The name ‘Elliott’ might sound familiar, particularly if you own shares in BHP Billiton Ltd [ASX:BHP].
The New York based hedge fund, Elliott Management Corp., took a stake in BHP 18 months ago and got to work doing what it does. That is, agitating for change.
Elliott is simply the middle name of founder Paul Singer. He started Elliott in 1977 with a reported $1.3 mln. Today, it manages around US$35 bln.
For a company and its board, an activist investor is probably the last thing it wants to see on its register. It means plenty of headaches. And, distractions. All the things a CEO doesn’t want as they go about their business.
The only reason why an activist investor buys shares in the first place is that it sees potential for change. And that usually means doing something different to the current management.
Whether it be to sell off or close a division. Or, pressuring the company to return excess capital to shareholders. Activist funds agitate to get what they want.
Or, as Singer wrote in an op-ed article for the Wall Street Journal in October last year:
‘Equity activism means using your voice and voting rights to improve companies in ways that maximize value for all shareholders’.
If they thought a company was already achieving this ‘maximum value’, an activist would have little reason to invest. That is why activist funds and management soon part ways.
In BHP’s case, Elliott was pushing for a number of changes.
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Elliott: Pushing for Changes
First, a change to its dual listing structure. The aim: to share BHP’s huge franking credits with all its investors. Not only the current franking balance, but future credits as well.
Elliott’s second target was BHP’s US oil business. It wanted BHP to spin out the whole division and list it separately in the US.
In July this year, Elliott perhaps got a little bit of what it wanted. Though, it wasn’t a separate listing. Instead, BHP sold the shale oil part of its business to BP.
No doubt Elliott will put the deal down to its activism. And you guessed it…BHP argues the opposite. After reviewing its shale oil holdings over a number of years, BHP decided it was time to sell.
Either way, BHP’s US shale oil adventure destroyed a big chunk of shareholder capital. It spent an estimated $30 bln buying and developing energy assets in the US.
For selling its shale oil assets to BP (not other off-shore assets), BHP receives US$10.5 bln. It is really hard for a board to defend a loss like that.
And that is what leads to Elliott’s drive for ‘maximum value’. BHP has also burned up capital conducting share buybacks at the top of the market.
When Elliott first started agitating for change, BHP shares were trading at around $25. At the time, Elliott was also agitating for a share buy-back. Something that would have helped propel the stock higher.
But with BHP recently trading as high as $35, perhaps a buy-back is no longer on Elliott’s mind.
Still a BHP shareholder, Elliott remains committed, though, to dismantling the dual company structure. But with a shareholding spread across the globe, and separate listings, it might prove hard to push through.
Either way, Elliott has picked up some tidy profits. Especially if reports that it owns 4% of BHP (via its UK listing) is true.
Of course, BHP is not the only target on Elliott’s list. There are plenty of other companies the hedge fund is running the numbers over.
This week, the Wall Street Journal ran a story of Elliott’s position in another stock. This time, it’s the US-based TV ratings company, Nielsen Holdings.
The article reported that Elliott now owns around 8.4% of Nielson stock. Enough to launch a bid itself, or join with other activists to take control of the company.
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Will Activists Have Their Way?
This time it looks like the activists will have their way. All, or part, of the company is now up for sale. The paper also reported that the CEO will step down at the end of the year.
Activism looks like a nasty business. It causes a great deal of angst to a company’s board and management. It also distracts them from doing their job…running the company.
Opponents will also argue that activist funds are only in it for a quick buck. That they are only in it for the short haul.
But as Singer argued further in his op-ed piece, it should not only be about timeframes: ‘Rather than “short terms vs. long term,” how about “good ideas vs. bad ideas”?’
With the world awash with so much cheap money, it needs to find a home. There just aren’t enough small and mid-caps — or, the ‘next big things’ — for all this money to go.
That’s why these activist funds are scouring the bigger end of the market. They can ply their vast sums to work, and if they get it right, amply reward their investors…and shareholders in those companies.
Elliott still retains a holding in BHP. Surely, there are other companies on the ASX that these activist funds will target in the future.
All the best,
Editor, Options Trader