This article was first published on Activist Insight Online on February 20, 2020. For more information about the product, click here.
While data shows that the number of activist campaigns is declining in Europe, particularly from U.S.-based investors, industry experts believe that the opposite is happening. Activist investors are still setting their sights on European companies but they are doing so in a much more cooperative manner, pushing for changes behind the scenes instead of launching public battles.
According to Activist Insight Online data, 27 European companies, including those based in the U.K., were targeted by U.S.-based activists in 2019, down 29% from last year.
For the engagements that became public, activists were far from aggressive. Trian Partners was relatively quiet about its June 2019 position in industrials products distributor Ferguson, which the activist said it would engage regarding the maximization of shareholder value. At the November Sohn conference in London Trian partner and senior analyst Brian Baldwin said Ferguson intends to demerge its U.K. operations and added that a U.S. listing would attract U.S. shareholders, which could plug the valuation discount to similar U.S. peers. The firm said in September it would spin off its U.K. operations and recently said it was considering a U.S. listing.
Elliott Management also took the quieter route in its push for ThyssenKrupp to boost performance and simplify its business structure, Pernod Ricard to boost margins and change its corporate governance structure, SAP to improve earnings, and Bayer to end litigation over its weedkiller by seeking a collective settlement. Third Point Partners has also had relatively quiet engagements with Nestlé, where the activist has sent a couple of letters, and EssilorLuxottica, where it said it sees scope for governance improvements.
Valuation is key
Undervalued firms are what draws U.S. activist investors out of home territory and into international markets, according to Greenbrook Communications managing partner Andrew Honnor. With the U.S. market “very intensively looked after now,” Honnor thinks that the number of U.S.-based activists investing in Europe will continue to increase due to the sheer amount of companies “that have a great value opportunity and are ripe for improvement” on the continent in particular.
Kepler Communications senior consultant Michael Henson also asserted that “as U.S. public equities became picked over, it was natural that certain activist funds would start looking abroad.” While Henson outlined M&A as a demand trend, he believes this is only activists capitalizing on sectors undergoing periods of consolidation.
Elliott has seemingly been at the forefront of this trend, recently playing a part in Capgemini sweetening its takeover bid for Altran Technologies, pushing against the transaction on the grounds that it undervalued the target.
While activists have increasingly demonstrated a desire to keep things out of the limelight through amicable engagements, European companies have also been responsive to their demands. ThyssenKrupp, Nestlé, and Ferguson have all agreed to implement at least some of the activists’ reported requests.
Georgeson’s global head of activism and M&A, Cas Sydorowitz, noted that activist campaigns can be hugely disruptive for a company. “I think previous examples have heightened sensitivity for boards to look to engage so they don’t draw down the shutters or shun activists,” Sydorowitz told Activist Insight Online. “No one wants to spend three to six months fighting an activist in a huge media campaign that is sapping 20% to 30% of their time.”
Yet the activists also run risks when launching campaigns. Sydorowitz noted that most activist investment firms have concentrated portfolios of between six and 12 companies, putting their reputations at greater risk if they don’t find success. With smaller portfolios, investors are inclined to challenge the fund more and are a lot more critical. “If they’re going to run a campaign they need to be sure that there’s a path to success,” he noted. “And if they don’t have a route to success, you see activists being less vocal and keeping things behind closed doors.”
Honnor mimicked this sentiment in his assertion that smaller firms may be more willing to run a publicly aggressive strategy, but there is an assumption that “a lot of North American funds wanted to be careful coming to Europe and not just repeat the U.S. playbook of aggressive public demands.” Honnor noted that U.S. activists are “culturally sensitive” to what strategies will work in their favor and how to be constructive with European boards.