Inclusive Capital spots multiple opportunities for upside with an active ESG focus at Verra

Business: Verra Mobility operates through two segments: (i) Commercial Services: the market-leading provider of automated toll and violations management and title and registration solutions to rental car companies, fleet management companies, municipalities, school districts and violation issuing authorities; and (ii) Government Solutions: works with local government agencies to help make cities and roadways safer for everyone through automated safety solutions, namely cameras that detect and process traffic violations for red lights, speed, school bus, and city bus lanes.

Activist Commentary: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting sound environmental, social and governance practices. It was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its inhabitants. As a pioneering active ESG (“AESG™”) investor, Inclusive seeks long-term shareholder value through active partnerships with companies whose core businesses contribute solutions to this pursuit. Inclusive is a returns-driven fund with a focus on environmental and social investing. The firm’s primary focus is on environmental and social value creation, which in turn creates value for shareholders. Inclusive is so focused on environmental value that it has created a new metric to screen and value companies: enterprise value to carbon emissions abated.

Sarah Farrell, a partner at Inclusive Capital, was appointed to Verra’s board on Dec. 30, 2021, just four months after Inclusive Capital filed a 13D, reporting its position in the company.

Additionally, there could be future upside from three areas. First, the company could have a huge opportunity replicating what they currently have in the U.S. in Europe. Europe has even more tolls. If the company could find a way to manage the tolls for the European arms of the U.S. rental car agencies, there could be a $300 million to $350 million market opportunity, compared to $230 million in revenue generated from CS in the US in 2019. Second, there are attractive opportunities for strategic M&A. The company’s management has shown they can be disciplined with acquisitions. The most recent acquisition, Redflex, is in the process of being fully integrated. Third, there are capital allocation opportunities with the company already announcing a $100 million stock repurchase plan.

As is customary with Inclusive investments, there is also a very strong ESG component to this business. Within CS, the company allows for more diversity in infrastructure funding. Most infrastructure costs are currently financed by gas taxes. However, with cars becoming more fuel efficient and the rise of electric vehicles, gas spending is in a secular decline, which is good for the environment. An increase in the amount of tolls collected will make up for this decline benefiting the environment while increasing VRRM’s CS revenue.

In the GS segment, the ESG benefits are much clearer. Motor vehicle traffic accidents are the third leading cause of death in the U.S. in individuals ages 1-44, after drug overdoses and suicides. As of 2019, motor vehicle accidents accounted for 36,000 deaths in the U.S. and speeding and intersection-related accidents accounted for 55% of those fatalities. The GS business directly targets that problem. The Insurance Institute for Highway Safety found that red-light cameras reduced traffic fatalities by 21% in the U.S. and speed cameras reduced traffic fatalities by as much as 39%. The higher penetration that the GS business gets, the more profitable the business becomes for sure, but just as clear, the more lives are saved on U.S. roads each year.

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.