March 30, 2012 5:49 pm

Laxey urges 3i to sell off investments

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Laxey Partners, the activist hedge fund, has greeted Michael Queen’s resignation as chief executive of 3i Group by calling for the private equity group to sell off investments and return cash to shareholders.

After announcing his impending departure on Thursday, Mr Queen criticised demands from unhappy shareholders to increase the company’s debt level in order to carry out share buybacks.

However, Laxey responded by submitting a pair of resolutions ahead of 3i’s annual meeting in July, calling for the group to sell its investments and return the proceeds to shareholders. This should be done “until such time as the [shares] cease to trade at a discount to their underlying net asset value”, said the Isle of Man-based fund, which holds 0.9 per cent of the company.

It added that 3i should make no new investments until the discount was eliminated, except investments to which it had already committed, or those necessary to protect or enhance the value of existing assets.

3i shares have lost a quarter of their value in the past year, and trade at a 27 per cent discount to their last stated NAV.

Mr Queen said on Thursday that he was “fundamentally opposed” to a large-scale buyback scheme. “I think that gives you a short-term, superficial financial kicker, but damages the business in the medium and long term,” he said.

But analysts at JPMorgan Cazenove called Laxey’s intervention a “well-timed move”, noting that ”a managed liquidation strategy is being pursued by other listed private equity companies with a better record than 3i such as Candover, Conversus and LMS”.

“We suspect that the final outcome will be somewhere nearer what Laxey is proposing than the status quo”, they added.

Sir Adrian Montague, chairman of 3i, said the company would “think hard about what [Laxey] say ... The top priority is to try to run this business and for value in the long term. We have got some great people here, and some really good assets”. And he added that he hoped to announce the appointment of a new chief executive at or before the July’s annual meeting.

Last year Laxey tabled a similar motion at the annual meeting of Alliance Trust, calling on the Dundee-based company to carry out buybacks whenever the share price discount exceeded 10 per cent. The proposal was voted down, but Alliance has since spent £250m on its own stock. Laxey is now trying to force the company to consider outsourcing the management of its assets.

The hedge fund’s letter to 3i on Friday follow its calls last year for the group to sell its minority stake in its listed infrastructure fund, and pay out the proceeds to shareholders.

Iain Scouller, an analyst at Oriel Securities, said that “to effectively put [3i] into windup mode is a pretty dramatic step. With a new chief executive, and clarity on the new strategy, the majority of the shareholders would be keen for the company to keep investing. You don’t want to be in a fire sale situation.”

Mr Scouller said that the new chief executive might look to compromise by committing to return a fixed proportion of realised gains to shareholders.

3i shares rose 2 per cent to 214p.

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