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Company: Criteo SA (CRTO)
Business: Criteo SA is a France-based company specializing in digital performance marketing. Its solution consists of the Criteo Engine, the company’s data assets, access to inventory, as well as its advertiser and publisher platforms. The Criteo Engine consists of various machine-learning algorithms, including prediction, recommendation, bidding and creative algorithms. The Criteo Engine delivers advertisements through multiple marketing channels and formats, including display advertising banners, native advertising banners and marketing messages delivered to opt-in e-mail addresses. The company operates in approximately 90 countries through a network of over 30 international offices located in Europe, the Americas and the Asia-Pacific region.
Stock Market Value: $1.84B ($33.39 per share)
Criteo SA’s performance over the past year
Activist: Petrus Advisers
Percentage Ownership: 5.60%
Average Cost: n/a
Activist Commentary: Petrus Advisers, a Europe-based activist investor founded in 2009, is focused on developing a deep, fundamental understanding of the public companies it invests in, paired with active engagement both publicly and behind the scenes. The firm focuses exclusively on European countries where it can invest like the “locals” and within industries in which it’s an expert.
What’s happening
On Feb. 22, Petrus sent a letter to Criteo’s chair of the board Rachel Picard and CEO Megan Clarken, calling for the execution of the following actions: (i) prepare an investor day as soon as possible to explain the company’s retail media strategy and a new mid-term plan; (ii) accelerate the existing share buyback by means of a substantial self-tender of up to $150 million; (iii) initiate a comprehensive strategic review no later than Q4 2024; and (iv) refresh the company’s board by adding independent candidates whom Petrus will propose.
Behind the scenes
Criteo SA is a global advertising technology company incorporated and domiciled in France with a primary American depositary receipt listing on the Nasdaq. The company leverages commerce data and artificial intelligence to connect brands, retailers and customers through their Criteo ad platform. Criteo operates across three segments – marketing solutions, retail media, and Iponweb – but generated 83% of its $1.95 billion of revenue in 2023 from the marketing solutions segment. Criteo is a market leader in the space and has access to some of the best technical talent in France. The company is profitable and has expanded gross profit margins over the past four fiscal years from 33% to 44%. However, since its peak in 2018, it has suffered top-line contraction to $1.95 billion from $2.3 billion, and the stock price has fallen to $33 from $44 in 2021.
Historically, Criteo’s marketing solutions segment has been a “cookie monster” with their key tech and revenue generation coming from cookie data-based applications for digital advertising. However Alphabet’s Google said late last year that starting in January 2024, it will start phasing out the use of cookies and expects to phase them out for 100% of Chrome users by Q3 2024. To many in the investor community, this was the death knell for cookies leading to uncertainty for Criteo’s largest segment. However, Criteo believes it has the technical capabilities and product suite in AI ad-tech to use algorithms that will replace 60% to 70% of the revenue loss associated with the end of cookies. Additionally, the company’s retail media segment is a very appealing and growing business using software as a service for e-commerce companies.
Accordingly, during its 2022 investor day on Oct. 31 of that year, the company presented a 2025 net revenue target (defined as contribution ex traffic acquisition costs (“TAC”)) of $1.4 billion and a plan to triple its retail media business, with retail media net revenue projected to grow at a compound annual growth rate of 45% to 50% between 2022 and 2025. But about a year later, on Nov. 2, 2023, Criteo stated that the ambition to achieve $1.4 billion in net revenue was “not expected to materialize within the 2025 time frame” sending the stock down nearly 12%. A quarter later, the company disclosed surprisingly upbeat results of total net revenue growth of 10% year over year and retail media growth of 29%, sending shares higher. The volatility in this stock is influenced by a management team that could stand to improve its communications with the market. That not only creates unnecessary volatility but also a lack of investor confidence in management guidance, which can have a significant ability to suppress a stock, particularly when Criteo’s largest segment is at an inflection point and investors need to believe management when they say that they can replace 60% to 70% of the revenue.
This situation reminds me of a story from the great basketball coach Frank Layden, in which he said to a young, talented player not reaching his potential: “Son, what is it with you? Is it ignorance or apathy?” To which the player responded: “I don’t know, and I don’t care.”
The good news is that the biggest problem facing this company is communications, not operations; and that can be solved with the addition of experienced directors to the board with capital market knowledge as proposed by Petrus. Additional value can be created through better capital allocation. Criteo is sitting on over $400 million of net cash and $150 million of earnings before interest, taxes, depreciation, and amortization. As a result, Petrus is calling upon Criteo to take four key actions: (i) refresh the company’s board by adding independent candidates whom Petrus will propose; (ii) prepare an investor day as soon as possible to explain the retail media strategy and a new mid-term plan; (iii) accelerate the existing share buyback by means of a substantial self-tender of up to $150 million; and (iv) initiate a comprehensive strategic review no later than Q4 2024.
Petrus will likely nominate outside directors to the board as they rarely propose Petrus insiders for board seats. Petrus is the kind of investor that likes to work with management to create shareholder value, but this management team has not shown a great willingness to work with others. In a rational world, this would settle quickly. If it does not settle, Petrus has shown that they are willing to take a proxy fight to a vote. But this one should not go that far as it is relatively easy for both Petrus and Criteo to know where they stand in a potential proxy fight. There is a very concentrated shareholder base with the top ten shareholders — including Petrus — owning 68.48% of the stock. Even better for Petrus, these are not the normal index fund owners but investors like Neuberger Berman, AllianceBernstein and Cadian Capital Management, who are more likely to support a shareholder on the board.
But Petrus is also calling for a comprehensive strategic review no later than Q4 2024. This is not because Petrus is being a short-term minded shareholder looking for a quick bump on a sale. They take positions like this because they believe in the company and the CEO. But if management cannot reinvigorate the equity story, they need to find a suitor. And there have been reports that suitors are interested. As early as February 2021, Bloomberg reported, citing people with knowledge of the matter, that Criteo is “attracting takeover interest from strategic and financial investors.” Then, in February 2023, Reuters reported, citing people familiar, that Criteo is “making a new attempt to sell itself” and hired Evercore to assist in that endeavor. However, on a Feb. 8, 2023 conference call, management dismissed the Reuters article as speculation, making some wonder whether management is genuinely exploring strategic alternatives or not.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.