News from the U.K. this week shows the limitations of activism in that market. While 2018 has seen a quiet buildup of activist positions, even setting up the possibility of a record year despite (or perhaps because of) the instability caused by Brexit negotiations.
Discontent over The Restaurant Group’s acquisition of Wagamama – a pan-Asian chain of eateries – surprised quite a few onlookers by falling short at the final hurdle when shareholders approved a necessary rights issuance on Wednesday. Although 40% of votes were cast against the deal and shareholders like Columbia Threadneedle, Vivaldi Asset Management and GrizzlyRock Capital grumbled about valuation, as far as I can tell no advisers were retained by activists to review options. Crystal Amber, a U.K. activist fund that previously held shares in The Restaurant Group according to Activist Insight Online, appears to have exited its stake two years ago.
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Part of the issue may have been that since the vote was on the side of the acquirer (Wagamama is private equity-owned), there was more value at risk than could be easily created. Even so, with a 40% drop in the share price over the last week and the chance to burnish credentials with institutional investors, there was something to be gained.
U.K. advisers I spoke with this week suggest a few different takes on the failure of opposition to snowball. First, public opposition to the deal came too late – just two weeks before the vote. Second, traditional British deference to management kicked in. Third, a concentrated shareholder register with several supportive constituents: Royal London Asset Management, Schroders, and J.O. Hambro among them.
Companies can do little to help these advantages, at least in the short term. The more interesting questions relate to how passive and active managers were wooed. A shareholder presentation naturally focuses on Wagamama’s growth prospects and potential new retail avenues The Restaurant Group could help facilitate. That will likely have helped sway the active managers, who will be smarting from tough markets and overseas buyers snapping up British assets. Passive managers, meanwhile, could fall back on support from proxy advisory firms (Institutional Shareholder Services brushed off concerns about valuation and leverage to support the deal) and the company’s relatively spotless governance record.
Any acquisition exposes a company to scrutiny and demands proper execution, so The Restaurant Group is arguably not even out of the frying pan yet. Nervous managers can nonetheless content themselves by knowing that activism is only a possible flavor to M&A in the current climate, rather than a guaranteed side.
What do Campbell Soup and advertising agency MDC Partners have in common? All unhappy companies are unhappy in their own ways but sudden dislocations in stock price connected with earnings reports, very public CEO recruitment drives, and ensuing strategic reviews may explain why both companies have issues with activists this year. While Campbell Soup settled its proxy contest with Third Point Partners earlier this week, MDC Partners’ campaign is just beginning, after FrontFour Capital Management went public with its concerns on Wednesday.
Defense strategies might differ too. Campbell Soup had large quasi-insider ownership that it could fall back on so held out until the last minute before driving a tough settlement. MDC has said it was disappointed FrontFour went public with its concerns but held out the prospect of further talks. Unlike Campbell, its CEO stayed on to oversee the search for his successor. That gives it some stability but could be a wildcard factor in determining how hostile a path the situation takes.
Quote of the week comes from a Barclays analyst report on United Technologies’ (ticker UTX) three-way split – a decision that gives activist investors Third Point Partners and Pershing Square Capital Management what they wanted but with a warning that costs associated with the breakup would be high at $2.5 billion to $3 billion. Barclays’ team picked up on another red flag, while maintaining that a sum of the parts valuation suggests a 20% upside from current trading levels:
“We had anticipated an 18-month spin process relative to UTX’s guidance of 18-24 months. The longer spin process may put UTX shares at risk of ‘spin limbo’; on average in between the spin announcement and spin close, the last 13 industrial stocks undergoing spins have underperformed the S&P by 4%.”