Recovery in dealmaking will fuel an activist comeback

Investment banking is on the up, with deal activity recovering slowly and corporate bond spreads following interest rate expectations down. Better financing conditions and more buoyant markets enable more corporate activity, such as divestments and listings. That, in turn, will stir up calls from activist investors for corporate break-ups.

This is activism 101: find a diversified and underperforming business, with a valuation discount in its shares. Take a position and then begin lobbying for a break-up to unlock value. Some of Europe’s oldest conglomerates have been targeted in this way in recent years, such as Thyssenkrupp and more recently Bayer. The results of this strategy, spurred on by investors such as Cevian, Elliott Management and Trian, vary: Thyssenkrupp shares languish near all-time lows and GSK’s consumer spin-off has failed to create value.

But the activist’s greatest weapon is timing. And market conditions now mean a tailwind to their success.

The UK is a favoured hunting ground, with low valuations across many sectors and favourable governance to boot. Activist interest has picked up this year. UK chemicals group Elementis has attracted the attention of Gatemore Capital, which among other things is calling for a portfolio review to make the business more attractive to a potential buyer. 

Engine Capital wants a break-up of London-listed cider maker C&C Group, where it thinks a steep discount could be unwound by selling off brands such as Magners and Blackthorn. Cevian has taken a position in perennial underperformer Smith & Nephew, where a spinout of the UK medical device maker’s orthopaedics business could be one option for the group.

The truth is that the success of these break-up campaigns is as much dependent on market conditions as on activist insight. Divestment campaigns launched before and up to 2020 generated outsized returns, according to data from consultants at Alvarez & Marsal. Measuring outperformance against the market two years after launch, these campaigns in this cohort outperformed other types of activism.

But the collapse in M&A activity over the past couple of years changed that. Outperformance for the targets of break-up campaigns launched in 2021 and 2022 disappears completely. “With a subdued M&A market, the opportunities for maximising shareholder returns via divestment are clearly reduced” says A&M’s Paul Kinrade.

A shoddy deals backdrop, or unreceptive equity market, makes it easier for companies to resist activist pressure. Take RWE, where shareholders voted against calls to spin off its coal division in 2022. Those excuses are evaporating, creating an opportunity. More European divestment campaigns were launched in the second quarter of 2024, notes A&M, than in the past five years. Good news for bankers and shareholders alike.

andrew.whiffin@ft.com