Bill Ackman’s much-derided investment in Starbucks might just represent the influence of activism, not its impotence.
News broke this Tuesday that the Pershing Square Capital Management boss had taken a more than 1% stake in the coffee chain, which was soon followed by a 44-page presentation entitled “doppio” or “double” in Italian, to match the stock’s prospects. Shares rose 2% on the news, showing the market gave Ackman some credit even if financial pundits mocked it as a “hidden gem,” before ceding those gains in Wednesday’s sell-off.
Of course, the mockery is as unsurprising as the target. According to Activist Insight Vulnerability, 16 activists were in the stock before Ackman’s announcement, albeit with tiny stakes. Starbucks had been thought of as an activist target since May – Bernstein analyst Sara Senatore hosted a call on the subject that we wrote about in our Half-Year Review. Shortly thereafter, the stock was hammered by a guidance reduction. Given how many companies have been targeted after an event-driven turn in the share price by activists desperate for value (look to Symantec or Papa Johns for examples), it was only a matter of time before Starbucks got roasted.
What’s notable about Starbucks is its adoption of the mentality, “be your own activist” (or else, its ability to wake up and smell the coffee). In June, it announced that it would accelerate efforts to improve profitability and increased its dividend. Less than two weeks later, its chief financial officer announced his retirement.
For now, Ackman isn’t making a wish list. “We believe Starbucks’ recent challenges are fixable with appropriate management execution,” his presentation noted. A relatively simple business, Starbucks had already effectively sold its packaged goods business to Nestlé. More than half Pershing Square’s base case for earnings growth is topline-driven: in essence, the activist is betting on Starbucks’ growth in the U.S. and China.
Nobody expected Starbucks to just sit around. On top of its historical record of growth and good governance, board members Myron Ullman, Javier Teruel, and Satya Nadella have a history of interacting with activists – the first two directly with Ackman’s efforts to overhaul JC Penney. It remains to be seen whether they will welcome Ackman more enthusiastically than in 2011.
Yet backseat activists – riding changes led by others – can also bite. This month alone General Electric and Perrigo, which have activists on their boards, changed their CEOs after 14 and nine months respectively. Ackman may ride Starbucks for a short while and then jump to another new idea, as he did with Nike recently. But he could become an agitator further down the road, pushing for management changes or a spinoff of the Chinese business once it has reached a healthy scale.
A busy week for Trian Partners, which announced a new stake in PPG Industries and was reportedly considering a bid for Papa John’s International. Handily, Wednesday and Thursday’s market turmoil has taken off some of the gains that the pizza chain recorded in the wake of that report. Less handily, the activist starts work at paint and specialty coatings company PPG at a disadvantage, revealing its stake just after the stock sold off on earnings.
Hat tip to Don Bilson for pointing out that Trian’s Nelson Peltz sat on the Heinz board with former PPG CEO Charles Bunch, who came to the activist’s defense during last year’s battle with Procter & Gamble. Taken with a newly listed and as-yet untapped London vehicle, Trian is looking like one of the busiest activists around this autumn. It’s unclear whether the Papa John’s buyout would be from fund capital, Wendy’s equity, or a newly formed holding company, but it has been creative and opportunist in its fundraising of late.
Quote of the week comes from Third Point Partners’ call for Campbell Soup to wait for the end of its proxy contest before hiring a new CEO, arguing that a new board with a fresh mandate and a plan would be better placed to lead the recruitment effort. While Campbell’s board may well choose to appoint an insider to the role, Third Point is making an aggressive legal threat by saying any change of control provision included in a new contract could be subject to litigation:
"Any termination payments that this board agrees to in conjunction with hiring a new CEO in the middle of this proxy contest may be grounds for an action for recovery of corporate waste and a breach of fiduciary duty against those directors who provide such a golden parachute."