Activist investors descend on ‘bargain basement’ UK companies
When Vodafone boss Nick Read unveiled a plan to energise the struggling mobile group in November, investors welcomed it as a step in the right direction after a lacklustre few years.
Little did they know that behind the scenes Vodafone was coming under pressure to improve its performance with the arrival of Cevian Capital in its shareholder base.
Since buying a stake in Vodafone months earlier, Cevian, Europe’s largest activist investor with roughly $15bn in assets under management, had been quietly engaging with management and the board. It urged them to be more aggressive in restructuring its portfolio and add more telecoms expertise to its board.
Whether Read telling investors of a renewed commitment to consolidation in Europe and willingness to offload businesses was a coincidence or shaped by the presence of Cevian, it is clear that activists are increasingly driving the conversation in the UK’s top boardrooms. These investors — who buy shares in a public company with the aim of effecting a significant change — are now on the shareholder register of at least nine companies in the FTSE 100. They are seeking to tap into shareholder discontent at companies such as Unilever and Vodafone following a period of underperformance, and are set to influence the direction of corporate Britain more than ever before.
The biggest draw is the depressed price of UK-listed companies. Public companies in the UK have lingered at depressed valuations since Brexit and look cheap compared with other developed markets, providing an attractive entry point for investors.
“The UK is a bargain basement right now, compared to the US, where there’s too much money chasing too few deals,” says Sarah Ketterer, chief executive of Causeway Capital Management, a $45bn, Los Angeles-based asset manager that is calling for a board refresh at Rolls-Royce. “There’s a confluence of undervalued companies and good corporate governance,” she added. “This means that with the right amount of persuasion, companies will do what they need to do to reward shareholders.”
Few sectors remained untouched. Last month the Financial Times revealed that Nelson Peltz’s Trian Partners had built a stake in global consumer goods company Unilever, which is reeling from the fallout of its aborted attempts to buy GlaxoSmithKline’s consumer health division. GSK has been targeted by Elliott Advisors, which is pushing to overhaul the pharmaceuticals group’s leadership. Elliott is also calling for a break-up of power company SSE and a management overhaul at housebuilder Taylor Wimpey. Meanwhile, Cevian also has a live campaign at insurer Aviva and at education company, Pearson. Elsewhere in the FTSE 100, Dan Loeb’s Third Point is pushing to break up oil major Royal Dutch Shell.
“A common theme is that many of these cheap opportunities are large, long-term underperforming companies who have faced strategic crossroads,” said Sue Noffke, head of UK equities at Schroders.
Derided by some as aggressive short-termists, the profile of activists and their specific investing strategies ranges from those who build a stake and immediately demand that capital is returned to investors, to those that take a “constructivist” approach, seeking to engage thoroughly with a company’s leadership to improve its operations over time.
Activists are not the only investors seizing on the perceived opportunity. For the past 18 months, private equity firms have been snapping up publicly listed businesses in the UK at a record rate. Those deals included the £10bn purchase of UK supermarket chain Morrisons in which buyout group CD&R paid a 61 per cent premium to outbid a rival. But unlike private equity firms, which typically pay a premium to acquire the assets, activists try to provoke change and boost returns in the public markets, without taking control of the company.
The onslaught comes two years into the pandemic, which has shaken up the corporate landscape. Trends such as environmental, social and governance considerations, working from home, supply chain disruption and technological innovation have exposed the gaps between corporate winners and losers.
“The type of company that is quite attractive to an activist is the bigger, conglomerate-like structure that has different business lines and geographies, which are core and non-core,” said Tom Matthews, co-head of the shareholder activism practice at law firm White & Case. “This means lots of opportunities to propose spin-offs” of underperforming divisions, he added.
Another favourable dynamic for activists is the fragmented nature of UK plc’s shareholder base and the fact that domestic investors are typically perceived to place greater emphasis on receiving dividends than in other countries. That means management teams are often more conservative in the way a company is run.
Unlike countries such as France and Italy, UK companies “generally don’t have large state or family holdings” with privileges that can come at the expense of minority shareholders, said Andrew Millington, head of UK equities at Abrdn, which manages £532bn. “This means that as a minority shareholder, if you can make your case and get other institutional shareholders on side, you can have influence and effect change.”
Others point to implications of the rise of passive players such as BlackRock, Vanguard and State Street, which by virtue of their vast exchanged-traded fund businesses that track indices, are big shareholders in most large companies around the world — resulting in the phenomenon of “ownerless corporations”. For example, Vodafone’s top three investors are passive players.
“The shareholder bases, especially for the large UK companies, are very fragmented,” said Harlan Zimmerman, senior partner at Cevian. “With the growth of passive investment, the big passive managers increasingly occupy the top slots of the registers. They own thousands of companies and generally do a very good job in advancing policies and dealing with crisis situations, but they really have to pick their battles to engage on issues of strategy and underperformance versus potential.”
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A December report by professional services company Alvarez & Marsal identified 148 European companies as potential targets for activist investors in the next 12 months. It found that Britain remains the most attractive country for activists, with 36 per cent of the European companies identified as “at risk” based in the UK and a growing focus on environmental and social performance increasingly driving campaigns.
Typically, these involve pressuring a company to split its “good” and “bad” assets. For example, Third Point’s campaign at Shell, which follows a successful activist campaign run by hedge fund Engine No 1 against its US rival ExxonMobil, is urging the oil major to divide into a legacy business that could handle fossil fuels and a separate entity focused on cleaner energy. It is a similar story at SSE, where Elliott wants the company to split the electricity networks and renewables divisions into two listed companies.
Analysts said activists had adapted their methods to the UK market. Gone are the days of the US-style corporate raid, characterised by “making high-profile unexpected announcements demanding companies get broken up, that divisions get sold and that management teams are changed,” according to Mark Kelly, a managing director at Cowen. Activists had become “much more savvy in the way they deliver their message,” he added, particularly in their efforts to win over active shareholders.
They are fully aware, he added, that “in the UK in particular, without longer-term investors fully buying into the activist campaign, the strategy faces little chance of success.”