The coronavirus pandemic forced some activists to surrender first mover advantage by putting public campaigns on hold. However, this week companies have been faced with evidence that they cannot expect big decisions to go unchallenged.
Q1 2020 hedge fund letters, conferences and more
On Tuesday, the London office of Elliott Management issued a public letter to Alexion Pharmaceuticals, a company it first targeted in 2017 and pushed to sell late last year. As the activist acknowledged, it took Alexion’s announcement of a strategic review in good faith and agreed to give management more time to prove itself. Then, the gloves came off again.
Alexion's Stock Performance
The spark was Alexion’s decision to purchase Portola, a commercial-stage drugmaker that focuses on blood disorders, for $1.4 billion. Although Alexion’s stock had clawed its way back to par for 2020 following March’s selloff, the deal’s announcement on May 5 sent shares down sharply. Although they have recovered a little, the shares are now down 7% year-to-date.
“To date, we have kept our dialogue with you private for the most part in an effort to be as constructive as possible,” Elliott wrote in its letter. “However, the Portola announcement’s profoundly negative impact on shareholder value – erasing approximately $1.7 billion from the company’s market capitalization in a single day – has led us to conclude that a broader public discussion about the best path forward for Alexion is necessary [Emphasis in the original].”
Early next week, we’ll learn to what degree investors punished the board of directors at Wednesday’s shareholder meeting. The results (along with those on a proposal to lower the special meeting threshold to 10% from 25%) could add weight to Elliott’s case. The first green shoots of M&A, with reports that Uber may acquire GrubHub in an all-stock deal, must add to the sense of vulnerability on the part of some at-risk companies.
OneSpaWorld's Capital Raising Issues
Even more worried should be those planning, like OneSpaWorld, to raise capital to keep their balance sheets strong. The Bahamas-based company, which runs spas on cruise liners and in resorts, said on April 30 that it wants to raise $75 million to sustain its operations without its spas reopening for 24 months and to fund improvements and growth opportunities.
Deep Field Asset Management, a Beverly Hills, California-based investor with no previous history of activism, responded on the day OneSpaWorld reported earnings that the terms of the proposed capital raise were “egregious and objectionable.”
Attacking the company for not announcing cuts to directors’ salaries, despite furloughing staff and suspending the dividend, Deep Field speculated that the company may have between three months’ and one year’s worth of liquidity, giving it time to find a more equitable solution. And because the capital raising is subject to a shareholder vote on June 10, albeit one in which insiders – including the board of directors with 12% and private equity firm L Catterton with another 16% – can vote, the activist is planning a “vote no” campaign.
All of which indicates that companies can still invite activism in the midst of a pandemic. This week’s events are merely the opening salvos in a brand-new climate and it is uncertain whether they will be successful. But as M&A, capital raising, and other forms of corporate activity return, so will activism.
Nominations and shareholder proposals continued to pour in over in Japan, where an interesting trend sees activists coming back for a second run at companies they targeted last year. Dalton Investments is seeking a board seat at Shinsei Bank and Fir Tree Partners three at Kyushu Railway. Both activists were unsuccessful in 2019’s proxy season but have been beneficiaries of increased payout or buybacks as they prosecuted their campaigns. Even that may be beyond Oasis Management’s new campaign at Hazama Ando, where the company has rejected calls to buy back shares, citing financial risks associated with the COVID-19 pandemic. As I wrote last week, however, a relatively mild pandemic for Japanese balance sheets could increase pressure on companies to go further and faster. This trio will be interesting to watch.
Quote Of The Week
Quote of the week comes from Starboard Value’s surprise announcement after the market close last night that it would be voting for GCP Applied Technologies’ poison pill, in an effort to rebut GCP’s inference that it is working with 40 North to gain creeping control over the company:
“In order to make this clear and avoid any confusion as a result of misleading statements that the company is making with regards to our intentions, we are making it known that Starboard has determined to vote our shares ‘FOR’ the ratification of the amended rights agreement that is being submitted for approval by stockholders at the annual meeting,” the activist wrote. “Rest assured, our interests are directly aligned with yours.”
