Activist hedge funds hunt for Brexit bargains
Several household-name British companies have been targeted, says Owen Walker
Throughout the morning of June 24, the currency and equity markets went haywire as investors around the world tried to capitalise on the chaos created by the UK’s shock decision to leave the EU. But one niche category of hedge funds, activist investors, could turn out to be the long-term winners from Brexit.
Several household-name British companies have been targeted by activists since last month’s vote. While these moves are not directly related to the referendum result, the Brexit fallout will make UK companies more vulnerable to activist attacks in the coming years.
Activist hedge funds — which focused not only on investing in companies where they expect significant change, but also on being the agent of that disruption — will be on the lookout for ways to profit from the disquiet the UK is set to endure as its relationship with the rest of Europe and the world is redefined. British companies dealing with these seismic changes would do well to prepare for an activist on their shareholder register.
The fall of the pound to the dollar and euro since the referendum has meant that British companies are now much cheaper for foreign investors.
At the same time, the FTSE 250 — whose constituents are mostly domestically focused, which means the index is a better indicator of the resilience of the UK economy than the more international FTSE 100 — has experienced considerable volatility. There is little to suggest these market forces will lessen in the coming years, resulting in plenty of UK buying opportunities for overseas investors.
Foreign activists have already started taking advantage of the increased vulnerability of UK companies. Shareholder Value Management, a German investor, announced a 7 per cent stake in John Menzies, the Edinburgh-based logistics company, soon after the Brexit vote. SVM joined another foreign activist, Lakestreet Capital Partners of Switzerland, in calling for John Menzies to split its aviation services from its newspaper distribution business.
Through its UK offshoot, Elliott Advisors, US hedge fund Elliott Management has revealed positions in SABMiller, the brewer, and Poundland, the discount retailer. In both cases, the target company is in the process of being bought and Elliott is pushing for better terms — a strategy common among activists and dubbed “bumpitrage”. Last year Elliott’s successful campaign against Alliance Trust in Dundee resulted in the hedge fund gaining two board seats and the departure of the investment trust’s chairman and chief executive.
In the medium term, the response of policymakers to market uncertainty could unintentionally make British companies more attractive to activist investors. A Bank of England decision to cut to interest rates could further weaken the pound, thereby making UK companies cheaper still.
Should Philip Hammond, the new chancellor, follow his predecessor’s lead and cut corporation tax in an attempt to incentivise companies to stay, the lower tax rate would make UK companies even more alluring to overseas activists.
But perhaps the most attractive feature of post-Brexit Britain for activist investors is the widespread instability UK companies will face and the tough choices their boards and executives will be forced to make. Activists thrive in such conditions.
Corporate leaders will have to decide whether to sell overseas operations, relocate teams or close underperforming business lines altogether. These will be hard and uncomfortable decisions to make, especially where large-scale job losses are involved. But where a long-term executive or director may feel ill at ease forcing through such changes, an activist investor would have no such sentimentality. The activist would also have an easier job of convincing the company’s other shareholders that clinical restructuring was needed.
For the UK’s boards and executives, life looks set to become a little bit harder.