Activist shareholders have built a fearsome reputation for shaking up underperforming big companies. Nelson Peltz has muscled his way on to the Procter & Gamble board and is expected to have a hand in General Electric’s reshaping. Carl Icahn may push Xerox, the print technology group, to put itself up for sale. But it has been a different story recently for Bill Ackman.
The hedge fund billionaire listed his Pershing Square Holdings vehicle in London last May. The appeal for would-be investors was clear: Mr Ackman had cemented his reputation by agitating for change at Wendy’s, the American burger chain, and turning around General Growth Properties, the troubled shopping centre operator. In the decade before it was listed in Amsterdam in 2014, Pershing’s average returns were 21 per cent.
Such swashbuckling success seems a distant memory. The FTSE 250 closed-end investment company has just notched its third year of negative returns. The shares, 20p off yesterday at £10.22, are down 15 per cent since their London debut (though they have improved from a 21 per cent decline at their lowest point) and now trade at an 18 per cent discount to net asset value. Any revival sparked by index tracker fund purchases has not endured and a share buyback has been too small to have much impact.
Like most activists, Mr Ackman places a small number of large bets and the recent poor performance can be blamed largely on the souring of one. Last March, Pershing sold its final holding in Valeant, a deal-hungry drugs group that plunged after its accounting and pricing had attracted the attention of American regulators. More recently, he paid $194 million to settle claims that he had profited from insider trading in the pair’s attempted takeover of Allergan, the Botox maker.
Yet there have been other setbacks for the portfolio, which comprises nine long positions and one short. Mr Ackman failed last autumn in his quest for election to the board of Automatic Data Processing, a payroll software group. He may try again this year. Meanwhile, the image of rats falling from the ceiling of the Dallas branch of Chipotle, the Mexican food chain, did little for consumers’ appetites. And shares in Herbalife, the nutrition supplements business that he has been shorting after saying it was tantamount to a pyramid scheme, have risen by more than a third in the past year.
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There are reasons for buying into Pershing now. Its preponderance of American investments increases exposure to the strong dollar for British investors. There is upside to be had from President Trump’s recent corporate tax cuts. And the type of straightforward stocks it favours do not deserve such a sharp discount. Another angle is that Mr Ackman will be hell-bent on reversing Pershing’s recent run. There are signs that such is the case. It has already made changes, refunding a portion of historic management fees.
Nevertheless, Mr Ackman is learning that there are no easy wins. Pershing is selling its stake in Howard Hughes Corporation, a property developer, which was the reason the fund’s ownership limits were capped at 4.99 per cent. A tender offer for up to $300 million of Pershing shares by Mr Ackman plus affiliates was meant to be a vote of confidence in its prospects, but investors say that this method of more than doubling his stake disadvantages others. Narrowing the price range at which he is prepared to buy back shares has not quelled the row, which could rumble on until the removal of the ownership limit is put to the vote at an annual meeting in April. There is no dividend.
Advice Avoid
Why? The discount may close but shareholders risk getting caught in a messy situation if the activist faces some activism of his own
Countrywide
To get some idea of what investors think of the future of estate agents, look no further than the market capitalisations of Purplebricks and Countrywide.
Purplebricks is an Aim-listed company with no physical branches that started four years ago and accounts for less than 10 per cent of the British estate agent market. Yet it has a market cap of £1.2 billion. Countrywide is the largest listed estate agency in Britain, owning Hamptons, Bridgfords and Bairstow Eves, but it has a market value of £254 million.
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Is the doom for Countrywide justified? A quick glance might suggest so. A profit warning last week caused its shares to fall by nearly 19 per cent. The group said its full-year income would be about £672 million, almost 9 per cent lower than in 2016. Those shares dropped again yesterday to 103p, a sorry sight from a peak of 643p in March 2014 and down from a float price in March 2013 of 350p.
Transactions have been falling amid economic uncertainty and slowing price growth. Investors also believe that high street estate agents are going the way of travel agents, with customers turning to online alternatives without the same high fixed costs.
Countrywide’s attempts at digital have been lacklustre. Samantha Tyrer, who was appointed from Dixons Carphone in 2015 to shake up Countrywide’s sales and letting operations and to launch the hybrid online sales operation, left under a cloud last summer. Countrywide said it was “pausing” the rollout of its online option three months later.
Despite all this, there may be a saving grace in the government’s ban on letting agent fees, due in the spring of next year. On the face of it, this would hurt Countryside, which makes £25 million of revenue from tenant fees, but several divisions are unaffected, including sales, conveyancing and financial services, putting it in a better position than an ordinary lettings agent.
The ban is likely to lead to smaller operators selling up, allowing Countryside to buy businesses and letting books cheaply. That will mean a bigger share of that lower-margin pie.
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Advice Hold
Why Short-term future looks stormy, but Countrywide may benefit from tenant fee ban