Friday 30 September 2016

Activist investors target Ireland

A shareholder salvo at C&C follows on from Petroceltic's battering as a new type of investor buys into Irish shares

Paul O'Donoghue

Published 18/10/2015 | 02:30

'Although somewhat loosely defined, activist shareholders are investors who buy stocks that they feel are undervalued and try to publicly force management to make changes to drive up the share price and shareholder returns'
'Although somewhat loosely defined, activist shareholders are investors who buy stocks that they feel are undervalued and try to publicly force management to make changes to drive up the share price and shareholder returns'

'Give up on your foolish dreams of US domination and you can salvage €200m.' Orange Capital's pitch to management at Irish drinks giant C&C had several core points, but the stipulation that it abandon its venture in the US in the hope of recouping between €150m-€200m was the most eye-catching.

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C&C bought the Vermont Hard Cider Company in the US for €235m in 2012 and has been trying to crack the market ever since. However, fierce competition from US rivals and distribution problems have eaten into its prospects and in May the company wrote down the value of the operations by €150m.

Investment fund Orange was not at all happy, raising this and other issues in the 22-slide 'Recommended Action Plan' sent to management. It also set aside space to demonstrate how Orange viewed C&C as underperforming, voiced concern over the company's aborted takeover of UK pub group Spirit Pub and noted a perceived "credibility gap" between the firm and its investors.

After the presentation was sent, C&C said it would consider the issues raised, leaving Orange to quietly stew.

The Canadian firm proceeded to build up its stake in C&C to just 5pc (worth about €64m, based on the drinks firm's current share price), before getting fed up trying to privately persuade management. Instead, it leaked the presentation to the media.

All of a sudden 'C&C under fire' headlines appeared at home and abroad. In response, the Bulmers-maker issued a statement saying that while it agreed with Orange in some areas, it was its responsibility to run the business "in the long-term interests of all shareholders".

But this is unlikely to keep Orange placated for long. It is understood that the firm, which has its headquarters in New York, is still very dissatisfied and is plotting to ramp up its pressure on management as soon as is feasible.

"The company believes that other investors feel a similar level of frustration," a source said.

Welcome to the world of the activist investor. Although somewhat loosely defined, activist shareholders are investors who buy stocks that they feel are undervalued and try to publicly force management to make changes to drive up the share price and shareholder returns - though this can be difficult if they do not get support from other shareholders.

Notable examples include billionaire investor Nelson Peltz, who rang up the CEO of PepsiCo one day after buying a $1.3bn stake in the firm and demanded it split into two parts, one focused on food, one on drink.

Another example is Carl Icahn, who got Apple to buy back $90bn in stock and convinced eBay to spin out Paypal.

As well as changing management direction, well-waged campaigns have the potential to generate high returns if done right. Statistics from hedge fund analytics firm Preqin showed that from the start of 2015 to the end of April activists funds have delivered a return of 6.85pc on investments, compared to the hedge fund benchmark of 4.4pc. Activists performed even better in 2014, averaging returns of over 12pc - almost 5pc higher than hedge funds.

Activists had about $120bn (€105bn) of assets under management at the end of 2014, according to a PwC report, (though this still only accounts for about 4pc of the hedge fund total). Of those companies that were subject of activism, about 75pc were in the US, where CEOs are now sitting up and taking notice.

In contrast, activist shareholders are still relatively rare on Irish shores. So far! According to London-based firm Activist Insight, only two activist campaigns were recorded in Ireland for the entire year of 2014.

This is not an anomaly among European countries, with Italy, Germany and France recording just five, four and one activist campaigns respectively during that year. The UK, which had the most campaigns out of any country in Europe, still only saw 14 cases of activism. This compares to over 250 in the US.

On the Irish side of things, Irish Association of Investment Managers CEO Frank O'Dwyer suggests that one simple reason why activism has not become a larger feature of Irish business is the fact that Irish companies are, for the most part, too small.

"If someone is looking to make money, there needs to be liquidity in the shares so you can sell them on and make a profit after you affect change - and some Irish companies just don't have the volume, their free float is too small," he says.

"If you don't have that, then you have a problem. I wouldn't say that having a smaller float protects you from activists, but it means that it is much less likely for them to come in."

He concedes that not all Irish firms fit this bill. For instance, CRH is valued at just under €20bn and is a well-performing member of the FTSE 100. However he says that, by and large, Irish companies have yet to really start flashing on the activist radar.

