1 Under-The-Radar Activist Campaign to Keep An Eye On

Activist investors like Dan Loeb and Carl Icahn get most of the attention in the financial blogosphere, but there are plenty of lesser-known guys you should know about too. Jeff Smith’s Starboard Value is one such hedge fund, and it has recently made a move in a small-cap environmental services company.

Jeff Smith

At Insider Monkey, we’ve discovered that hedge fund sentiment has several market-beating qualities, so let’s take a look at what Smith and Starboard are up to.

According to a newly amended 13D filing with the SEC, Starboard Value now owns 9.7% of Calgon Carbon Corporation (NYSE:CCC), good for about 5.2 million shares worth a little over $100 million. The activist has been invested in the company since November 2012, and he’s joined by the likes of David Shaw, Joel Greenblatt and Israel Englander, among others.

The primary reason behind Starboard Value’s new filing was to disclose a letter dated November 4th, sent to Calgon CEO Randall Dearth. The full letter can be seen here, and there are a few particular points we should mention. Smith and Starboard’s activist campaign is calling for: (1) a “large” stock buyback, (2) the conversion of its U.S. activated carbon assets into an MLP, and (3) more cost reductions.

Now, it’s worth mentioning that since the beginning of the year, Calgon’s margins have shown marked improvement on the back of “reductions in operating expenses,” as the letter points out, and shares of the company are up 42% year-to-date. More specifically, EBITDA margins are up to nearly 20% from 13.6% last year, and Starboard thinks this figure can pass 23% if its three aforementioned ideas are carried out.

Stock buyback

With regard to a stock buyback, Calgon already implemented a $50 million accelerated share repurchase plan at the end of last year, but Starboard believes this outlay should be increased to as much as $200 million. The hedge fund also suggests that the company should complete the buyback through a Dutch tender offer and subsequent open market purchases, rather than a continuation of the ASR, which it thinks is too restrictive.

MLP conversion

The bigger potential move is the MLP changeover. Starboard believes that Calgon would be better off converting its domestic carbon assets into a master limited partnership, which would save the company in taxes while giving it the ability to stabilize margins.

The hedge fund estimates that an 80% ownership of the so-called Activated Carbon MLP would create between $215 million and $397 million in shareholder value for Calgon Carbon investors. At a market capitalization of about $1.1 billion, this represents significant upside to current share prices.

More cost reductions

As mentioned above, Calgon Carbon’s cost reduction initiatives are moving in the right direction. EBITDA margins have improved by over six percentage points in less than a year, and they’ve outpaced five-year highs near 18%. Jeff Smith and Starboard Value think that more improvements can be made, particularly in comparison to companies like AMCOL International Corporation (NYSE:ACO), Polypore International, Inc. (NYSE:PPO) and Matthews International Corp (NASDAQ:MATW), and 17 other peers listed in the letter.

Starboard also points to the privately held Norit N.V. as an ideal foil to Calgon Carbon, and mentions that despite “substantially” lower revenues and fixed-cost leverage, Norit is able to generate peak EBITDA margins of 23%.

Due to Calgon’s larger size, the hedge fund believes it can improve this figure to between 23% and 25%, which implies that an EBITDA multiple of 8x currently rests on its shares. Citing a peer average of 11x from companies like Amcol, Polypore and Matthews, Starboard reveals that Calgon appears to be trading at a discount of a little over 25%.

Final thoughts

As we’ve said many times before, most activist investors suggest multiple value creation strategies to the companies they’re invested in, and the best situations occur when there’s more than one way to win, so to speak.

In the case of Jeff Smith, Starboard Value and Calgon Carbon, an expanded buyback, MLP conversion and additional cost reductions are three ways to boost shares of the stock even higher than they’ve flown thus far in 2013. We’ll keep a close eye on all three scenarios, and you should too.

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