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Elliott’s Stake In Softbank
CNBC's David Faber takes a closer look at the Activism in 2017 and what to expect in 2018. With Ken Squire, 13D Monitor founder.
A group of shareholders in Swiss-Irish baking group Aryzta (ARZTY) have called for a “swift conclusion” to discussions on a potential takeover by a unit of US hedge fund Elliott Management. The shareholder group, led by Swiss investor Veraison, said it was in the best interests of stakeholders to come to a decision on the takeover talks, which were first announced on Sept. 10. “Veraison expects both Aryzta and Elliott Advisors to comply with the ’Put Up or Shut Up’ rule and to provide clarity by the end of this week regarding the potential takeover offer,” the group said in a statement. The request came as Aryzta announced it would postpone its 2020 annual general meeting to allow the board to evaluate its strategic and financial options. Aryzta held an extraordinary general meeting on Sept. 16, with the rebel shareholders securing backing from voters for the election of Urs Jordi and two other of their candidates to join the board. The company’s three former Irish directors, including former chairman Gary McGann, as well as one Swiss board member signaled they were stepping down before the meeting. Jordi, who said on his appointment as chairman that now is “the worst time” for a sale, has set up a board committee to consider options, including a full sale and additional asset disposals.
SoftBank Group Corp. (SFTBY) charged ahead with its new public stock trading arm, increasing equity positions to more than $20 billion despite an initially skeptical response from shareholders. The Japanese conglomerate considered tempering its trading plans in early September after reports that SoftBank’s spending spree was disrupting tech stocks, which erased about $9 billion in market value for SoftBank at the time. Over the past few weeks, SoftBank renewed its commitment to the public equities trading arm. The strategy is currently built around expectations of a volatile third-quarter earnings season, the people said. SoftBank has been buying out-of-the-money call options, which deliver returns when share prices rise, and selling calls at even higher prices. An unidentified trader recently purchased around $200 million worth of call contracts on tech stocks in a single day. Founder Masayoshi Son has been reluctant to provide many details about his trading strategy. The company has talked more about a broader strategy of selling assets, paring debt and buying back shares that has been well-received by investors. The stock rose to a 20-year high Monday, the highest level since March 2000. In August, SoftBank disclosed holdings of $3.9 billion in stocks such as Amazon (AMZN) and Netflix (NFLX). It has bought a lot more stock since then, mostly major tech stocks.
IsZo Capital Management LP, a significant long-term shareholder of Nam Tai Property Inc. (NTP) with beneficial ownership of approximately 9.9% of the company’s outstanding shares, on Monday announced that it has taken legal action in the Eastern Caribbean Supreme Court against Nam Tai, Kaisa Group Holdings Limited’s wholly-owned subsidiary Greater Sail Limited, and West Ridge Investment Company Limited. IsZo’s action comes in response to Nam Tai’s Oct. 5 announcement of a $170 million private placement that distributed more than 16 million common shares to Kaisa-Greater Sail and more than 2.6 million common shares to West Ridge, which equated to approximately 47.6% of the company’s outstanding shares on a pre-issuance basis. The court has granted IsZo’s request for an injunction designed to protect Nam Tai shareholders, which was promptly served on Nam Tai, Kaisa-Greater Sail, and West Ridge. In addition, the court has agreed to hold an initial hearing on Oct. 19. Nam Tai executed its private placement earlier this month rather than proceed with convening a meeting of shareholders following IsZo’s delivery on Sept. 11 of verified requests from holders of approximately 40% of the company’s outstanding shares—a number in excess of the 30% threshold required to convene the meeting.
