Keep your eyes and ears open: activist investors are targeting UK companies, and that’s precisely what the FTSE 100 needs to surge in value and break its record high of 7,122 points. It currently trades at 6,734 points.
In this context, two companies should have caught your attention in recent days:
- Smiths Group, a paltry industrial conglomerate with a market cap of £4.7bn that has been a break-up candidate for ages. It could be assumed, the argument goes, that its business units are worth more than the whole.
- Rolls-Royce, an attractive £15bn turnaround story. The group has gone through a slew of dismal trading updates, and clearly lacks focus on strategy. Its assets could be separated to deliver shareholder value.
Both Rolls and Smiths have drawn the attention of ValueAct, an activist hedge fund based in San Francisco, which has become Rolls-Royce’s largest shareholder this week, with a 5.44% stake.
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The hedge fund could also increase its existing stake in Smiths, according to several market reports.
The UK Market Ain’t The US…
More a prey than a predator, most UK companies have historically been more conservative than their US rivals with regard to large stock buybacks, break-ups and, more generally, other kinds of extraordinary corporate activities, including jumbo acquisitions.
So, on this side of the Atlantic we have not enjoyed breaking news according to which underperforming companies, such as Rolls and Smiths, were about to have Bill Ackman, Carl Icahn or Dan Loeb on the shareholder register.
Cultural differences aside, now that two FTSE 100 constituents have attracted interest from corporate raiders, as activists are also known in the finance world, the odds are short that other big companies may be targeted, boosting the value of the FTSE well above its current level.
The equity premium at which the US market trades also backs this view.
A Few Candidates
How not to mention Royal Mail, for instance, whose valuation came under pressure in early 2014 when Chris Hohn’s activist hedge fund, The Children’s Investment Fund, decided to trim its stake in the company, or oil behemoth BP, which is underperforming in spite of a recent legal settlement for the 2010 oil spill and a decent asset base — a break-up of its upstream and downstream operations has long been rumoured as one possible option to release shareholder value.
Diageo is another big company whose valuation has gone nowhere for a couple of years now, and could benefit from more aggressive management.
Finally, virtually all miners — excluding BHP Billiton perhaps, which has already entertained a break-up — could do with some help from activist shareholders once multi-billion write-downs are over.
Consider that companies operating in the resources sector are among the biggest constituents in the main index — higher valuation for them would surely mean higher returns for FTSE 100 investors.
What’s Different Now?
What’s new is that activist investors used to be associated to smaller entities, such as those operating in the less appealing bus and rail sector — take FirstGroup, for instance. Elsewhere, the gambling industry is now consolidating at a fast pace, but has been closely monitored by activist investors for years.
Not all activists operate in the same way, but their modus operandi is predictable most of times.
Splitting up assets is not always part of their initial strategy, which tends to be more focused upon securing a proactive role in the company’s management, while pushing for lower costs and a barely acceptable level of investment. However, when things do not go according to plan, comprehensive restructurings tend to include large divestments and spin-offs.
“Smiths Group shares rose by as much as eight per cent yesterday after a report that US activist investor ValueAct had taken a stake in the British engineering company,” Reuters reported on Wednesday.
All good then?
In these situations, you just have to hope that if a deal is reached the short-term interests of certain shareholders are aligned with long-term value expectations — which is not always the outcome when activist investors appear on the shareholder register, history shows.
