Activist investors are a mixed blessing. While they sometimes shake up a sluggish board that is sleeping on the job, they can inflict serious damage on perfectly good companies, grabbing a short-term gain and leaving other shareholders with the long-term damage.
Activists to Avoid
I argued at the time that forcing a reluctant Whitbread (WTB) to divest its Costa Coffee outlets, leaving the Premier Inns rump, was a bad idea. The two chains fitted perfectly well together, both were performing well and they provided diversity so that if one side struggled the other arm could tide the group over.
The sale of Costa for £3.8 billion was completed on January 3 and just how badly the coffee shops chain has been missed is shown in the latest trading update. Total sales for the remaining business were down 1% in the first quarter while like-for-likes slipped 3.7% - and the weaker business and leisure market conditions are likely to continue for the rest of this year. The regional business market, which most Premier Inn hotels serve, have been particularly affected, with accommodation sales down 1.5% in the first quarter.
Loyal shareholders do not benefit directly from the Costa cash. Instead of distributing it as a special dividend so all share equally, Whitbread is spending £2 billion on a tender offer, which rewards only those who sell. In theory, future profits will be divided among fewer shareholders but whether that really works is a moot point.
Whitbread shares have slipped from a peak of £51.14 in March to £45.25 now. Initial reaction to the trading update was negative but by the end of the day the shares were marginally ahead. I have retained my holding but with some trepidation. I don’t blame anyone who decides to cash in while the going is good.
All Change, Please
Now activists are working on transport company First Group (FGP), where they have admittedly a better case to demand action. Its performance in running buses and trains in the UK has met with mixed success; however it is in the US that it has come a cropper, particularly with the Greyhound long-distance coach network, whose profitability has fallen far short of its fame. The US yellow school bus operations have also met with mixed success.
As a result, the shares have fallen back from 153p two years ago and they have been as low as 80p since. Attempts to recover have petered out on several occasions at 116p. It’s hard to make out a case for buying in at this stage or to imagine when such an occasion will arise.
Not surprisingly, it is from the US that the attack on its board comes. Activist investor Coast Capital, based in New York, wants to turf out six of the 11 directors, including the chairman and chief executive, and take a majority of seats. Bizarrely, Coast spokesman James Rasteh is reported as saying that First had made a “false and misleading” claim that Coast was trying to wrest control of the board. Six out of 11 directors sounds like control to me.
So Coast, if shareholders back its plans, will have 10% of the shares but 54% of the directors. Not a good idea. Shareholders should not assume that their interests are allied with those of Coast. Activists are interested in the short term; genuine investors in the long term.
First shareholders should vote against the proposal. If Coast wants to control First, it should launch a takeover bid, paying a premium for the extra profits it thinks it can squeeze out of the group under better management.
