ValueAct Capital’s Investment In Citigroup

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This week, ValueAct Capital Partners was reported to have made two new investments – one hiking from $70 million to $1.2 billion its stake in global bank Citigroup, market capitalization $183 billion, the other a new position in $778 million wood pellet producer Enviva Partners.

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While the latter will be seen as an acceleration of the environmentally and socially focused activism that has many excited and intrigued – indeed, it is the third of six reported positions in the ValueAct Spring Fund to be made public – the former could just as easily be seen as boosting the recent bout of activist positions in banks and financial services companies.

To add to Citigroup, ValueAct has kept a steady position in Morgan Stanley for nearly two years, despite prematurely pocketing some gains after the U.S. presidential election. Brian Kleinhanzl, an analyst at Keefe, Bruyette, and Woods, thinks Citigroup could be Morgan Stanley 2.0. “For Citi, we could envision a scenario where the geopolitical head winds subside in the near term and ValueAct reduces or even exits its position prior to overseeing any fundamental improvements in the company,” he wrote in a note on Monday.

Elsewhere, however, the investment has caused some tremors. Wells Fargo analyst Mike Mayo described its implications as “potentially ginormous,” in a research note. He predicts the stock will double over four years, and potentially sooner with structural changes. (KBW thinks shares are a steady bet, and ValueAct’s earnings projections aggressive.)

Like most large banks, a decision over the combination of the CEO and chairman roles will be controversial – when Chairman Michael O’Neill retires at some point in the next year, the board could choose to reward CEO Michael Corbat with the additional role but given the bank’s missteps in the past, that would probably be a mistake. Beyond that, a breakup or acquisitions are likely to happen only if the current management team is enthusiastic.

One of the pressing questions is why so many activists currently have so many positions in so many banks, including Barclays and Credit Suisse. How can one possibly be the laggard of its peer group?

The answer is in a line quoted by several media outlets from ValueAct’s investor letter. "We believe that in this era of banks, the winners and losers will be decided by strategic focus, customer-centric innovation, and capital allocation, as opposed to product breadth, appetite for risk and investment in trading talent that defined competition in the pre-crisis era," the activist reportedly wrote.

Increasingly, investors view banks less as an asset class and more as a collection of disparate businesses. Campaigns at Credit Suisse and UBS in recent years have focused on the value inherent in wealth management divisions. At Citigroup, the prize asset – to ValueAct at least – is treasury services.

Does this mean the end of the universal banking model, and the reversal of all that consolidation that took place before and after the financial crisis? That is unlikely. In 2016, Goldman Sachs branched out into retail banking, buying GE Capital Bank to boost its asset base.

An activist moving into the financial sector may be less of a bet on structural change, more a relatively passive one on strengthening fundamentals.

Much has rightly been made of the success of a shareholder proposal at Sturm, Ruger & Co by the Interfaith Center on Corporate Responsibility, asking for a report on how the company mitigates harm from the sale of its weapons. BlackRock, which had made a good deal of noise about its engagement with gunmakers, will come out of this looking more influential than ever. “This proposal requires Ruger to prepare a report,” CEO Christopher Killoy truculently told the annual meeting, according to several news outlets. “That’s it, a report.”

At Kinder Morgan, two of three nonbinding proposals passed, leading the New York State Common Retirement Fund jubilant. More sensibly than Killoy, the company’s executive chairman, Rich Kindler, reportedly said the board would “carefully consider the proposals and the information contained in the supporting statements in determining what actions to take with respect to them.”

Quote of the week comes from SandRidge Energy Chairman Michael Bennett, announcing that his company will be the first U.S. incorporated issuer to use a universal proxy card in its fight with Carl Icahn.

“The changes announced today reflect SandRidge’s ongoing commitment to good governance and ensuring the board consists of highly qualified individuals, focused on the best interest of all shareholders,” said Bennett. “We continue to believe that turning control of the board fully over to the slate of directors proposed by Icahn Capital, including its non-independent employees, presents numerous potential conflicts, and would be detrimental to the board’s ongoing formal evaluation of strategic alternatives.”

Article by Activist Insight

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