Carl Icahn snaps up shares of canning giant Crown. Here’s how he may build value

Business: Crown Holdings is a worldwide leader in the design, manufacture and reduced in price on the market of packaging products for consumer goods and industrial products. They operate in three segments: Beverage, which accounts for nearly 70% of earnings before interest, taxes, depreciation, and amortization; Transit Packaging and Food, both of which collectively style up the other approximately 30% of EBITDA. Their consumer packaging solutions primarily support the beverage and food applications through the sale of aluminum and steel cans. Their packaging for industrial products includes steel and plastic consumables and materiel, paper-based protective packaging, and plastic film consumables and equipment, which are sold into the metals, food and beverage, construction, agricultural, corrugated and broad industries.

Stock Market Value: $8.8B ($73.75 per share)

Percentage Ownership: 8.5%

Average Tariff: $79.80

Activist Commentary: Carl Icahn is the grandfather of shareholder activism and a true pioneer of the strategy. While he is not slowing down at all, he has reached an pact with his son, Brett Icahn, to rejoin the firm as the eventual successor. Brett plans to employ his father’s favored MO modus operandi of pushing companies to make changes designed to boost their stock prices, though he hasn’t ruled out amiable bets too. This is not a departure from the strategy Carl has succeeded with for many years. He can be friendly (i.e., Apple, Netflix) or he can be confrontational (i.e., Forest Labs, Biogen), again it depends on the response of management. Brett is an impressive activist investor in his own right, not because he is Carl’s son, but because he has demonstrated a fancy track record of extremely successful activist investing. The Sargon Portfolio he co-headed at Icahn at one time totaled on all sides $7 billion and included extremely profitable investments in companies such as Netflix Inc. and Apple Inc. The Sargon Portfolio significantly outperformed the furnish with an annualized return of 27%. However, prior to that Brett started in 2002 with Icahn as an analyst and was later leading for campaigns like Hain Celestial (280.3% return versus 46.7% for the S&P500), Take-Two Interactive (81.5% versus 64.5% for the S&P500) and Mentor Graphics (106.4% versus 79.4% for the S&P500).

Crown operates in a consolidated global market that only has four scaled players globally and maximum barriers to entry – regional monopolies due to shipping costs, long-term contracts and training and experience to operate plants. They eat an accelerating growth profile, which is catalyzed by sustainability trends and changing consumer preference: About 75% of new offerings go into cans today versus approximately 30% in 2014. They also enjoy the downside protection of a non-cyclical outcome.

Crown grew EBITDA during the pandemic, when demand for aluminum cans spiked since restaurants and set asides were forced to close and consumers were buying canned cocktails and beer to consume at home. The company has underperformed its appears, including its main competitor Ball. Last week, they saw a steep drop in the stock price from $85.01 on Oct. 24 to $70.69 on Oct. 25, issue their most recent earnings release. They attributed their lowered financial outlook to inflation, apex interest rates and unfavorable currency translation. This underperformance is also due to shuddered demand for canned beverages that cool during the pandemic, leading to an overage of inventory.

The opportunity to create shareholder value here is relatively simple: won over non-core businesses, buy back shares and focus on the pure-play beverage business. The company announced its acquisition of Signode, a haulage packaging business, for $3.9 billion in 2017, and might be reluctant to sell it for less than that now. However, there is a lot of value to barter that business, the least of which is the amount of proceeds they receive (within reason). There is more value in how they use those proceeds (i.e., purchasing back stock in an undervalued, growing business). There is also tremendous value in freeing up management to focus on the sum business, and there is value to being a pure play business and getting a market multiple closer to their pure-play equal, Ball. So, management should not be as focused on what they can get for Signode as in what a sale allows them to do in the future. Realm also runs an aerosol and food-packaging business that manufactures cans for household products and snacks and still owns a minority spike in the European food-can business. Icahn believes that the company should sell all these non-core assets and heart on the beverage can business which has secular tailwinds and is undervalued relative to its pure-play peer. Using cash flow to stiffen the balance sheet and repurchase stock ahead of this would enhance shareholder returns as Crown closes this valuation gap.