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Three Moves by Activist Marcato Capital You Should Pay Attention To

Although Marcato Capital is a relatively new hedge fund, having been established in 2010, it has risen to prominence in the world of activist investment. Before starting the fund, Richard McGuire worked as a partner at Bill Ackman’s Pershing Square, some saying that McGuire is Ackman’s protégé. Marcato Capital is mostly an activist fund, holding a concentrated portfolio with only a handful stocks. We have analyzed the fund’s latest 13F filing and have identified several changes that could turn out to be activist targets or are activist plays in early stages.

Marcato Capital

Marcato Capital has significantly increased its holding of Rayonier Advanced Materials Inc (NYSE:RYAM) stock during the fourth quarter. According to the fund’s latest 13F filing, its stake in Rayonier Advanced Materials amounted to 1.55 million shares, up from 454,300 shares reported at the end of the 2017 third quarter. Marcato has not submitted a 13D filing yet, so we are not sure about the reasoning behind this move. Howard Marks, the manager of Oaktree Capital Management, is also bullish on the stock, having initiated a new position that also amounts to 1.55 million shares. Jim Simon’s Renaissance Technologies holds the largest stake in Rayonier Advanced Materials among the funds in our database, having reported ownership of 3.97 million shares. Rayonier Advanced Materials Inc (NYSE:RYAM) manufactures and sells cellulose products that are used in various industrial applications. The company was spun off from Rayonier Inc. (NYSE:RYN) in 2014. In November 2017, Rayonier Advanced Materials completed the acquisition of Canadian paper company Tembec Inc in a cash and stock deal worth $870 million.

So, why would Rayonier Advanced Materials Inc (NYSE:RYAM) be a target for activist investors? Let’s have a look the company’s financial track record. Revenues have been falling for the past five years. Whereas Rayonier Advanced Materials reported revenues of $1.09 billion in 2012, by 2016 revenues fell to $869 million. Although management has taken steps to cut costs, they were not very successful. For the first three months of 2017, the company reported cumulative Operating Expenses of $44 million which is equal to the amount reported for the entire 2016. Margins have been declining as well, while asset turnover fell by nearly 50%. Also, Rayonier Advanced Materials missed earnings estimates for three out of the past four quarter and managed to meet expectations in the fourth.

Is there a light at the end of the tunnel? The acquisition of Tembec is expected to double the company’s revenue, diversify the company’s product offering and presents an opportunity to expand into adjacent businesses. Rayonier Advanced Materials is scheduled to release fourth quarter results on February 20 and investors will manage to gain some insight into how productive this acquisition has proven so far.

Marcato Capital is a long-term shareholder of Horizon Global Corp (NYSE:HZN), having invested in the company shortly after it went public in 2015. So far this has been an abysmal investment, with the stock down by 47% since the IPO and trading at all-time lows. According to its latest regulatory filing, the fund holds 784,400 shares or 3.14 of the company’s outstanding stock.

Richard McGuire seems to have finally run out of patience, as Marcato has recently fired a letter to Horizon Global Corp (NYSE:HZN)’s board of directors in which it severely criticizing the company’s management and its development strategy. In the letter signed by Shawn Badlani, a partner at Marcato, the fund laments the management’s failure to deliver on its promises for 2017, as the company registered no margin improvements and financial performance was nowhere near the management’s full-year financial guidance. They have also criticized the company’s recent M&A efforts and the board’s failure to tax the management for its poor results.

Going forward, Marcato insist that Horizon Global Corp (NYSE:HZN) should refrain from any new acquisitions and terminate the proposed takeover of Brink Group. Instead, the management should focus on delivering on their promises regarding organic growth and consider buying back its own stocks rather than pursue the acquisition of Brink. Should the management fail to achieve the proposed 2018 financial targets, Marcato argues a change in management would be necessary and the board should prepare a plan for succession. The other alternative would be to sell the company. Marcato plans to step up its interest and has proposed a phone call or a meeting with the Horizon Global’s board.

Although the stock jumped by 15% following the disclosure, it has since dropped again to the $8 level.

Another stock that Marcato Capital has increased its exposure to is Rent-A-Center Inc (NASDAQ:RCII), the provider of rent-to-own furniture and electronics. The company has been the subject of activist efforts by Marcato Capital as well as Glenn Welling’s Engaged Capital for the past year. Marcato first disclosed its stake in Rent-A-Center back in April 2017 and has since grown it to 1.22 million shares. Engaged Capital holds 8.98 million shares or roughly 17% of the company’s common stock.

Although activist investors were pushing for a Rent-A-Center Inc (NASDAQ:RCII) turnaround in the beginning, they have since changed their minds and would prefer the company to sell itself. One of Rent-A-Center’s largest shareholder, Vintage Capital Management LLC is reportedly in talks with the company’s board concerning a potential buyout. Rent-A-Center has already rejected two offers from Vintage Capital. Marcato’s decision to keep on increasing its stake in the company could signal that things are going in the right direction.

Disclosure: none.