This New Activist Fund Is Shaking Up Europe

Bluebell Capital Partners was up 1% year to date at the end of August, versus the STOXX Europe 600, which has returned -11.3%. The European activist hedge fund is fairly new, but its co-founders are not new to the activism scene. They spoke to ValueWalk about their background, brand of activism, strategy, and two of their positions.

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Background on Bluebell

Bluebell was co-founded by Giuseppe Bivona, Marco Taricco and Francesco Trapani, who all serve as chief investment officers. Bivona and Taricco each have about 25 years of financial experience with U.S. investment banks (Goldman Sachs, Morgan Stanley and JPMorgan). Trapani is the former CEO of renowned Italian luxury company Bulgari, which delivered a total shareholder return of 17% per year throughout his tenure until he orchestrated the sale of the company to LVMH in 2011. Trapani's operational and management skills complement Taricco and Bivona’s financial skills.

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The activist fund focuses predominantly on medium-to large-cap companies within Europe, which means companies with market capitalizations of between €2 billion and €15 billion, and which they believe to be high-quality businesses in attractive sectors, generally without a controlling or reference shareholder.

They launched the $75 million fund in November 2019, although they had been working on high-profile activist situations for over six years as co-investors alongside big-name activist funds such as JANA Partners, Elliott and Third Point. In their previous advisory business, Bluebell Partners, they took what they refer to as a “principal advisory approach” on these investments. They see a huge opportunity in front of them, with European activism being in its infancy compared to the U.S. and with twice as many potential target companies, coupled with a lack of competition as there are few managers operating within their focus area.

Activism in Europe

For the most part, the Bluebell team is working alone on their activist campaigns, although they can and do selectively invite co-investors (either institutional investors such as family offices and pension funds or other larger managers with whom they have a relationship) alongside them when they see a need for larger critical mass. This is the case in two of the 12 positions currently in the portfolio.

Bluebell's brand of activism differs from the very public activist campaigns that are common in the U.S. because European culture is quite different.

"Activism in Europe is certainly different to U.S. activism, for a number of reasons," Taricco said. "Firstly, European companies tend to be well behind the U.S. in terms of activist preparedness. Activism in Europe is typically conducted behind closed doors as opposed to in the U.S., where public proxy fights are much more common. Last but not least, there is certainly a cultural barrier in continental Europe to consider; activism needs to be adapted to account for these local differences and specificities."

Mediobanca

Taricco spoke about their long position in Italian specialty finance business Mediobanca. The firm has a €6.3 billion market cap, and they see healthy metrics across the board but with significant room for improvement in a number of key areas in which to create shareholder value. Bluebell sees upside of around 50%, excluding the value of its 13% stake in Generali, the third largest insurance company in Europe and the largest in Italy. They also see further upside which could be created by spinning off that stake.

Bluebell identified potential improvements in all four key areas in which their campaigns fall under: strategy, operational efficiency and transparency, capital allocation, and governance. The firm believes that the company's investment banking activities have lost their edge, as they have no growth, increasing costs and significant erosion in market share. They believe the increased focus on wealth management is not yielding the expected results. They also argue that with €38 billion of assets under management, the bank's wealth management business is still significantly under-scale.

The “holding function” division was set up in 2016 to house all central costs, treasury and ALM activities, and their leasing activities. The Bluebell team believes this division is overgrown and has a share of costs equal to 15% of the total cost base, well above the average central cost base of key Italian banks at around 5%. An overgrown holding function also makes it impossible for investors to understand the transfer pricing applied to funding across divisions.

Generali and corporate governance

The team added that in excess of 40% of Mediobanca’s regulatory capital is locked into the Generali stake. Not only do they believe that the stake has no strategic value, but they also see it as hindering growth both at Mediobanca and Generali.

Finally, the current bylaws call for any shareholder proposing a full list of directors to include senior employees of Mediobanca within the top three positions. The Bluebell team believes this self-perpetuating mechanism is what brought the bank to rest on its laurels, overpay top management and keep control over Generali to maintain their outsized influence.

They believe that Mediobanca’s holding-like structure and uncertainties about excess capital deployment and a disproportionate amount of regulatory capital locked into Generali have stood and continue to stand in the way of the market fully appreciating its equity. The Bluebell team is currently in discussions with top management and board members ahead of the company’s upcoming annual general meeting at the end of October.

Cineworld and Cineplex

Bluebell is a long-biased fund and at the moment only has long positions in the book, but it may opportunistically take single-name short positions if the team identifies a particularly compelling opportunity. Their prior advisory business was, in fact, founded on a short idea: Monti dei Paschi di Siena, famously quoted as “an Italian story of incredible value destruction.”

Bivona told us about their short involving Canadian movie theater operator Cineplex, a position held earlier this year. Cineplex was the target of a cash deal by U.K.-based Cineworld, announced last December just before the outbreak of the COVID-19 pandemic.

Bluebell Capital went short on Cineplex because both Cineplex and Cineworld were at risk of survival due to the pandemic. Bivona said they also believed that the Cineplex deal was totally wrong for Cineworld because the resulting company would be extremely leveraged. They believed that in the long term, the deal was not in the best of interests of Cineplex as the future of the company would be put in jeopardy.

BlueBell Short thesis for Cineplex

"We took a short position in Cineplex on the basis that the deal would not and should not happen. The social consequences for Cineplex, as well as for Cineworld, could have been huge,” Bivona explained.

He said the deal was subject to approval from Canada's Ministry of Culture, so they reached out to the regulator and explained why they believed the ministry should not authorize the deal. The expected timeline for the authorization to be released by the Ministry of Culture was extended as a result, but in the end, the deal was not authorized.

As a result, the deal was called off, and Cineplex shares, which had been artificially supported by the bid from Cineworld, corrected in an industry which had been severely affected by COVID-19. The Bluebell team had expected that the deal would fail, but since they are an activist firm, they stepped in to affect the outcome instead of just betting that it would fail.

This article first appeared   on 10/05/2020 on ValueWalk Premium.