Company: Pitney Bowes (PBI)
Business: Pitney Bowes is a global shipping and mailing company that provides technology, logistics, and financial services to businesses, including more than 90% of the Fortune 500, retailers and government clients around the world. It operates through three business segments: (i) Global Ecommerce, (ii) Presort Services and (iii) SendTech Solutions.
Stock Market Value: $666M ($3.83 per share)
Activist: Hestia Capital Partners
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Percentage Ownership: 6.90%
Average Cost: $3.59
Activist Commentary: Hestia is not an activist investor. Rather, the firm is a deep value investor that will use activism as a last resort. Kurtis Wolf, managing member and chief investment officer of Hestia is a former strategy consultant and notably worked at Relational Investors from 2002 through 2004. The firm is experienced in business strategy and applies its business acumen to deep value and distressed companies to determine which ones have a good path forward. As a result, Hestia often invests in companies that might be misunderstood or not favored by the market, like GameStop, Best Buy and Pitney Bowes. The firm eschews biotech and commodity-driven companies. Hestia's only prior activist engagement was in 2020, when it formed a group with Permit Capital and ran a successful proxy fight at GameStop.
Hestia has engaged with Pitney Bowes about enhancing the company's capital allocation, improving operational performance and making changes to the board's composition.
Behind the Scenes
Pitney Bowes' SendTech solutions business is the core enterprise that the company is generally known for: postage meters. This is a secularly declining, but not disappearing, business that generates significant cash flow. PBI expanded the SendTech division to include shipping labels, which is a growth business. The shipping labels business has historically competed with, and often lost to, stamps.com, which was built into a huge business ultimately acquired by Thoma Bravo for $6.6 billion. The SendTech Solutions segment accounts for 38% of Pitney Bowes' revenue and generated $429 million in earnings before interest and taxes in 2021. The postage meter business comprises 89% of the division's revenue and the shipping label business comprises the other 11%.
The Global Ecommerce segment is comprised of primarily three components: (i) a digital tech business that sells the technology behind Pitney Bowes' postage and shipping businesses, giving clients the ability to reduce transportation and logistics costs, select the best carrier based on need and cost, improve delivery times and track packages in real time; (ii) a global cross-border solutions business that handles all of the shipping and customs procedures of international shipping for customers like eBay; and (iii) a domestic parcel business, which is a niche e-commerce business handling returns of items and a competitor against companies like FedEx and UPS. Global Ecommerce comprises 46% of Pitney Bowes' revenue but lost $99 million of EBIT in 2021.
The Presort Services segment accounts for only 16% of revenue but generated $79 million of EBIT in 2021. This business makes its money from post offices and simplifies the sorting process for them. Pitney Bowes will pick up mail from businesses in specific zip codes, sort the mail by zip code and get it to post offices.
Bottom line, the company has too many businesses and needs to simplify. The digital technology and Presort businesses are synergistic with Pitney Bowes' core business as one provides it with the technology to operate and the other shares many of the same customers and gives them the ability to cross-sell. This means divesting the cross-border solutions business and the domestic parcel business. Neither is showing adequate levels of growth or profit. The former has single customer concentration risk as eBay is by far its largest customer, and the latter is competing with much larger companies like FedEx and UPS. Just closing those two businesses would be accretive to shareholders, and they should be able to get some money for them from a strategic acquirer. But the bigger benefit would be management focus on its core business and the ability to more appropriately incentivize management. Management can focus on using the cash from the secularly declining postage meter business to invest in the growing shipping label business. The SendTech and Presort segments alone could be worth $6 to $9 per share without the distractions and dilution of the other businesses.
Ideally, Hestia would advocate for this plan from a board level. The company has a nine-person, unstaggered board with a nomination deadline opening on Jan. 2, 2023. Hestia will likely need more than just one board seat to drive change at Pitney Bowes. The company has been around for over a century, and a majority of the directors have a 10+ year board tenure. Marc Lautenbach is not necessarily the wrong CEO for this company. He just has lost focus with his attention being pulled in so many different directions. A more streamlined core business with him as CEO could work very well. The company could benefit from a shareholder representative with a strong business strategy acumen, and we would expect Hestia to include Kurtis Wolf in its slate of nominees along with some experienced industry executives. With the universal proxy now in play, we would expect Hestia to nominate up to four directors to give shareholders a larger pool from which to select.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.