The Lex Newsletter: investors demand more from boring boards

Dear reader,

This week, FT readers may have learnt more about German and US motorised armoured weaponry for use in Ukraine than they care to know. But Lex has noted that a different sort of tank has returned, parking on and churning up the front lawns of listed companies. Resurgent stock prices have attracted activist funds to underperforming companies and the boards that run them.

Getting on to a board to influence change is an important step for activists. But recent volleys at board members are notable. In the US, Nelson Peltz’s fund Trian has taken on consumer entertainment group Disney in a proxy fight to get new directors on to its board. Disney’s expensive foray into video streaming has so far not paid off for investors.

The Trian presentation notably included a slide devoted to Disney’s total shareholder return underperformance versus the S&P 500 index during the tenures (averaging more than six years) of each of the 12 named members. Meanwhile, on Friday, reports surfaced of a board shake-up at US tech group Salesforce following the intervention of activists such as Elliott Management.

Not every board battle shapes up as a struggle between hard-headed, even rapacious activists and a sleepy, well-meaning board. The UK’s normally patient Investor Forum, which represents long-only institutions holding about a third of the shares in the FTSE All-Share index, has recently proffered some tart comments about UK companies and their boards. Not only were UK equities increasingly irrelevant to international investors, it said this week, but the relationship between boards and shareholders had frayed.

Chatting with London-based activists this month, one complained that UK board chairs preferred not to sully their efforts by fretting about their company’s share price and, anyway, tended to work only two days each month.

Another observed that while board members at UK-listed companies felt themselves more aligned with those at US companies, they actually resembled those at Japanese companies. The latter have tended to favour the company over its shareholders. Indeed, Lex also noted Elliott Management’s interest in Japan’s Dai Nippon Printing, which has some technology components businesses important to electric vehicle batteries.

That brings us to the case of Capricorn Energy, which unusually for an oil explorer has a cash-rich balance sheet. This week, Lex wrote about the travails of this longstanding FTSE 250 oil explorer, which has failed twice to sell itself in less than a year. Last year investors objected to an offer from indebted local rival Tullow Oil on the grounds it was too low, a grab for Capricorn’s net cash position and without strategic merit.

Capricorn was then approached by an Israel-listed natural gas explorer NewMed Energy. A higher offer price, though all in shares, plus promises to distribute much more cash to shareholders than in the Tullow deal only brought more protests.

In a highly unusual result, five members — including chair Nicoletta Giadrossi — resigned this week ahead of a February 1 meeting to decide their future. This was a victory for activist investor Palliser. Given the failure of the board to convince shareholders of two deals, Lex agreed that the board had to fall on its sword. Even so, the market has simply shrugged off the news, as the share price remains moribund and theoretically still undervalued. Capricorn is seen as a former energy explorer in run-off.

Another investor victory halted the plans of no less a figure than media magnate Rupert Murdoch, a man used to getting his way. His proposal in October to reunify his two companies News Corp and Fox did not sit well with other independent shareholders, including activist Irenic.

It argued that the News Corp was worth $34 per share, more than double the value when the reunification was proposed. With the share price now closer to $20, Murdoch and son Lachlan decided not to pursue their plan. Lex agreed with that and expects them to sell off some of News Corp’s alluring grab bag of assets to lift its share price.

As for 3i, the UK-listed investment group has no problem with its share price per se. This hit a new record high this week after the group offered a positive third-quarter update. For many years, the investment fund, which has mostly private holdings, has owned a large stake in fast-growing Dutch retailer Action.

While Lex applauds 3i’s conviction, led by chief executive Simon Borrows, Action has performed so well that it makes up 60 per cent of the 3i portfolio. This highly concentrated wager on Action in the past may not have bothered the market a few years back, but 3i’s share price premium to net asset value has disappeared in the past year. Lex believes that the market wants proof that Action, which 3i values on a pricey enterprise value to trailing ebitda multiple of 18.5 times, would receive this price in a sale.

Stuff I enjoyed this week

At a time when emerging wine-growing regions, such as those of England, offer so much potential, this article about the problems facing the US wine industry was interesting. Apparently, the only area of growth is among consumers aged over 60.

Wine in cans might appeal to younger consumers. Ugh. Then again, Jancis Robinson made a case (ahem) for these not so long ago.

Do enjoy your weekend.

Alan Livsey
Lex Research Editor