Yesterday’s first major foray into activism for D.E. Shaw, a $40 billion hedge fund firm better known for quant investing, should be a cause for concern among activists.
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In a public letter to natural gas producer EQT, the 4% shareholder said it would support the company’s bid for Rice Energy only if the company committed to certain steps it said could unlock an extra $8 billion in value. Given that Jana Partners this week launched a solicitation to vote down the deal, D.E. Shaw’s proposal may tempt management if it looks short on votes.
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Equally, the terms might prove too costly to swallow. D.E. Shaw wants EQT to immediately appoint midstream specialists to its board, and commit to splitting itself in two after the transaction, separating the combined company’s production and upstream assets from its midstream assets. It then recommends a merger of two separately listed partnerships, EQT Midstream Partners and Rice Management Partners, which EQT Midstream would control. EQT Midstream itself would be a potential takeover target, the firm suggests.
D.E. Shaw’s campaign is being led by its portfolio manager, Quentin Koffey, who joined the firm quietly earlier in the year from Elliott Management shortly after the activist wrapped up a campaign at Marathon Petroleum that bears some similarity to the EQT plan. Koffey, whom even defense advisers privately seem to like, was one of many Elliott portfolio managers who adopted activist tactics at a time when the firm was better known for its technology activism.
Like Elliott, D.E. Shaw is a sprawling collection of strategies with billions of dollars under management to back up its conviction. Hiring an experienced activist like Koffey may not mean a full-time preoccupation with pressuring companies into doing its bidding, but indicates it can be heard in the din of the campaign.
Of course, D.E. Shaw could end up boosting Jana’s campaign. Barry Rosenstein’s fund opposes the deal, wants to split the company on broadly the same lines as D.E. Shaw, and could benefit from Koffey’s support if management chooses to snub his contribution to the debate.
On the other hand, Jana has yet to lay out a positive case for its activism. That may be mechanical – the vote on the Rice Energy deal comes before the company’s annual meeting, when it is expected to nominate its co-investors: the president of Atlas Energy Group, Daniel Herz, and Jonathan Cohen, son of Atlas’ CEO – but it also means Rosenstein’s hedge fund is behind in the race of ideas. While we know Jana supports a split, to the extent its ideas differ from D.E. Shaw’s it may have to play catch up if it still wants to block the deal.
Moreover, consider that the activist hedge fund model might be losing its appeal. According to Activist Insight data, of primary focus funds based in North America, two-thirds have seen assets under management decline since 2015. Co-investment funds for single positions, such as CSX, or a lift for certain portfolio items, such as Nestlé or Procter & Gamble, have become more popular.
In this environment, Jana has become the go-to activist for boutique investment advisors or frustrated shareholders. It pushed Whole Foods Market into a sale earlier this year after Neuberger Berman trawled Midtown for activists willing to take up the standard and brokered a board seat for former Bulgari CEO Francesco Trapani at Tiffany’s & Co after being pitched by London-based Bluebell Partners. EQT marked a return to energy for the fund, an area in which it was particularly active before prices cratered.
Jana, a 6% shareholder, and D.E. Shaw, a 4% holder, may now duke it out to influence the future of EQT. Their rivalry could portend the future of activism.
Article by Activist Insight