Starboard Value sees big return in this infrastructure play even after activist campaign hits a snag

Starboard Value hit an unexpected stumbling block in its activist campaign in AECOM when one of the hedge fund’s members quit the infrastructure company’s board of directors over the summer. Peter Feld quit the AECOM board in protest of CFO Troy Rudd’s promotion to chief executive officer in June.

That snag, however, has not dented Starboard’s overall return on its AECOM investment. Since taking a stake in the company, AECOM shares are up more than 40%, easily outperforming the broader market in that time.

Business: AECOM is a company that designs, builds, finances and operates infrastructure assets for governments, businesses and organizations. The company’s design and consulting services segment is engaged in planning, consulting, architectural and engineering design services to commercial and government clients in major end markets, such as transportation, facilities, environmental, energy, water and government. Its services include planning, consulting, architectural and engineering design, program management and construction management for industrial, commercial, institutional and government clients. Its services need technical expertise, which include civil, structural, process, mechanical, geotechnical systems and electrical engineering, architectural, landscape and interior design, cost consulting and environmental, health and safety work.

Stock Market Value: $7.7 billion ($51.33 per share)

Percentage Ownership:  5.16%

Average Cost: $34.82

Activist Commentary: Starboard is a very successful activist investor and has extensive operational activism experience helping boards and management teams run companies more efficiently and improving margins. This is their 100^th 13D filing and in those 100 filings, they have averaged a return of 27.95% versus 11.24% for the S&P500. Their average 13D hold time is 17.5 months.

Starboard filed this 13D on Nov. 30 because they exceeded 5% ownership. However, they have been an active owner of the stock since June 2019 and have already accomplished much of their activist campaign.

13D filings often mark the beginning of an activist campaign, but not here. Starboard has been involved with this company since June 2019 and has already accomplished a great deal of value-creating activism that is evident in the stock price. The main reason they filed this 13D is because the shares outstanding decreased to put them above the 5% threshold and they have not purchased any material amount of shares since the third quarter of 2020.

When they initially got involved, AECOM was comprised of three businesses: (1) The Design and Consulting Services (“DCS”) – one of the largest engineering and planning consultancies globally that has market-leading franchises within the water and transportation verticals; (2) Management Services (“MS”), a U.S. Federal Contractor assisting the Defense and Energy departments; and (3) Construction Services (“CS”), a building and civil construction franchise with leading positions in NY and California and in the national sports arena construction market.

Starboard was urging AECOM to divest the non-core businesses (MS and CS) and focus on the operations of the core business (DCS), where Starboard saw an opportunity for operational improvements. The DCS business was operating at a 310 basis-point EBITDA margin gap to its closest peers. Starboard saw opportunities to manage delivery margin, address heightened non-billable employee costs and other corporate overhead and focus on selling its suite of services in a client-centric manner.

Through an agreement on Nov. 22, 2019, Peter A. Feld, Robert G. Card and Jacqueline C. Hinman were appointed to the board. On Jan. 31, AECOM sold the MS business to affiliates of American Securities and Lindsay Goldberg for $2.405 billion and in the first quarter of 2020, it reorganized its operating and reporting structure, resulting in the discontinuation of certain businesses within the former CS segment.

However, just when the strategic activism was finished and the DCS operational activism was beginning, Starboard’s activism hit a snag. On June 12, Feld resigned as a director of the company due to his disagreement with the board in connection with the CEO search process. While Feld was replaced with a Starboard designee — and Starboard still has three directors on the board — they do their best activist work when a principal of Starboard is one of the company directors. Moreover, his resignation is a signal that Starboard’s board representatives were not as persuasive here as they generally are in bringing most of the board to their side.

While this has not been a smooth-sailing activist campaign for Starboard, it has not significantly affected their ability to create value. When they first announced their position, the stock was trading at $36.54 per share. Today, it is trading at $51.89, a 42.01% return for Starboard during a time when the S&P500 returned only 22.59%.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.