IAA IAA Inc

Issues Open Letter to RBA Shareholders Highlighting Flawed and Risky Transaction with Limited Strategic Logic

NEW YORK, Feb. 15, 2023 /PRNewswire/ -- Eminence Capital, LP ("Eminence"), the beneficial owner of more than 900,000 shares of Class A Common Stock of Ritchie Bros. Auctioneers Incorporated (NYSE: RBA) (TSX: RBA) (the "Company"), today announced its intention to vote AGAINST the Company's proposed merger with IAA, Inc. (NYSE: IAA). 

Eminence also issued the following letter to RBA shareholders highlighting the flawed and risky nature of the transaction with limited strategic logic.  The full text of the letter is below.

Dear Fellow Shareholders,

In November 2022, Ritchie Bros Auctioneers Incorporated ("RBA") announced that it intended to acquire IAA, Inc. ("IAA") in a deal valued at approximately $7.3 billion (the "Merger"). Now, RBA is asking shareholders to approve necessary share issuances in order to complete the Merger at its March 14, 2023 special meeting.

Eminence Capital, LP ("Eminence", "we", or "us") currently owns over 900,000 shares of RBA and we intend to vote against the acquisition of IAA. We believe that RBA's proposed acquisition of IAA, at the current deal terms, is a flawed transaction that burdens RBA shareholders with unnecessary risk without providing enough credible upside relative to the standalone RBA opportunity.

Investors have seen this movie before
As previous IAA shareholders and long term auto auction investors over the last 15 years, Eminence has significant history in the ecosystem. We believe the quick fixes and "synergies" that RBA management is pitching are fraught with unnecessary risk for RBA shareholders. The hypothesis of combining IAA with another marketplace to create scale was tested in the public markets from 2009-2019 when KAR Auction Services combined IAA with Adesa (wholesale auto auctions) and AFC (floorplan financing). Unlike RBA and IAA which have limited customer overlap on either side of their marketplaces, there was real strategic overlap between KAR's auto auction and financing businesses. However, bigger proved not to be better, and in 2018 KAR management decided to spin off IAA after concluding that "independence will provide greater flexibility to meet the evolving needs of both companies' unique customers while advancing their respective strategic priorities."¹ We agreed with the IAA spinoff logic at the time, and we disagree with RBA management that this merger will be different.

There is limited strategic logic behind the transaction
RBA and IAA operate in different industries with different customers. RBA management has revised its synergy targets higher (including "revenue synergies") throughout the deal process to win over shareholders, but a large portion of these opportunities are and were available to both KAR and standalone IAA. We believe many of the targeted synergies require a heavier lift than RBA management acknowledges. For example, "attain 50/50 market share" is not simple when you are competing against a strong #1 player with an incredible track record of execution, a net cash balance sheet, a founder led mentality of investing with a long term horizon, and a history of exploiting instability at IAA. We doubt IAA's competitive position will be improved by a complex deal / integration that takes pro-forma leverage to 3x and pressures management to optimize short term results to appease a disappointed shareholder base. We are not surprised that following the deal announcement, IAA's 2^nd largest customer began shifting volumes to the competitor – a potentially existential risk if it continues and reminiscent of initial stages of large customer share loss over the last 5 years. Many of the synergies that RBA management pitches today are the same opportunities that IAA pitched in 2018-2019 around the spin; since then IAA has lost market share.

The transaction would burden RBA shareholders with unnecessary risk
The current takeout price for IAA is not particularly compelling for RBA shareholders who will assume the risk of what is effectively a public market LBO that will likely require a meaningful turnaround effort – a turnaround that IAA management / board has likely come to accept is difficult. Perhaps this is why "despite Ancora's public letter on March 12, 2022 advocating for a sale, IAA has not received any indications of interest other than from Ritchie Bros."² It is also telling that IAA's board initiated discussions with RBA (not the other way around) in June 2021, exactly 2 years after IAA spun out of KAR. We are concerned this transaction is more of a bailout for IAA shareholders than it is a strategic opportunity for RBA shareholders, and we do not believe current deal terms appropriately compensate RBA shareholders for the risks.  

The market appears to agree with our assessment. Since the deal was announced on November 7, 2022, RBA's stock has underperformed the market by 8% despite reporting two strong quarters.³ We believe RBA's share price underperformance will widen significantly if the transaction closes.

Our concerns have not been allayed by what we view as an immaterial revision of transaction terms, a preferred investment vehicle for a new shareholder, or public commentary from IAA shareholders. To date, there has been no public support for the deal from an RBA shareholder who is not otherwise conflicted. The public deal supporters include IAA shareholders who need an exit from their current investment⁴ and Starboard who negotiated a favorable senior preferred security with great optionality if this high risk, levered deal does in fact work out. We envy the deal RBA gave to Starboard. Neither of those groups have interests that are aligned with RBA common shareholders.

Based on all of the above, we intend to vote against the transaction at the current terms.

Respectfully,

Ricky Sandler 
CEO and CIO 
Eminence Capital

Disclaimer
This letter contains a number of forward-looking statements. Words such as "plan," "believe," "anticipate," "reflect," "invest," "see," "make," "expect," "deliver," "drive," "improve," "intend," "assess," "remain," "evaluate," "establish," "focus," "build," "turn," "expand," "leverage," "grow," "will," and variations of such words and similar future or conditional expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding Eminence's plans, impacts of accounting standards and guidance, growth, legal matters, taxes, costs and cost savings, impairments, dividends, expectations, investments, innovations, opportunities, capabilities, execution, initiatives, and pipeline. These forward-looking statements reflect either Eminence or RBA's current expectations and are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and beyond the Issuer's control.  Eminence disclaims and does not undertake any obligation to update, revise, or withdraw any forward-looking statement in this press release, except as required by applicable law or regulation.

Eminence has not sought or obtained consent from any third party to use any statements or information indicated herein as having been obtained or derived from statements made or published by third parties.

About Eminence Capital, LP
Eminence is a global asset management firm founded in 1999 that currently manages approximately $7 billion. Eminence's investment approach is anchored in bottom up fundamental research seeking to identify "quality value" investment opportunities.

¹ KAR Press Release 2/27/18: KAR Pursues Separation of IAA Salvage Auction Business Unit
² IAA Investor Presentation 2/14/23
³ Using closing prices from 11/4/22 (pre-deal) to 2/13/22. "Market" refers to the average of the S&P, Russell 2000, and Nasdaq. Pre-deal RBA consensus (Bloomberg) called for $436m of EBITDA in 2022; per the RBA 2/13/23 preannouncement, Adj EBITDA for 2022 will be $461m to $465m
⁴ The three publicly supportive shareholders are Independent Franchise Partners (owns 5.8m shares of IAA as of 12/31/22), Ancora (owns 4% of IAA per their February 2023 presentation), and Eagle Asset Management (owns 2m shares of IAA as of 12/31/22)

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SOURCE Eminence Capital, LP