Activist Investors in Europe: Who will they target next?

Executive summary

Principle observations

Since our last update report in May 2018, new public interventions from activist shareholders across Europe have shown no signs of abating. From the heavily reported targeting of Premier Foods and Whitbread before the summer, through to the demands made against BT Group in the U.K., Edison SpA in Italy and Aryzta in Switzerland,activists have continued to press for change. The pointed involvement of Elliott Management and others in the contest for Sky is yet another example.

Where such interventions are focused on driving greater value for all shareholders, they can be a positive influence. However, even when they are ultimately positive, a public action by an activist can also be accompanied with a range of managerial, reputational and financial challenges for the targeted corporate. Avoiding such a public targeting by presenting excellent performance across a range of key areas should clearly be the aim of all corporates.

Throughout this year, we have continued to hone the accuracy of our predictive A&M Activist Alert (AAA) model, and indeed our analysis predicted all the above activist actions. With the latest variables added in this refresh, and other adjustments made, it is pleasing to see a further increase in the predictive power of the model which is now 60 percent accurate in identifying the future targets for activist investors.

As we have previously seen, the operational underperformance of a corporate relative to its peers is one of the principal factors driving activist interest

In this update, we have again drilled down into the performance and underlying dynamics of over 1,700 European companies. As we have previously seen, the operational underperformance of a corporate relative to its peers is one of the principal factors driving activist interest. Further, the more underperformance is driven by weaker divisions within a conglomerate, the more activists will be tempted to launch an action. Whether such action seeks the turnaround of weaker divisions and/or their sale, activists increasingly see releasing perceived conglomerate discount as a value accretive route to increasing their return. The agreement by ThyssenKrupp to split into two publicly traded companies is a recent example.

This update also again brings into stark focus the short time that corporates are afforded before activist shareholders intervene when they identify perceived underperformance. This window of tolerance continues to be less than two years. This means that a corporate’s reported results and commentary need to clearly show that the improved performance has been achieved within two years of theunder performance being identified – simply forecasting future improvements is not enough. The ultimate agreement of Whitbread to sell Costa earlier than they initially intended is a notable example of this.

From an overall country perspective, we see that the U.K.,Germany, France and Italy continue to be more attractive to activists, whilst Swiss and Scandinavian corporates are relatively less so. Benelux is predicted to attract greater interest which would make 2018/19 the busiest period for activist action in that region.