Company: Avantor (AVTR)
Business: Avantor is a life science tools company and global provider of mission-critical products and services to the life sciences and advanced technology industries. The company's segments include laboratory solutions and bioscience production. Within its segments, it sells materials and consumables, equipment and instrumentation and services and specialty procurement to customers in the biopharma and health care, education and government and advanced technologies and applied materials industries. Materials and consumables include ultra-high purity chemicals and reagents, lab products and supplies, highly specialized formulated silicone materials, customized excipients and others. Equipment and instrumentation include filtration systems, virus inactivation systems, incubators, analytical instruments and others. Services and specialty procurement include onsite lab and production, equipment, procurement and sourcing and biopharmaceutical material scale-up and development services.
Stock market value: $8.85 billion ($12.98 per share)
Activist: Engine Capital
Ownership: ~3%
Average Cost: n/a
Activist Commentary: Engine Capital is an experienced activist investor led by Managing Partner Arnaud Ajdler. He is a former partner and senior managing director at Crescendo Partners. Engine's history is to send letters and/or nominate directors but settle rather quickly.
What's happening
On Aug. 11, Engine sent a letter calling on Avantor's board to focus on commercial and operational excellence, demonstrate organic growth, reduce costs, optimize the portfolio, refresh the board and use free cash flow to repurchase stock. Engine noted that the company can alternatively consider a sale.
Behind the scenes
Avantor is a market leading distributor of life science tools and products for the life sciences and advanced technology industries. The company is comprised of two segments: laboratory solutions (LSS) (67% of revenue) and bioscience production (BPS) (33% of revenue). LSS is one of the three top life sciences distributors in the world (Thermo Fisher and Merck KGaA being the other two).
BPS is a supplier of high-purity materials and is the leading supplier of medical-grade silicones. Despite being one of the few scaled global life science tool distribution platforms, the company has vastly underperformed. At its 2021 investor day, management projected earnings per share above $2 for 2025; and at its 2023 investor day, management targeted an EBITDA margin exceeding 20%. Now in 2025, these currently stand at 96 cents per share and 11.8%, respectively. Consequently, Avantor's share price has declined 53.96%, 59.69%, and 43.41% over the past 1-, 3- and 5-year periods, as of Engine's announcement Monday.
Engine believes that Avantor's significant underperformance is a consequence of self-inflicted mistakes rooted in a flawed leadership team and framework. A complex matrix organizational structure and resultant lack of accountability have led to mass leadership turnover, including Avantor's CEO, CFO and both segment leaders within the past three years, contributing to a dysfunctional decision-making process and inefficient employee structure.
The biggest casualty of this rocky management team is LSS, which has lost significant profitability and market share to its peers. Specifically, poor capital allocation decisions have destroyed significant value. In 2020 and 2021, Avantor spent a total of $3.8 billion to acquire Ritter, Masterflex and RIM Bio – companies that were notably purchased during the peak of the pandemic when life sciences businesses were trading at exceptionally high multiples. Applying Avantor's next 12 months 10x multiple to the 28x average acquisition price implies over $2.4 billion in lost value on these acquisitions, contributing to the company's high leverage.
On top of that, despite LSS's ongoing underperformance and the need for strong leadership, from June 2024 to April 2025, LSS was left without a leader due to a non-compete lawsuit involving the hiring of its new segment leader, underscoring the operational dysfunction that has been taking place at the company.
But perhaps the nail in the coffin for this management team and board is that despite this cascading set of errors and the internal knowledge of these forecasted losses, they were still given a way out. In 2023, the company was approached by Ingersoll Rand to be acquired at an estimated $25-$28 per share, a 20%-35% premium of the share price at the time, yet the board inexplicably rebuffed this approach. Today, Avantor trades at just under $13 per share.
Enter Engine, who has announced an approximately 3% position in Avantor and is urging the board to focus the organization on commercial and operational excellence, demonstrate organic growth, reduce costs, optimize the portfolio, refresh the board and use free cash flow to repurchase its own stock.
Engine points out that Avantor's reported $6.8 billion in revenue was stretched across 6 million stock keeping units, while Thermo's peer segment achieves similar revenue with less than half the SKUs, indicating a large opportunity, specifically within LSS, to optimize the portfolio by concentrating purchases to improve inventory turns, rebates and margins.
Divesting non-core assets is another way to optimize the portfolio. For BPS, certain facilities operate in periods of extended downtime, limiting growth. For LSS, subscale facilities in smaller geographies may be more valuable to a competitor, and the same goes for some of the assets purchased under Avantor's aforementioned acquisition spree.
On the cost discipline side, Avantor's history of poor M&A and its low valuation should limit its accretive M&A opportunities, and while the company is on the path to reduce leverage below 3x, the market remains concerned that once this is achieved, they will simply resume this costly M&A strategy. Engine argues that free cash flow should instead be allocated evenly to share repurchases and debt reduction.
Additionally, executive compensation is also a concern. In 2024, despite organic revenue declining by 2% and a 7% share price decline, the board awarded CEO Michael Stubblefield 110% of his target annual bonus, underscoring the need to align these management incentives with shareholder value creation.
Engine believes that all of these changes would be best implemented with a comprehensive board refreshment. Adding directors with executive leadership, capital allocation, and distribution expertise to replace board members that have overseen years of value destruction, likely targeting chairman Jonathan Peacock specifically, should signal to the market the start of a new chapter. Engine believes that if these changes are properly implemented that Avantor shares would be worth between $22 and $26 per share by the end of 2027.
As a secondary option, Engine suggests that if a standalone path does not appear viable then the board should consider selling the entire company or splitting LSS and BPS into separate entities.
When Avantor acquired VWR, which is now the core of the LSS business, it was valued at about 12x EBITDA, or $6.5 billion, and BPS peers trade at a median of 17x EBITDA. Neither of these businesses' valuations correspond to what Avantor trades at, roughly 8x EBITDA, and it's possible that a strategic path could become the best way to unlock this value on a risk-adjusted basis. If this were to become the case, there is likely to be both private and strategic interest. New Mountain Capital previously owned Avantor prior to its IPO and still maintains an approximately 2% position. Strategics, like Ingersoll, would likely be interested as well, especially at a significant discount to what they once offered. Engine believes that Avantor could sell between $17 to $19 per share.
Overall, Engine makes not only a compelling case that major change is needed at Avantor, but also a clear multipath plan forward. While some of these changes are already underway: a new CEO is set to start next week and management announced a $400 million cost-cutting initiative, the sheer volume of change required here is unlikely to occur by Engine's 2027 estimate.
Engine's plan includes strengthening execution, instilling a culture of cost discipline, improving capital allocation, evaluating the company's portfolio, aligning executive compensation to shareholder value creation and refreshing the board. Engine's plan is the right one, but this is a company whose top line and operating margins have been in decline since 2022 and refreshing a board, instilling a new culture, reversing declining revenue and operating margins and evaluating and executing asset sales, many of which cannot be done simultaneously, is something that will likely take much longer than two years, particularly with the director nomination window not opening until Jan. 8. Moreover, the kind of change that Engine calls for here is generally not the kind of change that comes from an amicable settlement.
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. Viasat is owned in the fund.
