NEW YORK (The Deal) -- Starboard Value’s Jeff Smith last week reported owning an 8.2% stake in Brink's Co. (BCO), in a little-noticed securities filing that didn't provide any useful information about what the investor is hoping to achieve at the armored-car transport company.
The filing was bare bones, but investors should expect Smith or another activist to try to bust a hole in Brink's board if operational changes aren't forthcoming in the coming months. People familiar with Smith's thinking note that the activist has had conversations with Brink's officials and said he's concerned about how the company has significantly underperformed compared with Loomis (LMOIF), Brink's major armored-car transport rival.
Brink's has also come under pressure from another big insurgent investor in recent months -- Mario Gabelli -- whose Gamco fund is no stranger to activism. Gabelli reported owning an 8.14% stake in December in a filing that said he "continues to believe" that Brink's trades at a "significant" discount to its private market value. Put together with Starboard's stake, at least 16% of the company's ownership has serious reservations with how Brink's is performing. Starboard accumulated its stake between March and May.
Jeff Kessler, an analyst at Imperial Capital in New York, agrees that Loomis and Brink's have had dramatically different share-price performances in recent years. Between 2012 and 2015, Loomis shares have skyrocketed on the Stockholm Stock Exchange from 83 krona a share to 251 a share ($10 to $30). At the same time, Brink's stock has traded between $21 and $27 a share, jumping to about $33 only after Starboard made its May 4 activist filing.
A Brink's spokesman acknowledged that company officials have "discussed" a wide range of topics with Starboard and that its board and management team "welcome constructive input" from investors on how to create additional value. Starboard has a history of submitting boilerplate 13D filings that presage activist campaigns. For example, a 13D filing on Staples (SPLS) was quickly followed by an insurgency that drove the national office supply chain into a February merger with Office Depot (ODP). The same sequence could happen at Brink's, but not immediately.
Richmond-Va.-based Brink's, which had its annual meeting on May 8, prohibits special shareholder meetings or acting by written consent, all of which suggests that any contest to elect directors won't take place until next May at the earliest. Smith or Gabelli could go public with more specific criticisms at any time.
Still, a proxy contest is a serious possibility down the road if Brink's doesn't improve its share price. Starboard's Smith and Gamco's Gabelli are among the most prolific employers of proxy fights at companies in the U.S. over the past five years. Starboard has launched 29 proxy fights and Gabelli 14 over that time frame, according to FactSet. Smith boasts that Starboard has added or replaced nearly 150 board members at almost 50 different companies.
In addition, Brink's has been in the crosshairs before. The company spun off its home-security operations, now known as Broadview Security, under pressure in 2008. That year, MMI Investments LP of New York and Steel Partners II LP launched campaigns to push the company to make changes.
Kessler suggests that Brink's has until the end of 2015 to improve its operating margins and share price or it will face an escalating Starboard or Gabelli campaign. "For Starboard to be more active, they have to see that no progress had been made toward the last quarter this year," Kessler said.
Progress would mean operating margins to 7% in 2016, up from 4% to 5% lately, a situation that would drive a share-price hike. Loomis has an 8% operating margin.
Some of Brink's problems are external. Its shares plunged last year after the company said it was going to write down the value of its Venezuelan assets in light of the country's currency devaluation. "They couldn't get cash out of the country, and they spent all their time dealing with the political situation in that country and naturally had to pull some resources away from their overall restructuring of U.S. and Mexico," Kessler explained. "The stock basically fell to levels that were so much lower when compared to Loomis that it was crying out for value investors, which happen to frequently include activists."
Before Venezuela, Brink's suffered after the 2008 financial crisis prompted banks and small businesses to start shopping around for better deals on armored transportation services. Other companies in the U.S. and other countries, including Loomis, Garda World Security (GWDAF), G4S (GFSZF) G4S in the U.K. and Prosegur (PGCSF) in Spain, started picking up market share.
But many wounds have been self-inflicted. On governance questions, Brink's has a poor ISS QuickScore rating, earning an eight out of 10 with 10 being the lowest score. Those issues could become major talking points for Starboard or Gabelli if either were to launch a proxy fight or public-pressure campaign.
ISS notes that the company has made non-timely financial disclosures in the past two years and it had a "material weakness" in its internal controls that was later remediated. It also has a "pay for performance" misalignment, its directors don't own enough stock and a little fewer than half of its directors have lengthy tenures, according to the proxy adviser.
The company hasn't done stock buybacks, but could be pressured by Starboard to distribute some of its roughly $140 million in cash to shareholders, says Ashish Sinha, an analyst at Gabelli & Co. in London. On May 8, shortly after Starboard's 13D filing, Brink's declared a quarterly dividend.
Sinha argues that Brink's is taking a number of steps to reach a 7% operating margin for 2016. These include setting up armored-car drivers with hand-held logistics devices, cutting back to one-man crews in safer areas and testing new billing software. Those steps may be positive, but Starboard's presence adds urgency to Brink's task.