Ancora Holdings Group, LLC (together with its affiliates, “Ancora” or we”), which is the beneficial owner of approximately 4% of the outstanding shares of IAA, Inc. (NYSE: IAA) (“IAA” or the “Company”), today released the below letter to the Company’s Board of Directors (the “Board”) regarding the proposed sale to Ritchie Bros. Auctioneers Incorporated (NYSE: RBA) (TSX: RBA) (“Ritchie Bros.”).
See the letter below:
November 14, 2022
Two Westbrook Corporate Center, Suite 1000
Westchester, IL 60154
Attn: The Board of Directors
Members of the Board,
Ancora is one of IAA’s largest shareholders, with an approximately 4% stake in the Company. We have had long-standing concerns regarding IAA’s capital allocation, governance, operations and performance. That is why we previously called on the Board to either replace Chief Executive Officer John Kett or proceed with a formal sale process to maximize value for shareholders. Unfortunately, the Board appears to have ignored both requests prior to entering into a seemingly flawed and rushed transaction agreement with Ritchie Bros. last week.
We view IAA’s proposed sale to Ritchie Bros. as a poorly structured sweetheart deal that puts leadership’s interests ahead of shareholders’ best interests. If the current structure and terms remain intact, we intend to do everything in our power to oppose the transaction. This will be the case despite our belief that Ritchie Bros. is a very logical and synergistic combination partner for IAA under the right circumstances. In fact, we have a great deal of admiration and respect for Ritchie Bros.’ Chief Executive Officer Ann Fandozzi, who is the type of proven leader needed to turn around IAA’s lagging operations. Despite this high regard, we are uninterested in seeing Ritchie Bros. shareholders walk away with a high-quality business, like IAA, without providing proper consideration. In our opinion, IAA is as good of a business – if not better – than Ritchie Bros. under the right leadership. IAA has significantly higher ROIC and historically higher EBITDA margins. We believe Ritchie Bros. and Ms. Fandozzi are well aware that closing the 1,000-basis point EBITDAR margin disparity between IAA and Copart, Inc. can yield an enormous windfall for the combined entity’s prospective shareholders.
It is our view that Ancora is one of many IAA shareholders concerned about the following aspects of the deal’s current structure:
- Insufficient Consideration for a High-Quality Business: Although IAA is poorly managed by Mr. Kett and the current leadership team, it is a very high-quality business. The salvage auto auction market has strong secular growth dynamics, counter-cyclical attributes and high barriers to entry, including in North America where IAA has approximately 40% market share. Furthermore, IAA has amassed a significant network of auction sites in nearly every major metropolitan area in the United States. This makes its location network virtually impossible to replicate given zoning considerations, regulations and land availability. Additionally, IAA’s business model is attractive and asset light with more than 90% of revenue on a consignment model, resulting in the Company having limited inventory or remarketing risk. We fully acknowledge that IAA’s attributes, coupled with Ritchie Bros.’ sound business and superior leadership, would make the combined entity a compelling investment opportunity for both companies’ shareholders, provided the transaction structure includes improved consideration and terms.
Our view regarding the transaction is grounded in facts. The market reaction to the deal announcement was exceedingly weak, signaling that IAA shareholders are dissatisfied with the premium and consideration they are set to receive. A 19% premium is woefully insufficient given the industry’s historical take-out premiums, and the fact that Ritchie Bros. is a strategic buyer with a very manageable leverage profile. The Board should have secured more cash for IAA shareholders during negotiations considering the cash flow profile of the combined Ritchie Bros. and IAA entity. We contend the combined entity would have a manageable debt burden, especially given optimization opportunities for the IAA business and numerous synergies that can support paying down debt over the long term. We expect the actual run-rate cost synergies associated with the combination would be at least $200 million by 2025, far more than the conservative estimate of $100 million to $120 million cited in the deal announcement. We deem this very achievable based on how severely mismanaged IAA has been over the last several years. Ritchie Bros.’ proven management team is well-positioned to utilize operating leverage and greater scale to increase IAA’s compressed margins. Lastly, increasing the cash consideration as part of a revised deal structure would reduce some of the dilution for Ritchie Bros. shareholders, who seem to have their own concerns about the transaction’s terms based on the initial market reaction.