"What also matters is who is doing research on mid-size companies in Ireland. On the FTSE 100 or on the S&P, there is more research available. The challenge is that if a company goes to London for its listing and doesn't get decent analyst coverage, then it is a tiny fish in a massive pool."

But activists have publicly targeted some of our biggest listed companies. Ib Sonderby unleashed a bazooka against drug company Elan.

Elan was a pharmaceutical giant with a market cap of $22bn at one point in 2001 and comprised almost one-fifth of the total value of the Irish Stock Exchange. However, by 2010 its shares had fallen from $37 to $4.90 a pop after a series of regulatory issues and disappointments in the development of a number of its more promising medications.

Sonderby bought two million Elan shares in 2002 at rock-bottom prices and said he was motivated by moral outrage rather than money. He proved to be a rallying for several investors who had grown dissatisfied with management, launching a series of stinging attacks on the board and an attempt to replace several of the directors, although he was blocked from doing so.

"There were a number of issues that I saw there that were just unbelievable," he said.

Among other issues, Sonderby identified what he thought were potential conflicts of interest involving Elan's chairman and raised questions about what he regarded as an unusually lucrative severance package for the CEO. Elan always denied all of his claims.

Eventually, Elan was sold to generic drug giant Perrigo for $8.6bn in 2013 as a shell of the company that it had been.

Although Sonderby clearly views it as somewhat of a defeat ("I just caved and said there was a limit to what one man can do to fight a company like that"), he maintains that he is pleased that he decided to wage the campaign in the first place.

"I'm happy I did it. I think it was the right thing to do. It took a lot of effort - but you can't just have guys like that going around like they think they own the world."

On the management side, perhaps the most high-profile boardroom row in an Irish company in the past 12 months is the one between Dublin-based oil and gas explorer Petroceltic and Swiss hedge fund Worldview Capital Management.

Although it may not meet the most common view of an activist, as Worldview holds a near 30pc share in Petroceltic and has held its stake for well over 18 months, the dispute meets most of the established criteria, with the two companies at loggerheads for much of the past year.

The fund grew increasingly dissatisfied with the direction of the firm after formerly Irish-listed rival Dragon Oil abandoned a proposed €627m bid for Petroceltic towards the end of 2014. The Petroceltic share price dropped from almost £2 last November to about £1.20 as soon as the bid was dropped.

Worldview held an emergency general meeting in a failed attempt to oust Petroceltic CEO Brian O'Cathain. It recently tried to convene another EGM in an attempt to stop the company completing a $175m bond issue which Petroceltic needs to finance its flagship project - a gas field in Algeria.

Petroceltic chief financial officer Tom Hickey admits that the dispute can be trying for both management and investors.

"We have always had civil discussions, even when there is tension, but when something like a press release goes out you need time to absorb it. That time could be devoted to other aspects of the business - and that factors into people's perception of the company," he said.

"You may be looking at investing and Petroceltic may be one you like. But you may be thinking, 'Will I have to go to a lot of EGMs? Will there be shareholder issues?' - stuff like that, it may stop investing and I think it is an issue in the back of people's minds."

However, he does not demonise Worldview, saying it has been a diligent investor.

"Worldview have been one of our hardest working investors, they are one of the few who have been to our project in Algeria, for example," said Mr Hickey.

"Also, sometimes an activist will have the courage to say what others won't; the challenge is to keep focused on company issues and not personality issues."

His view is one that is shared by Linda Hickey, head of corporate broking at Goodbody. She says that even though activists are often viewed with apprehension by management, under certain circumstances they can be beneficial to the company.

"Activists argue that by running their campaigns they get better returns and there are periods where they can do that," she says, although she cautions that many can have too much of a focus on short-term gains.

It has been suggested that activism could increase in Europe - and by extension Ireland - due to several factors, such as the relatively uncrowded playing field. However, for those who dread the day when they have to deal with a publicly noisy shareholder, Hickey gives one simple piece of advice: run your company well.

"You have to remember that activists go for low-hanging fruit. They look at companies where they think there will be a marked improvement in the share price, so well-run businesses don't generally find themselves subject to activism. If they are not active in Ireland, it is probably because there is no low-hanging fruit - and that is our advice to companies: good governance is the best defence against activism."

Sunday Indo Business

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