications. It enabled the company to build upon the Brink's brand, with its two remaining subsidiaries dedicated to security operations. Brink's Inc. is a provider of secure transportation and cash management; and Brink's Home Security is a residential alarm company. The proceeds of the sale also allow the funding of liabilities, in line with the Lifflander's agitation letter. In its 10-K filed yesterday, the company said that it would repay up to about $140 million in debt and that it had already paid down $46 million of short-term debt.
The 10-K also stated that the company would use $225 million of the sale proceeds to fund the VEBA, a fund destined to pay medical liabilities induced at the time when Brink's operated a now divested coal business. "
The funding of the VEBA would be a positive for the company and should positively impact the share price as a result," Lifflander wrote in his April letter. Bottom line, Millbrook's requests have been fulfilled and the stock has received a lift. From Millbrook's 13-D filing in April 20, the stock has gained 61%. "A lot of funds that got into the stock bought it in anticipation of the divesture and in anticipation of a very large buyback," says Clement. Now they have both. That is not to say that the company has not gone through some rough times lately. Last month, it reported a decline in profits for the fourth quarter due to higher operating costs, and the stock dropped. It remains below the $53 level it touched just prior to the earnings conference on Feb. 9. But the outlook remains positive. "Brink's has some tailwinds for 2006," says Steven Fisher, a UBS analyst who is neutral on the stock. He cites lower insurance pension costs and expected receipt of insurance proceeds in the aftermath of Hurricane Katrina. In addition, the company has reduced its costs in Europe and the absence of a restructuring this year should generate significant cost savings in 2006. Many believe that based on its healthy balance sheet and strong brand recognition, the company is not reaping the appraisal it deserves. "The company is trading at fairly substantial discounts as a multiple of EBITDA, compared to others," Clement says. But things could change. "Smart money is there because of the share buyback and because of the anticipation that the underlying results of the company will return to normal," Clement says. On the buyback end, hedge funds have cause to celebrate.