[co-author: Ben Coleman]
Companies previously considered immune from activist campaigns have come under pressure, driving new public and private deal opportunities for private equity.
US shareholder activists are an established presence in Europe. In 2018, activist campaigns targeted 160 European companies, according to Activist Insight. In the UK, 17 companies faced activist demands in the first quarter of 2019 alone. Activist funds have prompted public company boards to look more critically at their portfolio and product mixes, as well as their geographical footprints, either to avoid activist attention or to respond to activist activity.
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M&A activist campaigns that advocate for breakup or take-private transactions create obvious opportunities for PE firms. However, deal teams should take note of both recent activist strategies in the US and developments in the broader activist landscape. In our view, such strategies and developments will likely spread to Europe and create new PE opportunities.
Activist Focus on Family-Controlled Companies
As the US activist market has matured, companies previously considered immune from activist campaigns have begun to feel pressure. Listed companies whose shareholder base may have provided a level of protection from activist campaigns, such as family-controlled or closely held companies, are no longer protected. Third Point’s Autumn 2018 campaign against Campbell Soup Company demonstrated that no family-controlled company is immune.
In our view, economies with many family- controlled companies, such as Germany’s, could see increased activist targeting. The experience of US family-controlled companies suggests sponsors could approach and work with such companies — to discuss strategic alternatives and offer options for change either ahead of activist involvement or at the earliest stages of activist pressure. This has been recently seen in KKR’s successful engagement with Axel Springer.
Short-Seller Activity
Short-seller activists — who take a short position in a stock and then, for example, claim a company is overvalued — are creating deal opportunities in Europe. Short-seller activity has led to corporate change, such as carve-outs and divestments. Furthermore, decreased valuations and market sell-offs can put companies in play for take-private deals. Viceroy Research’s allegations of aggressive acquisition accounting at RPC contributed to a fall in RPC’s valuation and ultimately to take-private discussions with PE sponsors. In contrast, Viceroy was ultimately unsuccessful when pursuing German broadcaster ProSiebenSat.1 Media SE, which dismissed the allegations against it. The German Federal Financial Supervisory Authority opened investigations into Viceroy for possible market manipulation, demonstrating that buyout firms must exercise caution when engaging with activist targets.
Partnering With Activists
Other activist strategies which could be pursued by PE firms include partnering with activists to present management with executable transactions addressing activist or institutional investor concerns, or the adoption of activist strategies for their own and other stakeholders’ benefit, to unlock valuation potential not yet reflected in market pricing. In the past, PE sponsors may have feared reputational damage from working with activists. As activists become more established, have strengthened their reputations, and are increasingly aligned with large institutional investor goals, barriers have come down. Activists’ emphasis on ESG issues, long-term success, as well as stakeholder and shareholder interests have further improved their standing. Nevertheless, it will be crucial to carefully analyse any activist’s specific track record and reputation prior to teaming up.
Preparing for Opportunity
US-headquartered activist firms have long studied the European market, and having raised significant funds now seek to deploy capital outside their home market. Activists will continue to play in Europe as valuations remain attractive. In the UK, lower public valuations caused by Brexit will also attract US activists. While private primary deals remain in short supply for financial sponsors, we believe shareholder activism may drive new public and private deal opportunities.
