I’ve been told for as long as I can remember that retail is a graveyard for activists, and yet they keep coming back. Indeed, this week’s big campaign launch, at Bed Bath & Beyond, was a long time coming.
Bed Bath & Beyond was one of the first companies covered on Activist Insight Vulnerability, our predictive tool. Eight months ago, we ran a follow up article commenting that the case was “more compelling than ever – not least because the stock is substantially cheaper.”
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Among other things, Bed Bath & Beyond has been unresponsive to shareholder rebellions on board composition and pay at its annual meetings, and a variety of strategies including share repurchases, acquisitions, and digitalization, have failed to improve profits. Belatedly but unsurprisingly, a trio of activists has now nominated a 16-member slate to overhaul the company.
Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors have pedigree but their plan is an ambitious one. (Joshua Schechter, a former Steel Partners executive and activist representative on several boards according to Activist Insight Governance, has been nominated but is not a shareholder). Full-board slates can easily be interpreted as overreach. Nominating one at Deckers Outdoor cost Marcato Capital Management board seats a couple of years ago.
Nonetheless, to force out 16-year CEO Steve Temares and octogenarian co-chairs (and co-founders) Warren Eisenberg and Leonard Feinstein, a majority slate is the very least the activists could have advanced. As Macellum has found at Citi Trends, where it is currently fighting its second proxy contest, one seat is often not enough. And given that Bed Bath & Beyond will likely respond with some board refreshment before the annual meeting, even a partial victory could create an unstable dynamic. Insider ownership is just 5.5%.
A key question is why it has taken this long. Certainly, other activists have looked at the stock and passed (only Third Point Partners ever disclosed a stake, in 2014). The decline of Sears Holdings and Toy R Us, plus the growth of internet-only retailers Wayfair and Amazon, scared off many investors. One I spoke to this week cited Bed Bath & Beyond’s lack of a strong private label or online business. “It’s a shame activists have to focus on returns,” he quipped.
Analysts at Raymond James this week noted that the company’s third quarter earnings report could be interpreted as a sign the stock had hit rock bottom. Even so, short interest had soared to 30% - a factor that might have contributed to the 25% rise in the stock price when the activists announced their intentions.
The fact that analysts at both Goldman Sachs and Raymond James think Bed Bath & Beyond is now a takeover target probably helped too. According to the latter, “The math is even compelling if we postulate a sale of buybuyBABY and Cost Plus World Market, which would reduce a sponsor's cash investment.” It says the company could be bought for a $3.8 billion enterprise value at only 5.1 times 2019 EBITDA. Plans announced this week by Wayfair, one online retailer, to build a physical store could herald a buyout as unlikely as Amazon’s acquisition of Whole Foods Market two years ago.
Wells Fargo analysts were a little more circumspect, seeing less radical change as a result of the activist play. “[W]e wouldn’t chase shares higher here, as we anticipate a long process with success not guaranteed, and calculate relatively low value (~$300-400M for buybuyBABY) and potential dis-synergies from divestitures (as many stores are combined),” they said in a note this week.
Regardless of this chatter, the weeks ahead will likely be filled with debates about how Bed Bath & Beyond can restore lost earnings and same store sales. As my activist, who has stayed away from the stock, says, “Just because there’s competition, doesn’t mean you have to lose.”
Another interesting proxy contest this year is that launched by M&G Investments at $4.2 billion market-cap Canadian methanol manufacturer Methanex. A mere description of M&G, a U.K. retirement and savings business (currently in the process of separating from insurer Prudential), reeks of bowler hats and cautious stock picking – a video on its website says it prefers “companies run by sensible people.” That it should be engaging in a proxy contest is a case study in why activism is spreading outside of hedge funds.
M&G is arguing Methanex should find a joint venture partner before engaging in risky new investments, and has been pushing for share repurchases since 2016. Indeed, it says that course would allow for a more “conservative balance sheet” than if Methanex presses ahead with a methanol gas processing plant in Louisiana on its own. For its part, the company says M&G has developed “a short-term focus on share buybacks,” that the activist’s announcements contain “numerous misstatements, contradictions and factual inaccuracies” (which it did not detail), and that it had returned $1.6 billion (USD) to shareholders through dividends and buybacks since 2014. The relatively short contest should conclude April 25.
Quote of the week comes from international law firm Pillsbury and communications adviser Abernathy MacGregor, which this week published a guide to private equity firms considering dipping their toes into activism in a piece entitled “Wake up the Raiders.” Given activists are increasingly playing by private equity’s rules, activism may look attractive. Key to the advice, however:
"Not only do such fights generate outsized attention, but the novelty of private equity fully and publicly diving into activism may generate even more attention and could prove costly for all parties involved."