CIMIC Group (CIM) said on Monday it will sell half of its mining services business to activist hedge fund Elliott Management, valuing the unit Thiess at A$4.3 billion (US$3.04 billion). CIMIC, which will continue to hold the remaining 50% of Thiess, expects a pre-tax gain on the stake sale of around A$2.2 billion and a post-tax gain of around A$1.4 billion. The deal would imply a 50% stake is worth a little over A$2 billion and includes an option for CIMIC to repurchase Elliott’s half of the world’s largest mining services provider within three to six years at a potentially lower price. It will also beef up the Australian contractor’s balance sheet with cash of around A$1.7 billion to A$1.9 billion, CIMIC said. Also in the agreement is an option for a potential initial public offering or a sale to a third party, it added.
Investors in Unibail-Rodamco-Westfield (UNBLF) are frustrated with the company's decision that it needs to raise capital. Unibail-Rodamco-Westfield wants to raise 3.5 billion euros to maintain its good credit rating. The former CEO of Unibail-Rodamco-Westfield now has teamed up with shareholders that represent 4.1% of the company's shares. These shareholders have called on other investors in Unibail-Rodamco-Westfield to oppose the company's rights issue at its upcoming extraordinary general meeting. In a letter to shareholders, they also say Unibail-Rodamco-Westfield should focus more on Europe and sell its U.S. portfolio. The major concern is the rights issue will severely dilute shareholders, but selling U.S. assets is not a better alternative because Unibail-Rodamco-Westfield is overexposed to states that had long pandemic closures in place. The shareholder revolt and rights issue are symptoms of the underlying risk of the company's portfolio.
Dealnet Capital and Simply Green Home Services announced the successful take up of Dealnet's shares on Oct. 15. In late March, dissident shareholders Capital Partners and Municipal Home Service delivered a notice to Dealnet of their intent to nominate an alternate slate of directors to oust the failing incumbent board. The dissident shareholders will tender their combined 8.96% of Dealnet shares and encourage the remainder of shareholders to do the same. The successful take up of Dealnet shares represents a 320% return for shareholders since the commencement of the dissidents' actions less than nine months ago. The pressure on incumbent Dealnet directors ultimately resulting in a take-over bid that drove the share price up by more than three times and created more than $31 million dollars in shareholder value. "Our efforts led the price of the shares to a multiple that shareholders could accept," said Dr. Steven Small, who represented the dissident shareholders.
Investor Starboard Value boosted its stake in ACI Worldwide Inc. (ACIW) to 9%. The New York-based hedge fund now owns 10.5 million shares in the $3.7 billion company. Starboard began building its stake during the first quarter of the year and owned 2 million shares or 1.77% at the end of the second quarter, earlier regulatory filings show. Speculation has swirled in the last weeks that Starboard, which launched three new campaigns in the first nine months of 2020, would unveil a larger stake in ACI Worldwide before the company reports third-quarter earnings. In the filing, Starboard said the company’s shares, which have lost 17% since the start of the year, were undervalued when it bought them. The fund said it may propose a variety of changes that could include board changes or a strategic review. Starboard is known for its operational know-how and often proposes to add new directors to a company’s board. So far this year, Starboard has won 22 board seats, almost double the 12 directors that Elliott Management has placed on boards.
The SEC on Friday adopted changes that relax some conflict-of-interest rules for companies and audit firms, making it easier for them to avoid violating auditor independence in certain situations. “These modernized auditor independence requirements will increase investor protection by focusing audit clients, audit committees, and auditors on areas that may threaten an auditor’s objectivity and impartiality,” said SEC Chair Jay Clayton. SEC Commissioners Caroline Crenshaw and Allison Herren Lee opposed the changes, saying they introduce greater opportunity for error and uncertainty and reduce investors’ visibility into how auditors make judgments.
