Labor Day is fast approaching, the upper classes are packing up their summer whites, and with them into storage may go activists‘ white hats.
I've been speaking to a number of investment bankers about what they see as the near-term future of activism. With toppy valuations, a gentle pull back from activist strategies by allocators, and significant negative press, you might for a minute think that activists would adopt a more modest approach.
There are plenty of ways activism could beat a retreat. Returns could level off, leading to another wave of withdrawals similar to 2016. New private equity or impact funds could fail to raise sufficient capital to replace them. Overseas targets might prove too conservative to shake up. Institutional investors might become less supportive, both in the voting booth and with requests for activists.
Yet the bankers said 2018's proxy season was one of the busiest they could remember, despite the absence of some of the biggest activists from annual meeting ballots. A big ending to 2018 would look a lot like the first eight months of the year, Morgan Stanley's David Rosewater said in an interview, adding that while the pace of proxy fights is situation-specific, the general pace of activism is being driven as much by first-time or occasional activists as the professionals.
Even so, Trian Partners and Pershing Square Capital Management have each indicated they have new undisclosed positions. Advisers are coiled ready for Third Point Partners' next move at Campbell Soup. United Technologies has received clear signals that the result of its strategic review should be a breakup; the consequences if it does not are hazy.
After a period when it felt as though activists were struggling to digest big projects and the gaps between proxy fights lengthened, the next 12 months look like a time for opportunism. Bankers expect plenty of activity even if markets fall and allocators continue to steadily withdraw from hedge funds, citing the ability of activists to raise special purpose vehicles for one-off campaigns. One banker said that even companies well-prepared for activists had to consider the knock-on effects if they attempted to make acquisitions or raise capital just to keep up with the strategies.
And if the S&P 500 Index continues to rise, activists will simply go overseas.
“The risk-reward in the U.S. seems more challenging and larger activists don’t have time for smaller companies that won’t move the needle for their returns," says Steven Barg, co-head of M&A Shareholder Advisory at Goldman Sachs. "If dollar-based funds feel that overseas markets are undervalued or their companies haven’t self-corrected, activists will continue going abroad.”
David Rosewater agrees, saying even if there are a few high-profile defeats, it will likely not affect activists en masse. “Repeated failure to be effective can cause funds to move on,” he said. “If nobody could get anything done, that would be different, but that’s not the case.”
With appraisal litigation languishing as a strategy in the U.S., it continues to be a strategy overseas. Elliott Management, Davidson Kempner Capital Management, and Farrallon Capital Management were among Sky shareholders appealing a floor of 14 pounds per share set by the U.K. Takeover Panel as a mandatory bid for the company if The Walt Disney Company comes to acquire Twenty-First Century Fox before it completes its own takeover of the British broadcaster. Their arguments were thrown out, leaving them reliant on shareholders voting down an offer or Sky's board negotiating a deal at a higher value, but the outcome was a mushy one.
Under the "Chain Principle Offer," Disney should pay other Sky shareholders what it will pay to acquire Fox's existing 39% stake. But as the Panel pointed out "There was no perfect way to identify the value actually receivable by the shareholders of Fox for their interest in Sky." It rejected a valuation based on the increase in Disney's offers for Fox, which would have valued it at 14.59 pounds per share. Also rejected were Elliott's estimate of 15 pounds per share, and Disney's discounted cash flow (DCF) valuation range of 8.80-11.80 pounds. In the end, the Panel gave most credence to the 14 pounds per share Disney ultimately allowed Fox to bid for the outstanding shares of Sky.
A flexible system is not inherently bad. But the Panel's argument that it did not have to accept the Fox and Disney's agreed on value looks shaky. The 52-week high is 15.52 pounds and Comcast is offering 14.75 pounds. Independent Sky directors said the methodology "invited abuse." As the Panel noted, it has only had to rule on chain principle offers five times previously, and none were as complicated as this. Fox will probably end up paying more to control Sky, driven on by Comcast. If both drop out of the race, the Panel's decision might be worth another look.
Quote of the week comes from Sheelah Kolhatkar's long read on Elliott Management in The New Yorker. While few of the facts will be revelatory to followers of Elliott, the article is full of spicy quotes from a perhaps slightly embittered Jonathan Bush, who was recently ousted from his job as the CEO of athenahealth while trying to defend the company against a takeover offer from Elliott. This extended metaphor may be the nicest thing he said about activists.
“A baby left behind, a dog no one untied—they just get picked clean, there is nothing left,” Bush said. “But when they come back to the village there’s no more dysentery. The ants ate everything, even if there was some collateral damage. That’s sort of a metaphor for markets. Sometimes a crisis wipes the slate clean.”