EquipmentShare falls 9% on a Blue Orca short report; its OWN Program payouts equal half its segment EBITDA

Shares of EquipmentShare.com, the construction equipment rental company that went public in January, fell sharply on Thursday after short seller Blue Orca Capital said it had bet against the stock. The shares were down 8.7% at $16.50 late in the session, according to Nasdaq data, near their 52-week low of $15.71 and about a third below the $24.50 IPO price, Investing.com reported. Volume was about 7.3 million shares, against an average of about 2.9 million.

What Blue Orca alleges

The report targets EquipmentShare's OWN Program, under which outside investors buy equipment and lease it back to the company, which rents it out and shares the revenue. According to Investing.com's account of the report, Blue Orca says:

• Resellers and capital channels tied to co-founders Jabbok and William Schlacks attract investors by promising that EquipmentShare will provide first-loss protection and buy the equipment back at the end of the term. Blue Orca says these undisclosed backstops amount to billions of dollars of hidden liabilities.
• An entity formerly called Schlacks Rentals, now the Premiere Group, said on its website it owned over $440 million of equipment, which a former executive told Blue Orca is likely enrolled in the program.
• The company flatters its rental segment's adjusted EBITDA by leaving out payouts to OWN investors.

These are allegations from a firm that profits if the stock falls. The Investing.com reports did not include a response from EquipmentShare. Investing.com also noted that a different short seller, Umibozu Research, published a report on the OWN Program in late June, and that both co-founders have been buying shares in the open market throughout September.

What the company's own filing shows

We went to EquipmentShare's second-quarter 10-Q to size the program. The numbers are large:

Three things follow from that:

• The EBITDA exclusion is disclosed, and it is big. The filing's reconciliation subtracts OWN payouts below segment adjusted EBITDA. Take them out and the $472 million falls to about $238 million, so the payouts equal about half the headline figure. Blue Orca's argument is about how investors should read that metric, not that it was hidden.
• OWN buyers are the main customers of the sales business. About 89% of second-quarter equipment sales went to program participants, so the sales segment largely depends on investors continuing to fund the program.
• About a third of the rental fleet belongs to someone else. OWN equipment is about 32% of the roughly 280,700 pieces the company reported. The filing does not describe any first-loss guarantee or buyback obligation to those owners. That is the central question Blue Orca raises, and the one the company will be pressed to answer.

The filing also shows OWN payouts to entities controlled by the founders fell to $0.5 million in the quarter from $17 million a year earlier.

Why contractors should care

EquipmentShare rents excavators, lifts and other machines, mostly to construction contractors, from branches across the U.S. Its customers are the small and mid-size builders that rent rather than own.

141,913 independent construction and contractors are listed on CheckThisBiz, a directory of 7,704,724 independent US businesses, including 12,896 in TX, 12,642 in CA, 11,414 in FL. Chains and franchises are excluded from that count, so these are the owner-operated businesses that actually apply for funding.

A short report does not change what a contractor pays for a rental today. But if the stock pressure makes OWN investors harder to find, the company's fleet growth would have to come from its own balance sheet, which already carried $73 million of quarterly interest expense. Watch for a company response, any change to how it presents segment EBITDA, and whether new OWN sales slow in the third-quarter report.

Sources: Investing.com; EquipmentShare Form 10-Q (SEC EDGAR); Nasdaq. Percentages are Chronicle calculations from the filing. This is market information, not investment advice.