Invest like an activist

Published 06 December 2012 05:14, Updated 06 December 2012 05:53

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A handful of investment managers in Australia can legitimately describe themselves as “activist”.

The label has become synonymous with managers pushing for strategic change at underperforming companies, whether those managers like the term or not.

For example, Simon Marais, the founder and part-owner of Allan Gray (formerly called Orbis Funds Management) – the fund that earlier this year pushed the Spotless board to allow shareholders to vote on a private equity bid for the company – shies away from calling himself an activist investor.

“I’d describe us more as a long-term investor that looks for deep-value opportunities … we agitate when we need to in order to get the best value for our investors but we don’t set out to be an activist,” he says.

However, after speaking with Marais it is clear that his view of investing is rooted in the type of corporate disruption his fund has become known for among shareholders and executives alike.

Marais, like most activist investors, believes many corporate management teams and chief executives are not running companies in the best interests of their shareholders.

He says CEOs are often egged on by merchant banks to make the wrong choices for the company, which he believes can frequently lead them to consider unnecessary acquisitions or frivolous rights issues.

Similarly, high-profile activist Mark Carnegie and his Companion Fund, which emerged in November on the share registries of Washington H Soul Pattison and Qantas, lobbies institutional shareholders that Australian investors, in many cases, are getting less value for money from corporate executives than their overseas counterparts.

In the case of Spotless, Marais used his fund’s shareholding in the diversified services company to force a special meeting so shareholders could vote on a bid by private equity firm, Pacific Equity Partners, previously declined by the company’s management.

The vote went through with 99.3 per cent support, the company was sold and Allan Gray unit holders picked up a handy premium on the stock after buying into the company at distressed levels.

“We thought [the PEP bid] was a reasonable offer and the company wasn’t qualified to make that call [to decline
the bid] on behalf on shareholders,” he says.

Because activist shareholders tend to buy into a stock closer to a potential event, Clayton Utz corporate advisory mergers and acquisitions partner Karen Evans-Cullen says they generally are more willing to accept an offer from a potential acquirer if the situation arises at a lower price than other fundamental investors who may have bought in much earlier.

Evans-Cullen, who advised Spotless on the PEP approach, points to Allan Gray’s strategy in this and other situations to buy into a company vulnerable to an opportunistic take over, to wait for a potential acquirer to come along, and then force the company’s hand to accept the offer.

Activists generally will fall into one of two categories – either “aggressive” activists – those who seek out opportunities to force board and management change – or investors who find themselves to be “passive” activists and act only in situations as they arise, and in the best interests of their shareholders, Hunter Hall portfolio manager Jonathan Rabinovitz explains.

He emphasises that although Hunter Hall has taken on the role of “activist” in the past, the funds manager now falls into the “passive” category and does not seek to enter a shareholding with the intention of forcing a change.

Hunter Hall, however, has been an active participant in changes at companies, including technology company Redflex, healthcare company Sirtex Medical and the mining services company Decmil.

Rabinovitz acknowledges the approach of the aggressive activist may not be a strategy that is right for every investor.

“Aggressive activism is a higher risk than if you are investing in National Australia Bank, a BHP, or Telstra … it carries a higher risk than conventional investing and that’s not why [Hunter Hall unit holders] give us their dollars to invest,” he says.

Rabinovitz references the fund put together by Carnegie, former Qantas chief financial officer Peter Gregg, media magnate John Singleton, retail executive Gerry Harvey and Tourism Australia chairman Geoff Dixon, which already has reportedly taken a 1.5 per cent stake in Qantas, as a purpose-built fund that seems to be set up specifically for the purpose of corporate activism.

A handful of activist fund managers with varying degrees of interventionist styles are regularly investing in Australian companies, law firm Herbert Smith Freehills’ group head of corporate regional practice, Andrew Pike, says.

Although a company is not required to disclose a shareholding of less than 5 per cent, Pike points out that management at those companies is able to see who is buying into the company stock and will have their interest piqued when certain shareholders amass positions in the 1 or 2 per cent range.

Like-minded managers generally will group into certain companies, opening the possibility for those funds to use their combined votes to force change, funds management and corporate advisory business Sandon Capital’s founder, Gabriel Radzyminski, says.

Radzyminski points to the collaboration of Wilson Asset Management and Cadence Asset Management in forcing change at RHG (formerly RAMS Home Loans) as an example of this.

There may be reason to see increasing shareholder activism, Clayton Utz’s Evans-Cullen believes.

More companies in a post-financial crisis environment are trading below their long-term valuations, creating opportunities for activists to buy and force changes, she says.

Some other factors have invigorated shareholder activism in Australia.

These include the recently introduced two-strikes rule, under which shareholders have the ability to influence executive pay – as well as the increasing power of proxy firms as more institutional and overseas funds managers base votes on their recommendations.

“There are plenty of investments out there where the share price is below net asset value,” Radzyminski agrees.

“The valuation opportunity is there, we just have to be able to convince ourselves there is a path to unlock the value.”

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