Just as Steinhoff, the South African retailer, might have thought of putting its feet up, along comes US hedge fund Elliott Management to stir up trouble.
The US activist bumped up its stake in Poundland to about 17.5 per cent within days of the Black Country discount chain agreeing to be bought by Steinhoff for 220p a share in cash. It is enough to derail Steinhof’s bid should the US fund choose.
This is post M&A arbitrage, or “bumpitrage”, where funds agitate for a rise in bid prices. It is a form of merger or event-driven arbitrage and traces its roots to greenmail, where activists of yore forced companies to buy their stakes at preferential rates.
And now fund managers such as Elliott are bringing “bumpitrage” to Europe.
Poundland, market value £600m, is a titbit for Elliott, which was founded by Paul Singer in the 1970s and manages $28bn in assets. But Elliott’s targets are big and small. Just as the hedgie was picking up Poundland shares, it was donning a high-vis jacket and pushing for a better offer from Anheuser-Busch InBev, the brewer bidding for rival SABMiller. It succeeded, too. ABInbev’s boss Carlos Brito raised his cash offer by £1.
Elliott is on a roll. Last year it pushed US drug distributor McKesson to up its bid for Celesio, its German rival. The same year it extracted a higher offer from US buyout firm Lone Star for Quintain, the smallish UK property group that developed Wembley Stadium.
Five years ago, the hedge fund attacked DuPont after it had offered $5.8bn for Danisco, the Danish enzyme maker. The language became heated. Elliott accused the Danisco board of “a shameful betrayal”. DuPont thrashed about like a pike on a line. But it raised the offer in the end to $6.6bn.
There has always been a fringe of hedgies seeking to make a turn during UK takeovers. But they have tended to tackle smaller companies and been quieter. Polygon Investors, the Anglo-US fund, blocked any number of buyouts in the noughties including property group Countrywide and Telent, the telecoms rump of Marconi. It is now involved in a dogfight with private equity firm Apax Partners which bought Evry, the Nordic IT firm, last year.
Bumpitrage works well with small companies where funds can pick up a telling stake relatively easily and for a small outlay, says one UK-based hedgie. It is more complicated with big companies where activists have to marshal support from other investors to push their point home.
However, Elliott is not a fund to hide its fights under a bushel and its high-profile campaigns have forced the City to include bumpitraging as part of the package of advice for would-be acquirers of UK companies, says one Square Mile lawyer.
Practitioners of the dark art say that private-equity buyouts in Europe, where cosy deals with executives short change investors, provide fertile ground for bumpitraging. It helps that European takeover authorities impose high “squeeze out” thresholds.
It gives bumpitrageurs more leverage if bidders can only buy out all investors if 90 per cent of shareholders have accepted their offer. It is more difficult to push for better terms outside Europe where bidders can railroad naysayers and compulsorily buy their shares with acceptances from just 51 per cent of shareholders.
Steinhoff’s bid for Poundland has been structured as a “scheme of arrangement”. To succeed the South African group must win three-quarters of Poundland votes cast, excluding its stake. Elliott might be banking on Steinhoff, having failed in two previous takeover attempts paying up to gain total control. But it will have to be prepared to be a co-investor with Steinhoff if the retailer doesn’t play ball.
Sometimes bidders hold firm and activists are left with rumps of shares they can’t sell. That rarely suits acquirers. “We are a pain for them,” says a bumpitrageur cheerily. “We can still call meetings and block payouts.”
Bumpitrageurs argue they are a force for good, extracting better prices for all shareholders. Poundland’s investors will hope so. And maybe they are. But prolonged battles drain everybody’s pockets, except the lawyers.
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