‘Most listed companies have run across activists by now or at least come close,’ says Andy Ryde, Slaughter and May’s head of corporate. Shareholder activism, once barely registering on UK shores, is becoming a fact of life for corporate counsel. Is the trend set to continue?
Allen & Overy (A&O) M&A partner Richard Browne certainly thinks so: ‘The stock market has been going strong over the last couple of years and it is harder for activists to gain traction because shareholders are seeing prices go up. There is likely to be an explosion in activist-driven deals when the market turns.’
Notes Lorenzo Corte, co-head of Skadden, Arps, Slate, Meagher & Flom’s London M&A group: ‘Activism has picked up in the last two years. Activists are going after larger companies in Europe, and as a result they are a lot more visible.’
There are some numbers to back up this view. Figures provided by data provider Activistmonitor point to a rise in European disposals and spin-offs driven by activists, with 13 deals reported in 2018 compared with seven in 2017. True, takeovers of the entire company appear to have dwindled, from five in 2017 to just two last year, although M&A counsel would argue that is a volatile indicator.
The funds are increasingly sophisticated in their analysis of companies and are gaining support from previously conservative, long-only funds chasing better returns. Inflated US stock prices have also pushed funds to Europe to find under-valued firms to target.
It is certainly true that the UK, which accounts for around 50% of European activist activity, has seen its fair share of interest from US houses emboldened to target bigger companies, with activists operating behind the scenes of some of the most high-profile deals of recent months.
Vulcan Value Partners, an investor in British aerospace group GKN prompted the largest hostile takeover in recent years at £8bn by Melrose. More recently, Elliott Management Corporation and Sachem Head Capital were behind Whitbread’s £3.9bn sale of Costa Coffee to The Coca-Cola Company, with Slaughters advising on the sell-side.
Activist strategies vary and are not always geared towards driving major deals. Increasing shareholder returns is the core aim and there are many ways to skin this cat. ‘Barclays is the most current high-profile case and shows that size is no immunity from activists,’ says Browne. Last year corporate raider Edward Bramson and his fund Sherborne bought a 5% stake in the bank, enough to threaten to requisition a general meeting of the board. Bramson is no stranger to the UK, having bought shares in Electra Private Equity in 2014. His impact on that company, albeit a much smaller target, had been striking. Bramson agitated his way onto the board and forced changes, including the sale of Photobox and Knight Square, a revised investment policy and a review culminating in a £140m special dividend that was distributed at the end of last year. There are plans for further disposals to spawn dividend payouts of £10m a year.
‘Investors are becoming less passive – it is a growing trend of modern corporate governance to be more involved.’
Andy Ryde, Slaughter and May
A&O has advised Electra since 2014 when incumbent adviser Herbert Smith Freehills (HSF) switched allegiance to Sherborne amid Bramson’s successful attempt to get himself on the board.
Bramson’s pressed shake-up of Barclays – which includes a review of the bank’s capital allocation, quality of earnings and cost structure – has already yielded results, with the retirement of chair John McFarlane in May this year.
This kind of disruption is not exclusive to smaller companies, as has been seen with Rolls-Royce’s trade-off with ValueAct Capital in allowing one of its senior partners, Bradley Singer, onto its board in 2016 in exchange for a list of restrictions, including that the fund stopped lobbying for a break up of its businesses. The San Francisco hedge fund owns more than 10% of shares in Rolls-Royce.
HSF aside, few City firms have come out on the side of the activists, with the Magic Circle in particular protesting (too much?) their allegiance to plc clients.
With no such qualms is Wall Street law firm Schulte Roth & Zabel (SRZ), which in 2014 moved to bigger premises in the City to grow out its funds and activism advisory piece.
Tom Mercer, corporate partner at Ashurst, observes: ‘Most London firms will want to stick with their corporate clients. Advising activists would feel too much like you’re making the bullets being fired at company boards.’
City firms insist their wide plc client bases make them best placed to advise. ‘You need to have good public M&A, corporate governance and ECM [equity capital markets] credentials. It is not unlike a hostile bid defence, tooling up for a hostile raider,’ says Browne. ‘Firms aren’t hiring. Shareholders fly to trusted advisers when under attack.’
Mercer says that a lot of his advice is around recognising warning signs. ‘You need to ask: “What is going on with your share register?” Activists often build stakes using derivatives, so a warning sign is a lot of prime broker positions appearing on the register.’
Browne agrees: ‘You need to be able to simulate an activist scenario. This person comes on the register, you receive a letter – what do you do? You have to respond quickly when it happens for real.’
For leading US law firms, which are less embedded with UK bluechips, it remains a more finely balanced calculation in who to represent. But activists are certainly good for the general sales pitch as a US-led trend.
‘Why hire Skadden?’ says the firm’s Scott Hopkins. ‘We have worked opposite activists for years. We have that experience and are adapting it to the UK and European markets.’
The consensus is that activism is here to stay, at least as long as funds generate such hefty returns. Says Ryde: ‘Activist encounters will continue to rise. Lots of boutiques are setting up in London to advise on investor relations and governance issues related to activism and every investment bank has activist expertise. Investors generally are becoming less passive – it is a growing trend of modern corporate governance to be more involved.’
With Nelson Peltz, the hedge fund billionaire behind the Kraft/Cadbury hostile takeover, reputed to be raising a £1bn war chest to target FTSE 100 companies, it is time to tool up.