Europe's visible shareholder activism seen as 'tip of the iceberg' as companies prefer behind-closed-doors engagement

14 January 2020 - 06:40 pm UTC

Engagement between activist investors and publicly listed companies is being kept increasingly private as both sides seek to reach agreements without alarming the share-market at large, sector sources told Activistmonitor.

The rate of new campaign activity slowed in 2019, at least in terms of publicly visible shareholder activism, according to Activistmonitor figures showing a 24% decrease in the number of new public campaigns started during the year.

However, there was a 63% increase in new potential campaigns where companies were not publicly called out by an investor, but where Activistmonitor identified that activism is likely going on behind closed doors, the figures show.

Examples of these - where known activists have disclosed a position, but not made any public demands - include Elliott Advisors’ investments in SAP and CNH Industrial, Third Point’s stake in EssilorLuxottica, and several investments by CIAM, PrimeStone Capital, and Active Ownership Capital.

Such a private engagement approach is increasing as a proportion of traditional shareholder activism situations, according to activist investors and corporate advisors spoken to by Activistmonitor. But also fund managers across all equities investment strategies are increasingly more open to engage behind closed doors, they said.
 
Investor activism is more prevalent than ever before, but less of it is reported publicly, according to James Laing, managing director and co-head of shareholder engagement at investment bank Rothschild & Co.
 
Laing, previously head of corporate governance at Standard Life Aberdeen Asset Management before moving to Rothschild a year ago, believes European activism is like an iceberg because up to 90% of shareholder engagement happens “below the waterline” where it can’t be seen.
 
“Corporates have become better at ensuring that a lot of activism doesn’t come onto the public radar. Rothschild & Co’s Investor Advisory business is advising a number of very large corporates in the UK and Europe that are not on the [public] radar, they just aren’t being reported.” Laing said.
 
Law firm Macfarlanes partner Robert Ogilvy Watson said the prevalence of passive managers engaging in an active way has increased in the past year, often due to passive investors’ own duty to focus on environmental, social and governance issues (ESG) at the companies they invest in.
 
In terms of pure activist fund engagement, existing activists have been busy but there are not many new players on the scene, said London-based activist investor Petrus Advisers Partner and Head of Activism Till Hufnagel. Petrus launched two new campaigns in 2019, made nine demands across all situations in the year, and has six ongoing campaigns in Activistmonitor’s database.
 
Hufnagel predicts that more investors will “dare to do activism, both experts and non-experts”, and that there will be a slow trend towards the creation of pan-European activist funds. “We are a good example of that having started off with a primary focus on the German-speaking region, but have expanded to the Benelux, UK and so forth,” he noted.
 
Another driver of the trend is the implementation of the second iteration of the European Shareholder Rights Directive which requires all fund managers to disclose how they vote on resolutions at company meetings, said Laing.
“The fact you’ve got to report how you vote encourages you to be more active and means that you must justify your position on things because you will have clients that are interested in how you’re voting.”

Activism targets: Company size, sector and geography
 
Activism in the mid-cap space (USD 1-2bn), both publicly visible and potential, has increased from six new campaigns in 2018 to 12 in 2019, according to Activistmonitor’s data.
 
The increase in new campaigns among mid-cap companies could be due to it being easier to build a significant stake in a mid-cap company, in order to be a stronger voice at AGMs with less “back-up” from other investors than might be required at a large cap company, said Watson.
 
Meanwhile, the implementation of MiFID II rules in the European market has had an acute impact on the research coverage of small cap companies, which is a double-edged sword for activists investing in the space, commented Liad Mediar, managing partner of London-based activist Gatemore Capital.
 
“We look at good businesses which are going through a challenging period where, for example, a profit warning has caused a massive overreaction on the stock,” Meidar said.
 
“There is definitely opportunity to turn things around in such a situation. However, in small cap, good news takes more time to show in the share price because there is a general lack of confidence.”
 
Small cap companies are also taken private more often, and activists can act as a catalyst for such action, agreed Meidar and Watson.
 
Activistmonitor’s data shows 13 demands from investors calling for companies to look at “strategic alternatives including a merger” in 2019, but also 10 demands opposing an acquisition or merger, up from only two instances in 2018.
 
Activist support or opposition to M&A deals usually depends on the business cycle, said Hufnagel, noting that the European market in general is suffering from lower valuations compared to the United States.
 
By sectors, Industrials saw the most new campaigns in 2019 (13), although that was down 41% on the previous year. Meanwhile, new activity in the Consumer and Leisure sector has halved since 2017, from 14 campaigns to seven in 2019.
 
Financial Services remained relatively stable at 10 new campaigns last year. Activists in this sector have been shown to be willing to take positions in companies beyond banking institutions, with no firm being too big for an activist, said
Freshfields Partner and Co-Head of its financial institutions group Andrew Hutchings. “I wonder whether we might see some shareholder-driven M&A,” he added.
 
On a geographical basis, the UK was again the busiest country in Europe for activism with 20 public campaigns launched, down from 24 in 2018, but at the same level as 2017.
 
An uplift in public activism campaigns in Switzerland, from five in 2018 to 10 in 2019, reflects the country’s relatively liberal and open capital market with strong shareholder rights, noted Zurich-based financial advisory firm Alantra Managing Director Kurt Ruegg.
 
But more importantly, Switzerland’s corporate board members now have a more respectful attitude towards activist investors, but still prefer a constructive dialogue with activists that present ideas for medium-to-long term value generation rather than “short term opportunists”, he said.
 
Ruegg advised Cevian Capital on its engagement with Swiss transportation company Panalpina Welttransport, which was resolved with a sale of the company to DSV during 2019.
 
He believes the situation was a typical example of a long term constructive activist exercising pressure on a board and major shareholder that had not reacted for years, “which then led to a win-win-win situation”.
 
Yet, even where activists and companies want to settle an agreement, it can prove difficult due to local legislations, Hufnagel said.
 
For example, Petrus recently looked at forming a standstill agreement with an investee company, but found that such an agreement is not legally possible in the particular European jurisdiction where the company is based.
 
While engagement is still largely done on a case by case basis, there is clearly a trend towards earlier and more comprehensive engagement coming from companies towards activist investors, Hufnagel concluded.
 
by William Mace, Claudia De Meulemeester, and Pablo Mayo Cerqueiro.