13D Monitor founder and president Kenneth Squire highlights chip industry investor Starboard Value's push to keep up its success in the sector by focusing on ON Semiconductor (ON). Starboard's activism in other companies has seen a positive return on investment, with an average return of 71.62% against an average of 23.23% for the S&P 500 during the same time periods. ON Semiconductor sells products across diversified and attractive end markets, with the automotive and industrial sectors comprising almost 60% of revenue. About 80% of its revenue has three-plus years in product longevity and about half is seven-plus years. ON's primary focus on analog and power components and sensors also has positioned the company to net business regardless of end product features. Among the opportunities Starboard is eyeing at ON is a rationalization of its manufacturing footprint and improving utilization rates to increase gross margins. The firm is saddled with excess costs for not fully integrating its acquisitions or realizing other synergies from those acquisitions. ON has 12 manufacturing facilities worldwide, and could easily operate with only three to seven plants. The company has already initiated solid steps, migrating from smaller and outdated facilities to better equipped facilities with excess capacity. Starboard also sees an opportunity in transitioning ON to a fab-lite model allowing for more stable gross margins, more flexibility to meet upticks in demand and downturns, higher free cash flow conversion, and better returns on capital. Finally, Starboard envisions an opportunity for continued industry consolidation, and thinks ON is uniquely positioned as a scaled asset trading at a discount. The company could be enticing for strategic buyers.
Aimco (AIV) shareholder Jonathan Litt has filed to call a special meeting of shareholders in response to a move to split up the company. Litt's investment vehicle, Land & Buildings, says the company's proposal is a major move that should be put before shareholders. Aimco wants to split its operations into two publicly traded companies. However, Land & Buildings has argued that splitting Aimco into an apartment REIT and a developer will destroy shareholder value. Shareholders stand to lose up to $8 per share in taxes on the spinoff, according to Land & Buildings. However, Aimco's chairman and CEO Terry Considine will incur no tax on his unit ownership, says Litt. He also takes issue with Considine, at least initially, remaining in both roles at both companies.
The Australian Council of Superannuation Investors is encouraging its members to vote against the Crown Resorts (CWN) directors standing for re-election at its annual general meeting next week in protest over how the company has been run. Three directors are standing for re-election at the meeting, including Guy Jalland, who negotiated the sale of a 19.9% stake for the billionaire to Hong Kong's Melco Resorts in a since0abandoned deal that put Crown's Sydney casino licence at risk. Two independent directors, Jane Halton and John Horvath, are also standing for re-election. Horvath's independence was questioned on Wednesday when it emerged he was Kerry Packer's long-time personal physician and oversaw his kidney transplant in 2000. While Packer, who owns 36% of the company, has given no indication of how he will vote, he said in evidence last week he expected changes to the board would be required to make Crown a fit company to hold a casino licence. Crown's corporate governance has been under fire in recent weeks following evidence at a NSW Independent Liquor and Gaming Authority probity inquiry about the casino group's secret deal to pass on sensitive financial information to its largest shareholder James Packer. Prominent advisory groups ISS, CGI Glass Lewis, and Ownership Matters have all recommended Crown shareholders vote down the re-elections. ACSI's members own about 7% of the shares in Crown. Australian fund manager Perpetual, which owns about 9%, and private equity firm Blackstone (BLX), which owns almost 10% and has recently applied for regulatory approval to increase its stake, both declined to comment.
Building materials giant Boral Limited (BOALF) has buckled under pressure from activist shareholders, with its chairman Kathryn Fagg to retire from the board next year and Seven Group withdrawing one nomination for the board. In an announcement on Thursday afternoon, the Boral board said it had engaged with shareholders and "listened to concerns" that had been raised about director accountability for the past performance of the business. Boral chairman Kathryn Fagg will leave the company's board next year. Boral said some shareholders were concerned about the level of representation of major shareholder Seven Group on its board, after the recent appointment of Seven chief executive Ryan Stokes and chief financial officer Richard Richards to its board. Seven Group subsequently confirmed it would withdraw Mr Richards' nomination for the board. According to the most recent filing Seven Group has a 19.984% stake in Boral, but two large activist shareholders - Perpetual and Tanarra Capital - had questioned the appointments, claiming they gave Seven excessive influence on Boral. In a recent letter to Fagg the two activist shareholders did not call for her departure, and commended some of the recent decisions of Boral's board including the appointment of new chief executive Zlatko Todorcevski. But three proxy adviser firms had all recommended a vote against Fagg's re-election at Boral's annual shareholder meeting on October 27.
