Uncertainty over Brexit is finally over for European activists, but 2021 brings a new set of challenges stemming from the COVID-19 pandemic.
Nearly a dozen activists active in Europe interviewed for this article appear optimistic about the opportunities ahead in 2021, but agree companies face unique challenges and require urgent changes. Failure to adapt to the new environment makes them vulnerable to both activism and M&A.
Change or die
“It’s not necessary today to convince anyone that change is needed – it’s about ensuring that the right changes are being made, and for the right reasons,” Harlan Zimmerman, a partner at pan-European activist investment firm Cevian Capital, told Activist Insight Online. Cevian took a large stake in Pearson last year, just after the pandemic selloff in March and as the company was pursuing a leadership transition.
“COVID-19 will oblige companies to re-engineer themselves, adapt the business model, [and] compete in a generally harsher environment,” Marco Taricco from Bluebell Capital agreed. Bluebell was active last year at Hugo Boss, where it successfully pushed for a CEO replacement, and Mediobanca, where it lost a proxy fight for four board seats.
“Those companies that have done the homework and have used the crisis will come out strong and take market share, opening performance gaps to companies who have not been active enough,” Till Hufnagel from Petrus Advisers said. Petrus targeted three companies in 2020, including Aareal Bank for its high executive compensation. For Hufnagel, it was more difficult to engage physically in 2020, but he took advantage of easing lockdown measures in mid-summer to catch up with his portfolio companies.
Failure to adapt quickly to the new environment leaves companies vulnerable to M&A. Uncertainty in the markets demands “capital discipline” from companies and portends “heightened deal-making,” Adam Epstein from Teleios Capital Partners told Activist Insight Online. Last year, Teleios successfully pushed Aareal Bank to sell a stake in its software business Aareon, and gained two board seats at Maisons Du Monde following a settlement.
The end of Brexit and a possible re-rating of European assets could “lead to more companies trying to buy competitors at a low price after the impact of the pandemic deteriorated their businesses,” Catherine Berjal, partner and CEO at French activist CIAM, said. CIAM last year targeted Belgian personal hygiene solutions manufacturer Ontex Group, and publicly opposed a poison pill implemented by Suez, which is fighting against a takeover by rival Veolia. Berjal said many investors expressed their opposition to Suez’s poison pill and are now “ready to dismiss board members at the next shareholder meeting.”
Indeed, 2020 was already a strong year for transactional activism. According to Activist Insight Online data, 17 companies were targeted with “push for M&A” demands in 2020, matching 2019’s record. This high number was achieved despite the overall activism activity falling double digits in 2020. At the same time, “oppose M&A” demands declined from 23 in 2019 to 15.
Some markets remain extremely attractive from a valuation standpoint. Gatemore Capital founder Liad Meidar believes this is a “golden age” for activism in the U.K., citing low valuations, less competition from other activists, and the end of Brexit. “U.K. arguably has some of the deepest value opportunities,” Meidar said. Gatemore last year saw a multiyear turnaround of logistics company DX Group finally bear fruit, as the stock surged more than 170% to a five-year high.
Indeed, U.K. stocks trade at a trailing price-to-earnings ratio of 16, versus 28 for the U.S. and 21 for Continental Europe, according to data from Schroders as of September 30. Even perennial valuation laggards like Japan and emerging markets trade at higher multiples than the U.K.
For some, valuation analysis becomes ever-more challenging in the current environment. Paul McNulty, a partner at Veraison Capital, said it is getting harder to value companies due to a host of issues, including “temporary shut-downs of many sectors, extreme central bank support, pandemic employment subsidies, and continuing evolution to intangible assets.”
The next frontier
Activists largely agreed that ESG is going to be a strong trend in 2021 and beyond. “As an activist fund, G is in part of our DNA, but also E and S are very much at the center of our activity,” Taricco said. Bluebell launched its first ESG campaign last year against Belgian chemical products maker Solvay, where it is pushing to halt the discharge coming from a plant in Tuscany.
“We expect ESG to become much more prominent in the activism space,” Berjal said, adding asset managers will have an “increased role in supporting companies around the world with their transition towards more environmentally friendly activities.”
Meidar said ESG activism represents a test for the space and “ESG initiatives can result in strong investment gains” but such a strategy should be more than just “box-ticking.”