By David Ricketts
Of Financial News
It is shaping up to be a standout year for shareholder activism, with the impact of the Covid pandemic and the lingering fallout from Brexit expected to make the U.K. an ideal battleground for corporate agitators.
"This is the golden age of activism in the U.K.," said Liad Meidar, a managing partner at activist investor Gatemore Capital Management. "It is currently the best activist market in the world."
According to professional services firm Alvarez & Marsal, 59 U.K. companies are at risk of becoming activist targets, accounting for 38% of all those considered "at risk" in Europe.
There is "pent-up demand" from previously reluctant activists, who feared launching campaigns amid ongoing uncertainty and the risk of appearing tone-deaf to greater societal challenges, suggests Alvarez & Marsal.
But with restrictions easing and the vaccine rollout ramping up, activist investors are looking to fire up activity and begin targeting companies that have been left in weak positions.
"There was a hiatus with Brexit," a senior executive at a European activist investor said. "But people are past that and think now is a good time to look again at the U.K., particularly given the low valuations. It makes sense that the U.K. will see a lot of activity."
In the U.S., activism has made stars out of hedge fund managers, including Pershing Square Holdings Ltd.'s Bill Ackman, David Einhorn of Greenlight Capital Inc and Trian Fund Management LP's Nelson Peltz.
Activist stars are rarer on this side of the pond and the image of their effectiveness has no doubt been harmed by Sherborne Investors' notable flop campaign against Barclays PLC over the past few years. One of the big reasons activists have U.K. companies in their sights now: They have been worse hit by Covid than many of their peers in continental Europe.
"We see significant value opportunities in part from the overhangs of Brexit, MiFID II and even the Woodford collapse, which has particularly hit small-caps, said Mr. Meidar.
Another factor that makes the U.K. market more appealing than others, according to Mr. Meidar, is the extent to which there are uniform minority shareholder rights.
"This makes the U.K. far more conducive to generating change," he said.
Kirshlen Moodley, managing director in BNP Paribas SA's U.K. M&A advisory team, said despite a slowdown in campaigns launched in the U.K. and Europe during the past year, the U.K. was now ideal territory for activist funds.
"There are many companies in the U.K. at the forefront of strategic reviews that are in place to robustly drive valuation enhancement, but equally provide a good opportunity for a fund to enter the ownership and purport to accelerate this."
He added: "Large passive funds are becoming more vocal and supportive of change that will drive value unlock in the medium to long term--which an activist fund can help accelerate, sometimes with the tacit support of shareholders."
Covid hasn't dampened activity among some activists, with several notable campaigns waged in the U.K. over the past 12 months.
PrimeStone Capital wrote to St James's Place PLC in October, calling on the U.K. wealth manager to overhaul its "bloated organizational structure" to improve returns for shareholders.
The Mayfair-based investor, which holds a 1% stake in SJP, said the FTSE 100-listed company had "failed to deliver meaningful value for shareholders" over a five-year period and singled out its "overly generous" pay structure, claiming it had more than 120 employees with "head of" in their job titles.
PrimeStone later said there had been "productive and constructive dialogue" with SJP, which went on to announce it would cull 200 jobs and simplify its operations. The wealth manager's share price has risen by more than 27% this year.
Elsewhere, the U.K. pharmaceuticals giant GlaxoSmithKline PLC has found itself in a brawl with Elliott Management Corp., after the U.S.-based hedge fund--run by billionaire Paul Singer--built a multi-billion pound stake in the firm earlier this year.
Glaxo's Chief Executive Dame Emma Walmsley is expected to tell shareholders that she has what it takes to lead a break-up of the drugs company next year, amid rumors that Elliott is vying for a shake-up among top management.
More recently, Cevian Capital, one of Europe's largest activists, has built a 5% stake in U.K.-listed insurer Aviva PLC. It has called on the company to cut costs and return 5 billion pounds ($6.97 billion) of excess capital to shareholders.
Malcolm McKenzie, managing director and head of European corporate transformation services at Alvarez & Marsal, said U.K. companies are at the top of activists' hit lists.
"There are clear signs of pent-up demand starting to be unleashed after activity slowed during the pandemic," said Mr. McKenzie.
"There is no doubt that the corporate disruption caused by the pandemic has created both challenges and opportunities for U.K. companies, even those in sectors seen to prosper during the pandemic."
High-growth companies in sectors such as healthcare and tech are among those that activists have in their sights. Despite most of these companies growing revenues, they have failed to meet expectations on profits, said Mr. McKenzie.
"Combine these sector issues with a broader underperformance by U.K. corporates over the past year, plus the U.K.'s more activist-friendly regulatory environment, and you have the perfect storm for activist intervention," he said.
Now U.S. investors are looking with increased interest at listed companies in the U.K. and continental Europe, said Tom Matthews, head of the global shareholder activism practice at White & Case LLP.
"While that might have tailed off a bit last year as activists gave companies a chance to deal with Covid, 15 months on from the start of the pandemic, we are now seeing the emergence of winners and losers," he said.
"There is a perfect storm of conditions attracting them to the U.K. If you look at valuations of U.K.-listed companies versus their U.S. equivalents, the U.K. is significantly cheaper. Factoring in the dollar/sterling exchange rate, U.K. pricing continues to look attractive."
However, some long-standing campaigns ran out of steam during the pandemic.
Sherborne Investors announced in May that it had sold its entire 6.01% stake in Barclays, bringing an end to a three-year battle the activist had waged with the U.K. lender's Chief Executive Jes Staley.
Sherborne, which is led by Edward Bramson, had consistently called for Barclays to shrink its investment bank, since taking a stake in the U.K. lender in 2018. Mr. Bramson had also pushed for Mr. Staley to go, latterly saying his links with convicted pedophile Jeffrey Epstein should lead to his resignation. The activist also tried to gain a seat on Barclays' board in 2019.
Sherborne ultimately failed to win support from other shareholders, who gave their backing to Mr. Staley and strong performance at the bank. In the first quarter of 2021, profits at Barclays' investment bank were up by 54% to GBP1.3 billion as trading and advisory revenues increased.
Despite the acrimonious relationship between Sherborne and Barclays, Mr. Meidar said "hostile attitudes towards activism" are changing in the U.K., with a growing acceptance of what investors are trying to achieve.
The U.K. is also more of a civil environment, according to Mr. Meidar, who says this "helps to produce a war of ideas rather than a war of personalities."
Mr. Matthews added: "Five years ago, if you said the word 'activist' in the U.K., people would have perhaps reacted negatively. That's changed. As activism has increased and the sophistication of campaigns has improved, there has been an increased understanding by boards and among the wider shareholder base about what they are trying to achieve."
(END) Dow Jones Newswires