Bluebell was co-founded by Giuseppe Bivona, Marco Taricco and Francesco Trapani, who all serve as chief investment officers. The fund focuses predominantly on medium-to large-cap companies within Europe, which means companies with market capitalizations of between €2 billion and €15 billion, and which they believe to be high-quality businesses in attractive sectors, generally without a controlling or reference shareholder. They launched the $75 million fund in November 2019, although they had been working on high-profile activist situations for over six years as co-investors alongside funds such as JANA Partners, Elliott and Third Point. For the most part, the Bluebell team is working alone on their campaigns, although they can and do selectively invite co-investors alongside them when they see a need for larger critical mass. This is the case in two of the 12 positions currently in the portfolio. Bluebell's brand of engagement tends to happen “behind closed doors”, Tarrico says, because of a “cultural barrier” around activism in continental Europe. Taricco spoke about their long position in Italian specialty finance business Mediobanca (MDIBY). Bluebell sees upside of around 50%, excluding the value of its 13% stake in Generali, the third largest insurance company in Europe and the largest in Italy. Bluebell identified potential improvements in four key areas: strategy, operational efficiency and transparency, capital allocation, and governance. The team added that in excess of 40% of Mediobanca’s regulatory capital is locked into the Generali stake, which they consider a hindrance. Finally, they object to current bylaws call for any shareholder proposing a full list of directors to include senior employees of Mediobanca within the top three positions. Bluebell is currently in discussions with top management and board members ahead of the company’s upcoming annual general meeting at the end of October. Bluebell is a long-biased fund, but it may opportunistically take single-name short positions if the team identifies a particular opportunity. Earlier this year, Bluebell shorted Canadian movie theater operator Cineplex (CPXGF), which was the target of a cash deal by U.K.-based Cineworld announced last December. Bluebell Capital went short on Cineplex because both Cineplex and Cineworld were at risk of survival due to the pandemic and the resulting company would be extremely leveraged. He said the deal was subject to approval from Canada's Ministry of Culture, so they reached out to the regulator and about why the ministry should not authorize the deal. The deal was called off, and Cineplex shares fell.
AC Milan’s owners Elliott Management are happy to invest on young players in the transfer market such as Sandro Tonali, Gianluca Di Marzio claims. Milan’s owners have so far preferred a recruitment strategy centered around buying young players with high potential to develop and record capital gains on the balance sheet. Six players arrived in summer 2019, the oldest of them being 25. Di Marzio spoke to Sky Italia and outlined the philosophy that Milan have tried to follow in terms of player recruitment since Elliott Management took over. “Since Elliott has been around, Milan has followed a precise philosophy, that is, investing in players under 25 and borrowing players over 25 years old,” he said.
At consumer goods giant Procter & Gamble's (PG) 2020 annual shareholder meeting, 67% of shareholders approved a measure put forth by Green Century Equity Fund resolving that the company issue a report addressing how it could increase its efforts at combating deforestation. P&G said this resolution was the first shareholder proposal related to deforestation that it had received. The vote opposed the P&G board's recommendation that the measure be defeated. Environmental groups in years past have held protests both outside of and within P&G's annual meetings. The resolution only required P&G to "issue a report assessing if and how it could increase the scale, pace, and rigor of its efforts to eliminate deforestation and the degradation of intact forests in its supply chains." Green Century Fund, in its proposal, largely leaves it up to P&G what to include in that report. P&G CEO David Taylor said during the annual meeting that for every tree harvested for the company's products, another one is planted. On palm oil, P&G's board wrote that it is a member of the Roundtable on Sustainable Palm Oil (RSPO), which is committed to sourcing those products in a manner that does not contribute to deforestation and respects the rights of workers and indigenous people. P&G's board wrote that it has achieved 60% RSPO certification for the palm oil and derivatives it uses and is on track to reach that certification for 100% of its sourcing by the end of fiscal year 2022. Green Century claims that P&G has ranked below peers like Kimberly-Clark and Unilever by both Forest 500 and CDP Forest and lags on implementing its existing no-deforestation commitment.
