Many companies across Europe are effectively run by their largest shareholders. A trio of deals under discussion clearly demonstrate the dangers of this model.
At Vivendi, a US investor is agitating for the French media group to hand over more cash to shareholders and to spin off Universal Media Group, the world’s largest recorded music company. Peter Schoenfeld says UMG’s long-term profitability is “obscured” at present, and that half of Vivendi’s estimated €18bn in liquid assets by the end of 2015 should be paid out to investors.
Vincent Bolloré, though, Vivendi’s largest shareholder, with 8 per cent, and its chairman since last year, has vowed to create a media conglomerate, and its chief executive says UMG would be sold “over my dead body”. Mr Bolloré’s influence on Vivendi’s future could be increased further by a new French law that would give longer-term shareholders such as him twice as many votes as new investors.
Meanwhile, China National Chemical Corp’s agreement with the controlling shareholders of Italy’s Pirelli has paved the way for a €7bn takeover of the “Prada of the tyre industry”. CNCC will acquire the holding company Camfin, which owns 26 per cent of Pirelli, as a first step, before launching a full takeover of the group. While the Chinese will become owners, the terms of the deal allow Marco Tronchetti Provera, who owns half of Camfin and has been Pirelli’s chairman and chief executive for more than 20 years, to remain at the head of the group until 2021.
Across the Alps, Thomas Schmidheiny, board member and former chairman of Holcim, whose family founded the Swiss cement group and still owns 20 per cent of the shares, is supporting the takeover of Lafarge, its French rival. The deal will facilitate the dilution or even departure from Holcim’s shareholder register of Russia’s Filaret Galchev and his Eurocement group, which has built up an 11 per cent stake. It will also guarantee the Schmidheinys’ legacy by creating a behemoth in the form of the world’s largest cement group, one unlikely to be the target of any “undesirable” buyer in the future.
At all three companies, the stance of the board members cum largest shareholders has some logic. But is it fair on minority investors?
Vivendi has slimmed down in order to bulk up in future and says the “American hedge fund” just wants to dismantle the group and lay hands on its cash. The media group has promised to return €5.7bn to shareholders over the next three years via dividends and a large share buyback. But Mr Bolloré’s vagueness about how it will spend the rest of its cash has frustrated smaller investors and its buyback programme will be at a maximum price per share of €20. On Tuesday the shares closed at more than €23.
Holcim and Lafarge need to reduce their footfall in low-margin countries. But a lack of information means it is difficult to tell if the sale of many of their European assets as part of the takeover is a good deal for shareholders or not. And although the companies are promising savings of €1.4bn a year, synergies are easily predicted, challenging to deliver and notoriously difficult to measure. Finally, making any company so large that it is bulletproof to any future approaches is no guarantee of good management.
Pirelli would get much-needed access to the Chinese market from CNCC. But Mr Tronchetti Provera knows that without a transformative deal such as this, the tyremaker would become a target and has struck deals with a sequence of different investors in the hope of getting the outcome he wants, most recently Russian oil group Rosneft. The falling oil price, not to mention sanctions against Russia, put paid to those hopes, but CNCC has stepped up to the plate. It plans to offer €15 a share to take over the rest of Pirelli, but since the shares closed at €15.40 before the confirmation of the deal, that would suggest an offer without any premium. Given the other large shareholders on the register include the supportive Benetton family, it will be hard for smaller Pirelli investors to hold out.
Both Pirelli’s and Holcim’s deals are ones in which the leading shareholder and a compliant board have sought a partner to ensure any deal of which “their” company is the subject is the one they want. Mr Tronchetti may come to rue the day he ushered in a Chinese chemicals company as a white knight, and the revived Holcim takeover of Lafarge still looks troubled. But minority shareholders are likely to feel the pain first.