UK Activist Targets Face Push to Return Cash

Will Arnott of Diligent pens an article about the activism landscape in the UK market which quotes Andrew Brady of SquareWell.

According to Diligent Market Intelligence (DMI) data, while the number of UK companies targeted by activists so far this year has declined by 20% and M&A activity has more than halved, there has been a six-fold increase in the number of companies subjected to return cash demands in the nine months to September 8.

“What we are seeing is that both traditional and non-traditional activists are looking at companies in a more strategic way and taking a hard look at companies’ balance sheets and asking, ‘what are you doing with that money? And if you are not doing a lot with it, why not give it back to your investors?’,” Domenic Brancati, Georgeson’s global chief operating officer, told DMI.

Opportunity knocks
A similar trend has been played out in Korea where shareholders have been pushing companies to pursue stock buybacks, with 36 targeted with such demands in the first nine months this year, compared to 13 in the same period in 2022.

For the UK market, the 500% rise in the number of companies targeted with return cash demands is considered by many industry experts to have been largely influenced by currency headwinds and rising inflation.

“It has obviously caused a lot of U.K. companies to have lagging valuations despite maintaining good cash flow. Good cash flow with a poor valuation combined with a higher interest rate environment and the spreads between return on invested capital and weighted average cost of capital tightening has put companies in the position where they have to ask themselves what the best use of that capital is,” Okapi’s co-founder and head of its U.K. expansion, Pat McHugh, told DMI.

“Investors have looked at these situations and said, ‘well wait a minute, maybe rather than trying to reinvest this cash when conversion and interest rates are unfavorable, you would be better served sending it back to shareholders’.”

Irenic Capital Management targeted Capricorn Energy with such a demand while the company was already embroiled with an investor group led by Palliser Capital over its proposed merger with Israel’s NewMed Energy. Irenic encouraged Capricorn’s board to terminate the transaction in favor of “initiating an objective and speedy review of value-maximizing alternatives” which included the immediate return of the company’s excess capital and “near-term contingent consideration receipts” to shareholders. Capricorn pulled the plug on the merger in February and just two months later pledged to return $575 million to shareholders.

Kelso Group Holdings targeted THG in late March, urging the online retailer to consider a stock repurchase program among other demands including a strategic review and focusing on cash generation. The activist highlighted that THG had the authority to buy back 10% of its outstanding shares and had at the time over 470 million pounds ($572.5 million) in cash on hand, adding it believed “such a buyback would demonstrate the board’s confidence in the business.”

Hedging for future risk
Due to the lack of a defined proxy season in the UK, the market is seen as one to have a year-round trend with an uptick expected in the fourth quarter. Three U.K. companies have been targeted by dissidents in the last month alone.

As year-end approaches, companies who fail to hedge for the risks of the challenging macroeconomic environment may well find themselves at risk as activists refocus.

“Last year, I think investors may have still been viewing the U.K. market as being in post-pandemic recovery. This year, patience has waned. This, combined with the headwinds facing the U.K. economy, has led to an adjustment from activists as they find higher resonance with traditional asset managers who are frustrated with persisting underperformance,” Andrew Brady of SquareWell Partners told DMI.