A Procter & Gamble (PG) shareholder raised a question at the company's annual shareholder meeting on Oct. 13, concerning why investor Nelson Peltz still had a seat on P&G's board, in contravention of company rules regarding retirement age. "Mr. Peltz is 13 years older than the director retirement age for directors and 13 years older than the average age of the current board of directors," the question stated. "At what point will you stop making a special exemption for this one particular director or just get rid of the retirement age?" However, Peltz is really only six years older than the P&G director retirement age of 72, though his Trian Fund Management had previously claimed that those rules were non-binding. In his 2017 proxy battle for a P&G board seat, Peltz argued that the company's stock was undervalued, citing a "suffocating bureaucracy," and calling CEO David Taylor misguided in promoting divestment of 105 lesser brands in favor of the 65 most profitable ones. Although P&G prevailed, Taylor appointed Peltz to the board, and at the Oct. 13 meeting defended Peltz's position as a "very positive experience for the company." He explained that "Nelson and all of our directors...provide valuable input and to me are contributing to the success that you're experiencing in our company today. We benefit from the wise counsel of all of our directors and I can say with very clear set of experiences that all directors, including Nelson Peltz, continue to contribute to help the company grow and get better over time."
The economy appears to be on track for a V-shaped recovery, with activity returning to pre-pandemic levels by next summer, according to Dan Loeb's third-quarter letter to Third Point clients. He called the economic fallout from the coronavirus pandemic “a shock recession,” which historically results in a quicker recovery. “The policy response so far, whether through monetary, fiscal, or public health measures, has been aggressive by historical standards,” Loeb wrote. As a result, Loeb said he is bullish on the market, adding that conditions seem favorable for asset prices currently. He also said declining unemployment is good for stocks, and that he is bullish on stocks no matter who wins the upcoming U.S. elections. Loeb also discussed his credit strategy; Third Point essentially doubled its exposure in structured and corporate credit securities in mid-March. At the time, the fund cut its equity exposure by roughly 15% shortly after the market sell-off began. Third Point Offshore was up 3.6% through the first nine months, mostly led by the credit book.
Investors propelled ESG funds to new heights in 2020, and federal agencies are watching. The Wall Street Journal explains why regulators have ethical and sustainable investment funds under review.
Authors at Mayer Brown LLP provide detailed advice to companies about preparing for the 2021 proxy season. Topics discussed include the impact of Covid-19 on proxy statement disclosures; trends in environmental, social, and governance (ESG) and its impact on the proxy statement; and Covid-19 disclosures in annual reports. As a result of the confluence of COVID-19 and social unrest, human capital matters are poised to play a magnified role in the 2021 Proxy Season. In addition, it is worth noting that some shareholder proposals during the 2020 proxy season achieved approval from a majority of the shares voting. Most of these involved governance matters, but there were also some social and environmental proposals that achieved majority support, or significant minority support, at a number of companies. This trend is likely to continue and evolve in 2021. The Covid-19 pandemic may bring more proposals focusing on employee health and safety, as well as on human capital management generally. In a separate matter, on Sept. 23, the SEC adopted amendments to Rule 14a-8 that effectively make it more difficult to have a shareholder proposal included in a company’s proxy statement. In another matter, on July 22, the SEC adopted amendments codifying its view that voting advice produced by proxy advisors generally constitutes a solicitation under the proxy rules, which has been controversial. ISS sued the SEC in October 2019 over the SEC’s position that proxy voting advice constitutes solicitation, but the parties agreed to hold this litigation in abeyance until the SEC adopted its final rules. On September 18, 2020, ISS filed an amended complaint and motion for summary judgement to encompass the final rules. Regarding virtual meetings, based on the 2020 proxy season, companies may want to cover how they will handle technical glitches and other matters of shareholder interest in their proxy statement.
