Activist Ancora joins investor calls for a strategic review at Forward Air

Business: Air forward is a transport service provider. These transportation services include less-than-truckload (LTL), truckload and intermodal transportation services, and freight and supply chain brokerage services in North America, Europe and Asia. Its segments include Expedited Freight, Intermodal and Omni Logistics.

Scholarship value: $884.7 million ($31.94 per share)

Percentage of ownership: about 4%

Average cost: N/A

Activist Commentary: Ancora is primarily a family wealth investment advisory firm and fund manager with $9.5 billion in assets under management. The firm has an alternative asset management division that manages about $1.3 billion. It was founded in 2003 and hired James Chadwick in 2014 to continue activist efforts in niche areas such as banking, savings and closed-end funds. Ancora’s website lists “small-cap activist” as part of its products and strategies, and its tactics have evolved over the past few years. From 2010 to 2020, most of Ancore’s activism has been 13D filings on microcap companies, and in the past few years they have taken a larger number of sub-5% stakes in larger companies. The Alternatives team has a history of using private and, when necessary, public engagement with portfolio companies to catalyze improved corporate governance and long-term value creation.

On August 20, Ancora sent a letter to Forward Air’s board of directors. The firm called for a strategic review by independent legal and financial advisers, noting that improving operations and balancing the balance sheet would be better achieved as a private company.

Forward Air is an asset-light transportation company focused on the expedited less-than-truckload markets; all their goods are transported by land. The company offers an alternative timed delivery solution at a lower cost than traditional air freight and also has various other transport services, including intermodal transport, brokerage and last mile. However, the majority of its profits are generated by its core Expedited LTL business (80% in 2023).

Ancora has a nearly four-year history with Forward Air, initially filing a 13D on December 28, 2020, and finally settling for two board seats on March 15, 2021. This campaign focused on capital allocation, cost reduction , margin improvement and divestment of non-performing or underperforming assets. By the end of 2021, the stock began to outperform after the company cleaned up the deal, driving the price to over $120 per share. The anchor exited in February 2022 and saw a 58.63% return on its investment, compared to 5.13% for the Russell 2000 over the same period.

However, by the end of 2023, the company’s share price began to languish. In October 2023, Ancora announced that it had once again become a top shareholder when the stock was trading at $70. This followed the company’s announcement in August 2023 that it would acquire one of its top five customers, Omni Logistics, at 18 times earnings before interest, taxes, depreciation and amortization, well over multiple at which the company was trading. Shares of Forward Air fell following the announcement. Anchor vehemently opposed the deal, saying it saw the deal as entrenchment by management and the board to secure excessive levels of compensation, and the firm argued the deal was structured to avoid a shareholder vote. Ultimately, despite Ancora’s objections, the Omni deal closed on January 25, 2024, and Ancora sold its position in the first quarter of 2024. The stock has since fallen to $11.21 in May and is now trading at a minimum. 30 dollars.

When an investor publicly agitates for the sale of the company without a detailed analysis of alternative paths to value creation, we often view such campaigns negatively as short-term opportunistic engagements that do not portray shareholder activism in a good light. But in this case, Ancora has run two previous campaigns, the first of which was long-term oriented, highly successful and based on careful analysis for business improvement and collaboration. The second was launched after the two Ancore directors resigned from the board. The anchor now returns to Forward Air – now as a top 10 shareholder with a position of around 4% – and after the company changed drastically thanks to the acquisition of Omni Logistics. This time the activist’s message is simple: Hire advisers and sell the company. Ancora recognizes the path to value creation as a public company. However, the firm notes that if the company remains public, it will need to execute flawlessly to achieve transactional synergies, reduce cost overruns, repair its highly leveraged balance sheet and grow profitably. . Ancora sees this as a Herculean feat, especially for this management team and board, many of whom have overseen questionable decisions such as the debt-financed acquisition of Omni.

Simply put, Forward Air is a great company that made a bad deal. It now has an over-leveraged balance sheet and inflated SG&A expenses. What needs to be done here – the sale of non-core assets and restructuring operations – is best done privately. Moreover, these are also the things that private equity funds excel at. It just so happens that private equity firm Clearlake Capital has made the rare move of filing a 13D with language suggesting their willingness to engage with the board on strategic alternatives. While this does not necessarily mean that Clearlake is the clear-cut potential acquirer, the firm could put the company on the line with an offer. Clearlake owns a 13.8% stake and Ancora owns about 4%. Irenic Capital built a nearly 5% stake earlier this year and called for a strategic review, including weighing a possible sale of Forward Air. The key investor to watch here is major shareholder Ridgemont Equity. Ancora has two ways to force the sale of the company – through persuasion or a proxy fight, and either way will likely require the support of Ridgemont, who also has two board seats at Forward Air. However, Ridgemont acquired its stake as a large shareholder of Omni Logistics and retained ownership in the surviving company. So there’s no reason to think the firm wouldn’t reinvest its equity in a private equity package. The only potential obstacle to a private equity buyout is the company’s high debt of about $1.6 billion, with interest payments already choking the cash flow that private equity investors love so much.

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