30 October 2019

Australian Activism: Down but far from out

VICTORIA GEDDES, EXECUTIVE DIRECTOR

As we approach the end of the year with, realistically, less than two months left to launch and complete a new campaign, the stats already tell us most of what we need to know about the changing shape of activism in Australia in 2019.

Activity is 20% down on last year’s record performance (83 companies targeted), returning to a level that reflects the pattern in the previous four years (62-66 companies). However, the stats highlight that there have been other changes going on, which corroborates our own experience in this space.

Activism increasingly concentrated within the Nano/Microcap stocks

The market cap of companies engaging in activism skewed noticeably towards the nanocap end of the market (72%) with an increasing focus on board related activism (76%). While this bias has always been present in the Australian market, there was a trend from 2014 to 2017 for activism to migrate into larger market cap stocks. That trend reversed sharply last year and has continued in 2019 with the proportion of activism attributed to the nanocap sector of the market (less than $50m) pushing above the previous record of 69% in 2013.

It is the same story when microcap stocks ($50-250m) are added into the picture. This year nano/microcaps accounted for a record 87.5% of campaigns. The previous highest share at 80% was in 2013.

As we know size matters in terms of any news getting picked up by the media, so the 57 nano/microcap companies who were subject to activist demands during the year would have barely registered in the business news unless there was a particularly colourful angle or very diligent media advisor. Adding to the media’s lack of interest has been the fact that, for the first time in seven years, no large caps have had to manage a public campaign.

All bar one of the activist campaigns and contested takeovers we worked on this year have been sub $50m market cap which is consistent with the findings by Activist Insight.

Resources sector dominates but other industry sectors are waking up to the ‘opportunity’

Prior to 2016 there was a tendency for the majority of activism to emanate out of the resources/basic material sector (up to 66%). Since then this has settled around 44-46% of total activity with much more attention being paid by activists, particularly this year, to companies in the financial (18%), services (12%), consumer goods (9%) and healthcare (8%) sectors.

In Australia the ‘opportunity’ is most commonly the use of s249D/F in the Corporations Act to requisition a meeting to effect changes at board level. Sometimes it is to add or remove one or two directors and often the CEO, while at the more extreme end it is a complete spill of the board and their replacement with a slate of directors nominated by the activist.

Board related activism still dominates but there are other issues

In 2013 activism was almost exclusively board related (90%). It remains so today (76%) however other areas of focus have also assumed varying levels of prominence and it is worth being aware of how these can play out.

The big three issues over the past year, accounting for up to 20% of activism, have been:

Other Governance: amendment of by-laws, replacing the auditor and lack of/insufficient information from the company (8 companies in 2019)

M&A: takeover bid by shareholder or opposed the terms of a takeover (6 companies in 2019)

Balance Sheet: recapitalisation proposals, the sale or retention of assets, opposition to an equity issue, support for a share buyback (5 companies in 2019).

A review of Activism would not be complete without mentioning the other significant theme in play that has increasingly seen requisitioned resolutions concerning ESG matters being brought by environmental or social activist groups (as opposed to shareholders) at companies’ AGMs. This trend continued in the past 12 months, including:

  • Origin Energy facing calls for better reporting on methane gas emissions and the process for getting support of traditional landholders,
  • Whitehaven Coal being asked to improve disclosures around climate related risks,
  • Qantas facing calls for heightened human rights due diligence regarding deportation of refugees and asylum seekers, and
  • Woolies being challenged to improve labour and human rights standards for third party employees in its supply chain.

The clear message therefore, whether it is ESG or climate related or Australian investors with the local knowledge that allows them to quickly react to strategic opportunities, is activist campaigns are set to remain a feature of Australian corporate life.

Sources: Activist Insight Database, FIRST Advisers, Law Business Research Ltd

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