We have talked about G4S plc (LON:GFS) (OTCMKTS:GFSZY), the UK-based security solutions company, a couple of times before. The company now has an activist hedge fund, associated with Carl Icahn, on its back, which reports suggest is calling for a break-up.

Carl Icahn

Carl Icahn backed Cevian Capital wants G4S to sell cash services

Cevian Capital, the Sweden-based hedge fund, is asking the company to sell off a part of its business. Reuters reports that Cevian is pushing the company to spin-off its cash services business which makes up for 25 percent of the company’s profits. In the past months, G4S has been marred by a string of blunders which have seriously tainted the company’s reputation as the largest global provider of security solutions. In a note from RBC Capital Markets, David Greenall and Andrew Brooke note:

“The last 2-3 years have seen a company losing its way somewhat and the likes of the ISS foray, the Olympics issues, the Q1 2013 warning, and the UK Tagging contract issues had allowed the market to question everything from growth potential, to controls, to systems, and clearly management.”

G4S plc (LON:GFS) (OTCMKTS:GFSZY)’ newly appointed CEO, Ashley Almanza, will be informing investors of the company’s plan for growth in a shareholder meeting scheduled for November 5. So far, G4S has not acknowledged any meetings or discussions with the activist hedge fund.

Cevian’s history of activism and receiving criticism

Cevian Capital is Europe’s equivalent of  Carl Icahn, Dan Loeb and Bill Ackman types, i.e. it is an activist hedge fund. Cevian Capital II owns 72,142,365 shares of the company, which amounts to a 5.11 percent stake. The other major holder in the company is the Bill Gates Foundation with a 3.2 percent position, which equals 45,224,081 shares.

Cevian is chaired by Lord Myners, former minister of UK financial services; the fund was founded by Lars Förberg and Christer Gardell in 2002. The hedge fund manages $12 billion and has returned +1.8 percent in the first six months of this year, according to Harriet Angnew from eFinancial News.

Now Cevian has a reputation in its hometown—it is called “the butcher”, a nickname which in the present context of wanting to cut G4S in pieces is ironically accurate. Cevian’s Förberg and Gardell started their aggressive form of activism at a time when Europe was not familiar with the style. As a result, Cevian came under intense criticism, back in 2006 Swedish Prime Minister said:

“I am very skeptical in regards to these venture investors’ way of breaking up companies, it is they who will destroy the national capitalist structures.”

Cevian Capital London did not respond to a request for comment.

Cevian backed by the formidable force of Wall Street, Carl Icahn

The hedge fund has successful activist runs at AB Volvo (OTCMKTS:VOLVY) (STO:VOLV-A) and Swedbank AB (OTCMKTS:SWDBY) (STO:SWED-A) and so many others under its belt. Cevian Capital is backed by one of the most formidable activist investors of the present time, Carl Icahn. He has invested in Cevian Capital funds and has also teamed up with Cevian in shaking up the companies. The two have co-invested in Skandia and Mesto Oyj in the past. According to Financial Times, Carl Icahn invested $180 million in Cevian.

AB Volvo (OTCMKTS:VOLVY) (STO:VOLV-A) has been a long-term holding of Cevian; the fund still holds a position, a 6.5 percent stake, in one of its earliest investments.  At Volvo, Cevian demanded that the company either use its ample cash stash or return it to investors. Along with Icahn, Cevian arranged the buyout of Skandia by Old Mutual plc in 2005-06. As of June, Cevian still holds a position in Old Mutual.

Commenting on the relationship between Icahn and Cevian Capital, Förberg  once said, “He has been a great supporter of ours, …and we have brought him in when co-investment capital has been needed. We have invited him into four situations as a co-investor in the last 3 or 4 years. We have developed a very good personal and professional relationship with Carl.”

Gardell has described Carl Icahn as an occasional tennis partner and a good friend.

The other company that Cevian and Carl Icahn have invested in was Metso Oyj (OTCMKTS:MXCYY) (HEL:MEO1V). The fund currently holds a 13 percent stake in the company, and the position was initiated in 2005. Cevian and Carl Icahn’s fund have also invested together in Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) in 2011. However, Cevian now separately holds over 5 percent of the Denmark-based bank.

Carl Icahn did not respond to a request for a comment.

Currently, Cevian Capital has major stakes in Vesuvius PLC (LON:CKSN), a manufacturer of ceramic products to the steel industry, Bilfinger Group, Tieto Oyj (HEL:TIE1V) (STO:TIEN), an IT solutions provider, Metso Oyj (OTCMKTS:MXCYY) (HEL:MEO1V), a servicer in mining as well as pulp and paper industry and Panalpina Welttransport Holding AG (SWX:PWTN), a provider of logistic services.

Short interest in G4S

G4S was previously a popular short position, however short interest in G4S has waned, and big hedge funds like Egerton Capital, AKO Capital and Adelphi Capital reduced their negative bets in the company towards the end of August. So far, the standing short bets are from Lansdowne Partners and Odey Asset Management; each holds 0.57 percent and 0.7 percent of outstanding shares shorts, respectively.

In a note dated September 18 from Jefferies, Kean Marden estimates that the company could add close to $50 million to EBITA if it revived its underperforming business, however, Marden argues that even if the new CEO follows a successful turnaround strategy, the profits will not be evident in 2014. UBS rates G4S as Neutral and in a recent report, analyst George Gregory expected the company to reiterate the 5-8 percent growth target. Gregory said that, “Relative to peers, margins do not strike us as very low, so focus will likely be on internal improvements, in our view.”

While Cevian has won many scuffles with companies, its magic takes time to perform. It is unlikely that a drastic plan to break up the company would see favor with the board very soon, but Cevian is known to be resilient and G4S has many troubles on its hands right now.