- Highly Questionable Sale Process: When we had conversations with IAA’s Chairman and Chief Executive Officer last week, neither answered “yes” when asked about whether the Board ran a comprehensive and wide-ranging process to review all sale options and value-maximizing alternatives. Companies that run these types of processes typically volunteer that information to their shareholders. Our interactions with market participants and possible suitors have reinforced suspicions that IAA did not invite the obvious universe of strategic and financial buyers to explore an acquisition. This is baffling to us given our prior engagement with the Board, and the fact that IAA is an attractive target for many well-heeled acquirers.
- No Go-Shop Period: The transaction terms do not include a go-shop period, thereby restricting the Board from seeking superior offers that could maximize value for shareholders. When one considers that the Ritchie Bros. proposal has a mere 19% premium and is extremely stock-weighted, the Board’s decision to forgo a go-shop provision is confounding. Based on our own market research, we believe there are parties that could offer highly competitive transaction terms if given the opportunity to access a data room, perform diligence and negotiate with the Company.
- Four Board Seats for IAA Incumbents: We cannot help but question the Board’s decision to prioritize director positions, particularly for Mr. Kett, over other deal terms that could yield more benefits for IAA shareholders. IAA’s Board has presided over dismal operating performance and numerous strategic lapses throughout its independent existence, leading us to believe many shareholders would prefer to have the current IAA Board out of the picture altogether. Keep in mind, this is not a merger of equals.
- Lucrative Off-Ramp for Mr. Kett and IAA Management: Since IAA’s separation from KAR Auction Services, Inc. in mid-2019, Mr. Kett has led the Company to objectively poor performance and overseen a series of destructive capital allocation decisions.1 To be clear, IAA’s share price is lower today than when it began trading as a standalone entity more than three years ago. Additionally, IAA’s growth, margins and trading price multiple have lagged peers despite the Company’s considerable operating tailwinds. Nonetheless, Mr. Kett’s reward is an estimated $11.8 million change-in-control payment and a director role at Ritchie Bros. should the deal go through. Other members of management are set to collectively receive nearly $10 million in additional change-in-control payments, despite also presiding over the destruction of shareholder value.
We fear that IAA’s Board and management suspected they would face an election contest in 2023 and therefore rushed into a poorly negotiated transaction. However, the threat of a contest that could trigger what we view as long-overdue leadership changes is not justification for entering into what looks like a very self-serving deal. You, as directors, have fiduciary obligations to shareholders – not management or one another.
In terms of the path forward, Ancora’s strong preference is that IAA obtains improved terms from Ritchie Bros. before consummating a transaction. As noted, we do view Ritchie Bros. as a quality buyer. But to avoid wasting time before a proxy is filed and to ensure a deal can get done, we contend the companies must first acknowledge that their respective investor bases are extremely displeased with the transaction’s present structure. From the IAA perspective, the Company’s negative share price since the deal announcement should speak volumes. Indeed, obtaining approval from the requisite number of IAA shareholders could prove very difficult if the status quo persists.
Ancora urges the IAA Board to pursue a modified transaction agreement that includes, at a minimum, more cash consideration and a higher premium. We also believe that any director position presently slated for Mr. Kett should be reallocated to a top IAA shareholder, such as Ancora, so it can designate an aligned and qualified investor representative. If past performance is any indicator of future results, Mr. Kett and his “institutional knowledge” of IAA would be best left out of the newly combined entity’s boardroom.
Ultimately, whatever actions Ancora takes regarding the deal approval process will be dictated by the respective share prices of IAA and Ritchie Bros. If it seems unlikely Ritchie Bros. shareholders will approve this transaction (as it currently does), we will take action to block the transaction on the IAA side. We will then seek to reconstitute the IAA Board in light of the appalling lack of appropriate governance demonstrated by the incumbent directors, including your apparent failure to initiate a transparent, wide-ranging sale process and secure other terms in shareholders’ best interests.
As the Board considers how to advance what could be an attractive deal under the right terms, we stand ready to engage with you and provide additional feedback.
|Frederick D. DiSanto||James Chadwick|
|Chairman and Chief Executive Officer||President|
|Ancora Holdings Group LLC||Ancora Alternatives LLC|
Founded in 2003, Ancora Holdings Group, LLC offers integrated investment advisory, wealth management and retirement plan services to individuals and institutions across the United States. The firm’s comprehensive service offering is complemented by a dedicated team that has the breadth of expertise and operational structure of a global institution, with the responsiveness and flexibility of a boutique firm. For more information about Ancora, please visit ancora.net
1See Ancora’s public letter dated March 15, 2022 (link here)