Peloton will be forced to sell. Kohl's finds a benevolent investor. Unilever may split.
Disclaimer: when we talk about, that something has grown, we mean a comparison with the same quarter a year earlier. Since all issuers are from the USA, then all results in dollars. When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
We would like to dedicate today's issue to the analysis of the recently launched campaigns of activist investors against specific issuers. Such campaigns allow you to pump up quotes for the benefit of all minority shareholders like you and me. And therefore such campaigns or the possibility of launching them is an important point., which should be taken into account when formulating your own investments. For example, we considered the possibility of such campaigns when creating ideas for KLA or Take-Two.
Today we will analyze three new companies and draw general conclusions, which will help us to find other issuers in the future, that may become targets of activists, - which will allow us to earn.
King Kohl’s: organized attack on a department store to buy it
A consortium of investors led by the hedge fund Starboard Value, which is notorious for its aggressive campaigns, has put forward a bid for department store chain Kohl's.
The terms of purchase are:
- 64 $ per share - approx. 37% premium to the price of the company's shares at the close of trading on Friday, when the price was 46,84 $;
- in absolute terms, the purchase of Kohl's will cost about $9 billion;
- financing for the transaction has not yet been received.
Kohl's business history is fairly typical for the US: the once-legendary department store chain missed the online retail revolution and its financials and quotes have stagnated for years. The pandemic with a drop in visitor traffic has not made the situation better. As a result, the company even had to cut dividends by more than three times..
Here's what we can learn from this story.
Preparatory work has been carried out. A pair of activist hedge funds, Macellum Advisors and Engine Capital, recently raised the issue of, for the company to put its business up for sale. So this idea has been in the air for a long time..
It's a worthwhile goal. At the time of receipt of the offer P / S of the company was only 0,37, a P / E — 7,26. Also the company during the last 5 years, nevertheless, made significant efforts to modernize its business, using their stores as warehouses and points of receipt of goods by customers: it accounts for about 29% proceeds, but in 43% of all these sales, Kohl’s stores were used as the point of delivery of goods.
Some stability. It cannot be said, that the company's business was fading, - it stagnated. If we add to this a wide geography - 1162 stores in 49 states of the United States - and a wide representation of brands popular and in demand among Americans in the company's stores, then it becomes clear, why activists thought, that more can be squeezed out of Kohl’s – including by buying it in order to further optimize it.
In a broad context, I would not say, that “private investors buying Kohl’s is a serious private equity bet on the future of department stores”. Rather, it is a private capital bet on the transformation and rebirth of department stores in the brave new world of an endless pandemic..
At the same Macy's, things are going noticeably worse, than Kohl's, — so for the time being, investors are more interested in, to highlight from Macy's its most promising divisions, than in that, to sell the company to a new owner, which with the available inputs may not be found.
Although, may be, new owners want to sell or lease out all Kohl's stores, effectively liquidating the company or a very significant part of it. But it doesn't matter, what matters is, what they see in buying Kohl's.
Bet by bet, business is more important. Potential buyers of Kohl's could and should have been deterred by its very large amount of debt.: more than 11 billion dollars, of which 3.939 billion must be repaid within a year, despite the fact that there is not so much money in the company's accounts - 1.873 billion. But the consortium of buyers was not deterred: working, a profitable business with prospects for improvement is more important to them.
It also shows, that a not particularly large fund with 6 billion in management can, in principle, organize the missing funding, having collected many other players with money and received the necessary loan at an acceptable percentage. This is especially important: if the deal goes through, then we get another proof, that the level of fame and connections of a financial actor can help him jump above his head.
Criticize - suggest. Also in the story with Kohl’s, I was surprised by the proactive position of Starboard. In most cases, activists limit themselves to words and calls or threats to bring the case to court.. Often they get the right to put their people on the board of directors and influence the decisions of the company in the future.. It happens, that they get what they want in the course of a lawsuit or as a result of a settlement agreement. But the option “we ourselves found potential buyers and organized financing for the deal” is a rarity..
This model of behavior can be adopted by other activist investor funds., which will greatly increase the likelihood of buying some promising issuers in the future.
Of course, deal may not go through, if the members of the consortium refuse to participate in this. Or if financial institutions suddenly refuse to provide financing for the transaction. In this case, the story of the failed purchase of Kohl's could be made the plot of an entire arc in "Billions" or "Football Players". Tragicomic nature, certainly.
Make yourself some delicious tea: activist against consumer sector giant
British conglomerate Unilever, producing consumer goods of various kinds, was the target of an attack by activist fund Trian Fund Management, run by renowned investor Nelson Peltz. well, more precisely, not yet, but it's about to be: until Peltz made any demands, just became aware, that he is increasing his stake in Unilever, - and he is clearly not going to remain a passive investor.
