Monro Inc. (MNRO) has already faced one shareholder call to collapse its dual-class share structure, and with poor performance and a good deal of consolidation in the auto services sector in recent years, it could attract suitors or an activist campaign.
Last year, about 88% of voting shares approved a nonbinding shareholder proposal seeking to recapitalize Monro’s insider-controlled share structure into a one-share, one-vote company. Soon after, however, the auto services and tire centers company in August noted the measure “cannot be effected,” as its Class C preferred shares didn’t vote for it.
Investor Ides Capital Management LP submitted the proposal, which targeted the Rochester, N.Y.-based company’s Class C preferred shares, which gives one board member, 83-year-old investment banker Peter J. Solomon, control of the shareholder vote even though he owns only 2% of shares.
Solomon is the founder of boutique financial advisory firm Solomon Partners LP, which focuses on providing M&A and activist defense advice, and he’s been a director at Monro for 38 years, according to relationship mapping service BoardEx.
Institutional investors are likely still very disappointed with Monro and probably would back another proposal seeking to collapse the company’s dual-class share structure if it were up for consideration at the upcoming 2022 annual meeting. According to FactSet Research Systems Inc., Monro has produced total returns of -23%, -34% and -18% in 2022 and over the past 12 months and three years, respectively.
Jefferies LLC analyst Bret Jordan told The Deal that many shareholders have been frustrated with Monro’s performance over a number of years.
“It would be hard to look at a company that has comped negative for most of the last decade but one that is in a sector that has done reasonably well over the same time period,” he said. “[Shareholders] have a case that execution has not been strong.”
Consider T. Rowe Price Associates Inc., Monro’s second-largest shareholder with a 15% stake. The investment management firm voted to support Ides’ proposal last year, saying “it would provide all shareholders with equal voting rights on all matters.” It also voted against four out of five directors up for election, including Solomon, in an uncontested election, explaining that it opposed the nominees “because the company has superior voting rights without economic control.” T. Rowe Price voted against directors in 2020 with the same reasoning.
Whether Ides founder Dianne McKeever will be back with a new proposal is unclear, though the fund still owns a small stake in the company. The deadline to nominate directors or submit shareholder proposals for Monro’s annual meeting, expected in August, is Monday, April 18, according to FactSet.
McKeever declined comment.
Buyers Could Be Interested
Analysts following the company insist that Monro continues to be attractive to both private equity and strategic buyers.
The Deal reported in August, citing company followers, that Monro had received inbound expressions of interest from private equity firms previously but that Monro rebuffed those offers.
Jordan noted there has been a lot of consolidation in the auto services sector in recent years, involving both private equity and strategic buyers.
“Monro would probably be worth something in the 12ish times Ebitda range, and you could argue that it could be worth more given its size,” he said.
Private equity has been a key part of dealmaking in the sector. In March 2021 an investor group led by buyout shop BayPine LP acquired Mavis Tire Express Services Corp. from Golden Gate Capital LP for an undisclosed amount, though reports said the buyer may have paid more than $6 billion including debt.
In 2018, buyout shop Hellman & Friedman LLC acquired a majority interest in Caliber Collision Centers Inc. from OMERS Private Equity Inc. in a deal that merged the provider of collision repair services with a portfolio company, Abra Auto Body & Glass LP. OMERS and fellow investor Leonard Green & Partners LP became minority shareholders in the combined company.
Famed financier Carl Icahn, who acquired auto services company Pep Boys – Manny Moe & Jack in 2016 for over $1 billion after winning a bidding war with a unit of Japan’s Bridgestone Corp., is a good example of consolidation in the space, Jordan said. Icahn reportedly folded Pep Boys together with three other auto-related companies into Icahn Automotive Group LLC.
Jordan said potential Monro buyers could be interested in creating a large auto and tire servicing operation for companies and fleets seeking a national repair service provider.
“The idea is that a fleet will need service capacity on a national basis with an institutional provider, and you want as many service bays as you can get,” Jordan said.
Monro, which installed a new CEO last year, Michael Broderick, in a March presentation said it had completed acquisitions of 47 stores with $70 million in annualized revenue in its most recent fiscal year, with plans to “roll up attractive opportunities in a highly fragmented market.”
Jordan noted that historically Monro has sought to acquire a large number of small tire and auto service companies for roughly 7 to 8 times their Ebitda. He added, however, that, until recently, there hadn’t been a lot of emphasis on integrating or improving the businesses.
“The acquired stores might have been fixer uppers, but there wasn’t much focus on fixing them,” Jordan said, adding that execution and value had deteriorated during the growth phase. “You can look tired and be cheap, but you can’t look tired and be expensive.”
He noted that a lot of competitors, including Mavis, Brakes Plus, Bridgestone and Sullivan Tire and Auto Service Inc., have generally been better at executing and have gained market share while Monro has seen a consistent trend of same-store sales declines.
Prior CEO Brett Ponton launched a five-year “Monro Forward” plan in 2018 to spend $75 million to reset and improve stores, which has produced mixed results in some cases. Jordan said that some locations were rebranded in the process, which confused some customers.
Monro did not return calls for comment.