Bill Ackman has long argued the benefits of activism, once saying the companies that fight the most to avoid having activists on the board are most in need of one. Now his conviction behind those words is being tested.
On Tuesday, London-based Asset Value Investors wrote a scathing letter to Anne Farlow, the chair of Pershing Square Holdings Ltd (LON:PSH) – a publicly-listed fund Ackman manages – calling its $400 million bond issuance of a day earlier “outrageous.” It wants the debt plan stopped and a more aggressive share repurchase initiated to increase the fund’s leverage, hinting at changes to the board of directors if it doesn’t get its way.
Pershing Square Holdings has yet to comment publicly but shows no sign of changing course. Small wonder, since the intervention may be the best kind of activism that it could have encountered.
First, there is little time to stop the issuance, since the bonds are due to be placed with Guggenheim Partners Investment Management on July 25. The bonds themselves are at a lower interest rate than Pershing Square Holdings' existing debt, a $1 billion note due in 2022. They are also stretched over 20 years, which may be “excessive” to Asset Value Investors’ eye but will potentially limit asset sales or foregone new investment opportunities that might otherwise be required to pay off the note.
Second, Pershing Square Holdings has seen its net asset value rise almost 50% year-to-date. If Ackman can’t defend his right to manage the capital raised in his name (albeit in happier times) with recent performance like that, the game is up.
The stock has followed investment returns – up 40% year-to-date – likely rewarding a new set of shareholders to balance more long-term ones (a process the fund’s transfer to the FTSE 250 may have helped). While, like most activist campaigns, this is another question of pacing or degrees of change, Ackman could argue that extending investment gains is a higher priority than narrowing the stock’s discount to net asset value.
Third, Asset Value Investors' demands are tame by the standards of most closed-end fund activists, which often seek to narrow the discount to net asset value by demanding a liquidation or seek to separate the fund from its external manager. Even if Tom Treanor’s fund did write that "shareholders would likely benefit from a newly reconstituted board," it only owns 3% of the shares, not the 5% required to call a special meeting. The fact that Asset Value Investors hedged 44% of its stake may not endear it to long-only holders.
Finally, Pershing Square Holdings is already paying a dividend and repurchasing shares, and last year added new board members and ran a tender offer for $300 million. It at least has some record it can point to of shareholder-friendly actions.
That said, the lack of public response from Pershing Square is surprising. It would be helpful if its board could discuss and, if necessary, defend leverage targets (although movements in the market tend to make this like slapping a sticker on a moving train).
Even more importantly, shareholders might want to know its priorities for the use of the capital. Not signaling or explaining the bond issuance may have left some shareholders confused as to whether it means to add leverage, pay off existing debt, or sally forth on a new campaign. Such creative ambiguity is catnip to activists.
Permanent capital vehicles have become a popular backstop for activists, and while a closed-end fund like Pershing Square Holdings might be a softer target than, say, Third Point Reinsurance or Greenlight Capital Reinsurance, not to mention Icahn Enterprises, the capital is not permanently at the beck and call of the firm whose name is above the door. Those shareholders are neglected at the investor’s peril.
When he publishes his next quarterly update in August, Ackman should encourage his board to stand up and be counted. He himself should think like a defense adviser – not just an activist.
This must be a week for karma, with not just Pershing Square Holdings but Sports Direct and GAM Holding (okay, a one-off dissident) attracting activist attention. Meanwhile, Elliott Management’s deployments across Europe step up a gear.
Quote of the week comes from Elizabeth Gonzalez-Sussman, a partner in Olshan Frome Wolosky’s shareholder activism practice. Gonzalez-Sussman was interviewed by my colleague, Eleanor O’Donnell, for a story [subscription required] on why founders and ex-CEOs returning to run campaigns at their old companies can be successful.
"Founders have these very detailed platforms because they used to operate the business so they can make a very compelling case for other shareholders to align with and if they have a track record of success they can come back and be very successful," she explained.