Let's try to figure it out, what Peltz wants to do with Unilever. Generally, you don't have to look far for clues..
Unilever is a big stable business, that pays big dividends: 1,99 $ per share, which is approximately 4% per annum, what it takes about 68,5% company's annual profit. The company has a wide business diversification: 13% revenue comes from ice cream, and 14% - fabric cleaners. What else is there to wish for?
Maybe, more: The company's shares have been treading water for the past few years., does not reflect the value of the business at all. And besides this, that Unilever is relatively inexpensive: P / E of the company is about 21,17, a P / S a little more 2.
The company's deal to buy a medical products division from the pharmaceutical business GlaxoSmithKline could also have been affected. (GSK): Unilever was going to buy this division for $68 billion, of which 11.2 billion were to be Unilever shares.
By the way,, The prize didn't look like much.: the estimated value of the unit is about 60.9 billion, and the selling price was about 4,86 division's annual revenue. Division's operating margin is low, but very worthy 6,5% from proceeds. I'll add on my own, that this purchase made sense for Unilever precisely in terms of developing and diversifying it as an enterprise, regardless of the consequences for shareholders.
At the same time, Unilever tried to buy this division several times., each time met with a refusal and increased the amount of the offer. Unilever recently abandoned this venture - after another failure of GSK. But you should also take into account, that this decision was made by Unilever amid a storm of protests from its own shareholders, concerns, that if the deal was successful, Unilever would increase its debt burden. And this, in an era of raising rates and rising prices for loans, could lead to a cut in dividends.
Maybe, Peltz, who had a stake in Unilever even before the possible deal was announced, was going to upset Unilever's plans and make money on it - especially since investors and the market reacted positively to the news about the cancellation of the deal. So that, may be, Peltz has already completed the task. Or maybe, and no.
Very likely, that he will move Unilever to the side, for example, further sale of their assets. News came out in November, that Unilever is selling its tea business to a private company, - quite possible, that it can sell off other assets. Or list your divisions on the stock exchange as separate enterprises. They will help grow more vigorously than a single Unilever and bring joy to shareholders - after all, Unilever shareholders will receive a proportional number of shares of newly formed issuers.
Last thing, By the way, would be a very logical demand from Peltz - and in the spirit of the latest trends among large conglomerates: remember the forthcoming Johnson divisions & Jophson и General Electric.
All in all, on the example of Peltz and Unilever, we could see, how noise from investors can affect the refusal of the business itself to expand and develop in favor of shareholders. It makes sense to look at other companies, whose management is considering the purchase of expensive assets: a loud activist-scandalist can raise a fuss and force the company's management to refuse such a purchase, which will positively affect quotes.
The pedals are spinning, laveha is turbid: Peloton are asking for a good sale
The company is a manufacturer of treadmills and exercise bikes Peloton (NASDAQ: PTON) became the target of a campaign by activist fund Blackwells Capital. The fund demands to fire the current director of the company, John Foley, and find a buyer for the Peloton business.
Peloton is an example of a typical company, risen on the pandemic and rested on the ceiling: a sudden rise in revenue during the pandemic sent prices into the stratosphere, but then weekdays began - revenue growth slowed down sharply, and logistical and production problems have dramatically increased costs.
As a result, the company's shares surrendered all their gains from the first year of the pandemic - after all, a loss-making company, what Peloton has been for most of its existence, investors are not ready to forgive the cessation of revenue growth.
It's hard to say now, how successful the Blackwells campaign will be. The firing of the current director of Peloton may not lead to anything in terms of business: Foley already announced changes to the company, which should result in lower costs.
And taking into account all the negative points, it’s not at all a fact, that the company will be able to find a buyer for its business at a significant premium to the current price in 27 $, which is only slightly less 29 $, what these shares cost during the IPO of the company. In absolute terms, Peloton is quite expensive at $8.83 billion.. And what will a potential buyer get for this money - a simulator, who killed the beloved character of the popular TV series?
However, may be, Blackwells initiatives and will lead to an increase in quotes: many investors would be happy to see, how to sell a company, and will count on the success of the fund.
But Blackwells gets in the way, what about Foley and Peloton management 80% votes in voting in the company due to the fact that they have a second class of shares, giving more votes. So the fight against them will require a very, very significant effort from Blackwells - up to and including a lengthy and costly lawsuit..
However, based on this example, we can expect other activists to attack the management of other "pandemic beneficiaries" who have fallen out of favor with the market.
