Elliott Management and chief Paul Singer have picked up a couple of new targets this week. The newer of the two, Symantec, has not been officially disclosed, although the other, the Hong Kong-listed Bank of East Asia, is embroiled in a battle against the activist’s attempts to get it to sell itself. Shares of both companies edged higher during regular trading hours today, with The Bank of East Asia up 5.05% at HK$22.90 and Symantec up 4.14% at $19.98 per share.
Elliott said to take sizeable stake in Symantec
The Wall Street Journal reports that Elliott has become one of Symantec’s biggest shareholders, citing its own unnamed sources who reportedly said that Singer supports the deal with Silver Lake and the other announcements it made on Thursday.
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The deal mentioned in the report is the $500 million Symantec received from Silver Lake Partners in exchange for unsecured convertible notes. The tech company has given the private-equity firm a seat on its board and also announced a $2.3 billion share repurchase program as part of a total capital return package amounting to approximately $2.7 billion, including special dividends. This amount is on top of the previous capital return program, which now adds up to $5.5 billion and is expected to be completed by March 2017, reports Reuters.
Symantec has been pressured by tumbling PC sales as its antivirus and security software is typically sold in a bundle with new PCs. Despite the pressure, the tech firm beat estimates for profits and revenue in its third fiscal quarter.
Symantec goes into debt
In a post on MarketWatch, Jeremy Owens notes that despite the influx in cash from the sale of its Veritas information management and storage business, Symantec is choosing to cut costs and go into debt. The reason is for all that debt is because the company is returning all the proceeds from the Veritas sale to shareholders. Symantec will use the $500 million it is receiving from Silver Lake and raise debt to pay for the rest of its massive cash return plan. He notes that unloading all that cash may make it difficult for the company to fund future acquisitions and thus could be a mistake because tech startup valuations are finally starting to return to Earth.
It should be noted though that if Paul Singer has been building a stake gradually in Symantec for some time, as The Wall Street Journal indicates, these plans could have been recommendations made by his firm, particularly the cost-cutting initiatives. Of course we have no confirmation on this, but it is a possibility.
Elliott urges Bank of East Asia to sell itself
Elliott also holds a stake in The Bank of East Asia and this week has been pressuring it to sell itself, although Singer must convince the bank’s two biggest shareholders, reports Bloomberg. Elliott holds more than a 7% stake in the bank, and it addressed shareholders in a letter on Thursday, recommending that BEA look into a sale “at an appropriate premium.” In the past, the premiums on other Hong Kong banks have averaged two times book value, which would be about HK$60 ($7.70) per share.
Elliott’s letter says “Shareholders have long suffered from BEA’s entrenched executive management, which has mismanaged the business, resulting in weak underlying financial and operating performance and poor returns for independent minority shareholders.”
A spokesperson for BEA told the website that Elliott has used the same tactics before and that they believe the actions “demonstrate self-interest rather than the best interests of all shareholders.”
See the full letter below:
We hold over 7% of the ordinary issued share capital of BEA and have been a shareholder for several years.
We believe that BEA shareholders have suffered over many years from an entrenched executive management team which has mismanaged the business, resulting in its weak underlying financial and operating performance and poor returns for independent minority shareholders. We consider that BEA has now reached a stage where the cumulative damage to shareholders’ interests must be stopped.
The current BEA board should finally focus on delivering proper value for BEA shareholders – and in our assessment the only responsible way for the board to do that is to conduct an auction process to explore the scope for a sale of BEA at an appropriate premium.
Underperformance and mismanagement at BEA
BEA shareholders have long suffered from poor returns:
- BEA: Total Annualised Return (“TAR”) of just 2.7% since 19972
- Leading Hong Kong listed banks: TAR of 8.6% since 19973
- Family-run Hong Kong listed banks: TAR of 12.8% since 19974
Based upon TAR over the past 1, 3 and 5 years, BEA has underperformed an index of its peer group Family-run Hong Kong listed banks by 28.1%, 28.8% and 13.1%, respectively.
In our view, this chronic underperformance is attributable to the long-term mismanagement of BEA, combined with the entrenchment of the current executive management team, all of which has come at the expense of BEA’s independent minority shareholders and has prevented BEA from being sold at an appropriate premium to its market value, for the benefit of all shareholders.
The serial usage by the BEA board of the general mandate to place new shares on a selective basis to CaixaBank, S.A. (“CaixaBank”) 5 and Sumitomo Mitsui Banking Corporation (and the related agreements between BEA and those shareholders) from 2007 onwards, for “strategic” purposes has, we believe, assisted in entrenching the incumbent BEA management and led to BEA’s chronic underperformance.
Scope for a sale of BEA at an appropriate premium
BEA has failed to demonstrate that it can remain competitive and generate healthy returns for shareholders as an independent bank, in a market where the best performing banks are backed by large foreign or PRC financial institutions. In stark contrast to BEA, most other family-run Hong Kong listed banks were able to provide attractive returns for their shareholders over the last several years, including by way of an opportunity for those shareholders to sell their shares at a significant premium into a takeover offer. Those takeover transactions were priced at an average of 2.0x book value, which for BEA would equate to approximately HK$60 per share6, or around 185% above the current share price.
Regardless of poor performance and poor corporate governance, the scale and profile of BEA’s banking platform is attractive to any potential acquiror who wants to expand its banking operations in the Greater China region. In addition, BEA finally announced on 19 January 2016 that the long-standing lock-in agreement, which had prevented CaixaBank (one of BEA’s largest shareholders) from accepting any non-recommended takeover offer for BEA without BEA board approval, had been removed.
BEA’s management can no longer rely on contractual lock-in arrangements to assist them in preventing a suitably-priced takeover offer for BEA from succeeding.
CaixaBank is clearly willing to sell its 17% BEA shareholding, because it has currently conditionally agreed to sell it to its parent company, Criteria, at just HK$24.257 per BEA share. Consequently, CaixaBank and Criteria may now have an opportunity to agree to put that related party transaction aside and instead sell the BEA stake at a significantly better price, into a takeover offer for BEA made by a third party, thereby strengthening CaixaBank’s capital base.8 In ourview this would be a win-win outcome for CaixaBank’s shareholders as well as BEA’s shareholders.
In our view, the BEA board should now finally focus on delivering proper value for BEA shareholders, by conducting an auction process to explore the scope for a sale of BEA at an appropriate premium. We have asked the BEA board to do this, but they have so far not responded to our request.