The post argues that, contrary to popular assumptions, activist investors can increase long-term value by improving productivity, innovation and focus. One study found that, when a hedge fund makes a 13D filing, firm value increases by 7% with no long-term reversal. Separate research discovered that even after the hedge fund exits, stock prices keep rising for the next three years, contradicting common concerns that hedge funds “pump and dump”. Another study found that hedge funds increase plant productivity, primarily through raising labor productivity. A fourth paper finds that while hedge funds cut R&D expenditure, more patents are generated, and patent quality increases. Hedge funds’ effectiveness is likely due to three reasons: portfolio concentration, resources, and incentives.
Gillian Tett suggests a Biden presidency could be beneficial to environmental, social, and governance (ESG) investing, as it might bring in changes to rules around ESG investing and corporate disclosures. Such changes "could accelerate capital flows into the sector, pushing up prices for assets—or delivering what Larry Fink, head of BlackRock, has described as an ESG 'momentum' trade," she argues. Tett cites a transatlantic investment rift opening under the Trump administration, with European regulators and officials rushing to adopt ESG-friendly standards. "The European Central Bank, for example, is setting capital markets benchmarks by getting involved with green bonds. Regulators are moving to embrace the Task Force for Climate-Related Financial Disclosure [TCFD] system," Tett notes. She also reports that the European Commission (EC) is finalizing a taxonomy to define green holdings. Tett refers to Standard Chartered chair José Viñals' statement that this is "pushing financial companies around the world to consider ESG factors." In contrast, the U.S. Securities and Exchange Commission has balked at establishing a scheme for ESG investment. "American regulators seem uninterested in imposing TCFD," Tett observes. The rift is making the EC the de facto global standardization body for big finance groups, and making domestic U.S. players more cautious of ESG than Europeans. An RBC Global Asset Management survey found just 74% of American financial groups believe ESG boosts performance, versus 78% last year; that ratio rose to 96% and 93% in Europe and Asia, respectively. "In ESG, Europe is way ahead of the U.S.," said EY's Carmine di Sibio. "The sustainability issue became a very political issue starting 10 years ago in the U.S.—views are different depending on what party is in office." Tett therefore thinks the prospect of a Biden administration being more favorable to ESG "is likely to spark a portfolio shift—particularly as more U.S. investors are forced to contemplate the degree to which tough climate change regulation could reduce the value of assets like fossil fuel stocks."
Hunton Andrews Kurth partner Steven M. Haas writes that many retailers are bracing for shareholder activism in late 2020 and early 2021. The Covid-19 pandemic largely curtailed activist hedge funds in the spring, but as investors and companies have shifted to the “new normal,” activist hedge funds will start engaging with new companies. The retail industry is especially vulnerable to activists who build up shares at historically low prices and then pressure companies to shift strategy. "We expect the primary activist thesis in retail to be driven by [mergers and acquisitions], as activists take positions in companies and try to initiate sale processes." Also anticipated is pursuit by activists of operational changes and replacing senior management teams, particularly in cases where activists are of the opinion that retailer is not aligned with changes in technology and consumer preferences. "Balance sheet strategies (e.g., pushing for an extraordinary dividend or stock buybacks) are much less likely in the sector given the financial condition of most retailers and uncertainty about when the industry will fully recover," Haas says. He expects brick-and-mortar retailers will be most susceptible, while e-commerce retailers will be less, but not completely, vulnerable. "Regardless of the thesis, the activist is likely to be highly critical of retail management's handling of the Covid-19 pandemic—including claims that management did not react quickly enough or, in some cases, overreacted and missed opportunities," Haas observes. "Retailers should assess their vulnerability to shareholder activism and review their preparedness."