Activist Ancora joins investor calls for Forward Air strategy review

work: Forward air is an asset-light transportation services provider. These transportation services include LTL, full truckload, intermodal drayage, freight brokerage and supply chain services throughout North America, Europe and Asia. Its segments include Expedited Freight, Intermodal and OmniLogistics.

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

Ownership percentage: Approximately 4%

Average cost: None

Activist Comments: Ancora is primarily a family wealth investment advisory and fund manager with $9.5 billion in assets under management. The firm has an alternative asset management division that manages approximately $1.3 billion. The firm was founded in 2003 and hired James Chadwick in 2014 to drive activism in niche areas such as banks, thrifts and closed-end funds. Ancora’s website lists “small-cap activism” as part of its product and strategy, and its tactics have evolved in recent years. From 2010 to 2020, the majority of Ancora’s activism was 13D filings against micro-cap companies, but in recent years it has increasingly acquired less than 5% stakes in larger companies. The alternative team has a proven track record of using private and, where appropriate, public engagement with portfolio companies to drive improved corporate governance and long-term value creation.

Ancora sent a letter to Forward Air’s board of directors on Aug. 20, stating that operational improvements and balance sheet repairs could be more effectively achieved as a private company and asking for the initiation of a strategic review with independent legal and financial advisors.

Forward Air is an asset-light transportation company focused on the express less-than-truckload market, with all goods transported by road. The company offers a time-definite alternative delivery solution at a lower cost than traditional air freight, and also offers a range of other transportation services, including intermodal, brokerage and last mile. However, the majority of profits are generated by its core express LTL business (80% in 2023).

Ancora has been with Forward Air for about four years, first filing its 13D on December 28, 2020, and finally settling on two directors on March 15, 2021. The campaign focused on capital allocation, cost reduction, margin improvement, and elimination of non-core or unprofitable assets. By late 2021, after the company cleaned up its business, the stock price began to improve, surpassing $120 per share. Ancora exited in February 2022, achieving a 58.63% return on investment versus 5.13% for the Russell 2000 over the same period.

However, in late 2023, the company’s stock price began to stagnate. In October 2023, Ancora announced that it had once again become the largest shareholder when the stock was trading in the low $70s. This was after the company announced in August 2023 that it would acquire Omni Logistics, one of its top five customers, for 18 times earnings before interest, taxes, depreciation and amortization, significantly above the stock price at the time. Following the announcement, Forward Air’s stock price plummeted. Ancora strongly opposed the transaction, stating that the transaction was a consolidation of management and the board to ensure excessive compensation levels, and arguing that the transaction was structured to avoid a shareholder vote. Ultimately, despite Ancora’s opposition, the Omni transaction closed on January 25, 2024, and Ancora sold its shares in the first quarter of 2024. Since then, the stock price has fallen to $11.21 in May and is currently trading in the low $30s.

When investors publicly agitate for the sale of a company without detailed analysis of alternative paths to value creation, we often view such campaigns negatively as short-term opportunistic engagements that do not paint shareholder activism in a good light. However, in this case, Ancora had previously conducted two campaigns, the first of which was long-term oriented and very successful, based on thoughtful analysis for business improvement and collaboration. The second campaign was launched after two Ancora directors resigned from the board. Ancora is now back in Forward Air as a top 10 shareholder with a stake of about 4%, after the company was dramatically transformed by the acquisition of Omni Logistics. This time, the activist’s message is simple: hire an advisor and sell the company. Ancora recognizes its path to value creation as a public company. But the firm noted that if the company stays public, it will need to execute flawlessly to achieve deal-related synergies, reduce excess costs, fix a highly leveraged balance sheet and grow in a profitable manner. Ancora believes this will be a Herculean feat, especially for a management team and board that oversaw questionable decisions like the debt-financed acquisition of Omni.

Simply put, Forward Air is a great company that got into a bad deal. The company now has an over-leveraged balance sheet and inflated selling, general and administrative expenses. What’s needed here — selling non-core assets and restructuring the business — is best done privately. Plus, these are areas private equity funds excel at. Private equity firm Clearlake Capital made the unusual move of filing a 13D that includes language suggesting it wants to discuss strategic alternatives with the board. This doesn’t necessarily mean Clearlake is an obvious acquisition target, but the company could certainly make the company a takeover target with a takeover bid. Clearlake holds a 13.8% stake, while Ancora holds about 4%. Irenic Capital acquired a roughly 5% stake earlier this year and has called for a strategic review that includes considering a possible sale of Forward Air. The key investor to watch here is Ridgemont Equity, a major shareholder. Ancora can be forced to sell the company in two ways: persuasion or a proxy fight. Either approach would likely require the backing of Ridgemont, which sits on both of Forward Air’s boards. But Ridgemont acquired Omni Logistics as its majority shareholder and retained ownership of the surviving company, so there’s no reason to think it wouldn’t roll over its shares again in a private equity buyout. The only obstacle to a private equity buyout is the company’s massive debt load, about $1.6 billion, with interest payments already eating into the cash flow that private equity investors love so much.

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