Vestis’ business of supplying and laundering uniforms to industrial and service companies is about as mundane as it gets, making Vestis an ideal company for us to learn about. Combine a boring, predictable business with 90%+ recurring revenue, a significant margin expansion opportunity, and a motivated and seasoned management team and you’ve got my attention.
Nov 19, 2023·edited May 2Liked by Eagle Point Capital
Another outstanding article as $VSTS along with its competition is competing against non-consumption which is similar to the datacenter industry 15 years ago. For one to “bet” on $VSTS, one will need to track & monitor route density along with margin improvement. Can $VSTS, as a spin-off, focus on its operations and become $CTAS or will this segment of the market resemble auto parts where there is a clear leader ($CTAS) along with several laggards ($CTAS $UNF). Time will tell but one thing that makes me less optimistic is that few $ARMK leaders went to the spin whereas Greenblatt states to watch where the parent CEO goes. To be repetitive, time will tell
Good question - I didn't post a picture of the table with the ROIC measurement but for the long-term incentive grant allocations (composed of PSUs, RSUs, and stock options) there is a component of ROIC. The performance-based units (50% of the total stock awards) are based off of revenue growth (30%), operating income growth (30%) and 3-year ROIC (40%). Good to see a balance of growth and return on capital, it's unfortunately all too rare it seems.
If the three leading companies in this market have only 25% combined market share wouldn’t that sound like a possible market consolidation situation. Or even an acquisition of or by a competitor once the debt gets paid down to more reasonable levels?
Brent - I agree with all of that, it's definitely ripe for continued consolidation. It really reminds me of the C-Store industry in which Alimentation Couche-Tard is steadily participating in the industry consolidation by making consistent bolt-on, and occasional large, acquisitions. It wouldn't surprise me to see the same take place in this industry.
Reflecting on this a few things that come to mind. The business is mundane, probably not something customer companies pay a lot of attention to unless service is poor. As long as service is responsive and high quality the only option is to compete on price. Given it’s not a high margin business, volume is important making it hard for new entrants and favoring service over price (challengers would have to buy market share with unprofitable business). With an industry with many small closely held players the best option for owners wanting out is to sell to a large consolidator who will keep the staff and name and bring a stock based acquisition where (correct me if I am wrong) that the owners can treat as a merger vs sale and avoid immediate tax liabilities. In fact the stock can be passed down to heirs with a stepped up basis shielding a substantial portion of the gain from taxes. Brings to mind one of the reasons closely held companies like to sell to Berkshire-Hathaway.
Another outstanding article as $VSTS along with its competition is competing against non-consumption which is similar to the datacenter industry 15 years ago. For one to “bet” on $VSTS, one will need to track & monitor route density along with margin improvement. Can $VSTS, as a spin-off, focus on its operations and become $CTAS or will this segment of the market resemble auto parts where there is a clear leader ($CTAS) along with several laggards ($CTAS $UNF). Time will tell but one thing that makes me less optimistic is that few $ARMK leaders went to the spin whereas Greenblatt states to watch where the parent CEO goes. To be repetitive, time will tell
It appears they’re measuring operating income margin (not ROIC) in management incentives per the chart?
Good question - I didn't post a picture of the table with the ROIC measurement but for the long-term incentive grant allocations (composed of PSUs, RSUs, and stock options) there is a component of ROIC. The performance-based units (50% of the total stock awards) are based off of revenue growth (30%), operating income growth (30%) and 3-year ROIC (40%). Good to see a balance of growth and return on capital, it's unfortunately all too rare it seems.
Thanks!
If the three leading companies in this market have only 25% combined market share wouldn’t that sound like a possible market consolidation situation. Or even an acquisition of or by a competitor once the debt gets paid down to more reasonable levels?
Brent - I agree with all of that, it's definitely ripe for continued consolidation. It really reminds me of the C-Store industry in which Alimentation Couche-Tard is steadily participating in the industry consolidation by making consistent bolt-on, and occasional large, acquisitions. It wouldn't surprise me to see the same take place in this industry.
Reflecting on this a few things that come to mind. The business is mundane, probably not something customer companies pay a lot of attention to unless service is poor. As long as service is responsive and high quality the only option is to compete on price. Given it’s not a high margin business, volume is important making it hard for new entrants and favoring service over price (challengers would have to buy market share with unprofitable business). With an industry with many small closely held players the best option for owners wanting out is to sell to a large consolidator who will keep the staff and name and bring a stock based acquisition where (correct me if I am wrong) that the owners can treat as a merger vs sale and avoid immediate tax liabilities. In fact the stock can be passed down to heirs with a stepped up basis shielding a substantial portion of the gain from taxes. Brings to mind one of the reasons closely held companies like to sell to Berkshire-Hathaway.
Hey! Really good article! If you like spin-offs take a look into my article about Solvay Spin-off
https://antarcticcirclecapital.substack.com/p/solvay-spin-off-a-greenblat-type?utm_source=profile&utm_medium=reader2