Board must stand up to minority activists
Sunday, 17 June 2007
Anthony Bolton
OCCASIONALLY in this business you come across events that change the investment landscape - an episode that alters the relationship between shareholders and the companies in which they invest. I believe such an event happened in March this year and it relates to Cadbury Schweppes.
First, some background: Cadbury Schweppes has two distinct activities confectionery and beverages. It controls some of the oldest brand names, such as Cadbury Dairy Milk, and has made a number of significant acquisitions including Canada Dry, Dr Pepper, 7Up and Snapple to build up its portfolio. During the past 25 years the company has changed the geographic and product mix, mainly through acquisitions and disposals. A key transaction in early 2006 was the sale of its European beverage business to leave a regional drinks operation that serves only the US and Australian markets. In contrast, the confectionery business is the largest in the world. It is the number one or two in 22 of the top 50 confectionery markets in the world.
In the past few years, however, there has been a shift in consumer habits to healthier eating. Chocolate and sweet fizzy drinks are not as much in demand. This change and some more one-off problems led to the shares being poor relative performers during much of 2006 and the early part of 2007.
Following the sale of the European beverage business, investors and analysts began to question keeping the global confectionery and regional beverage business together. However, in conference calls and meetings executives were robust in defending the logic of an integrated group. The 2006 accounts contain no hint that a split might be an option. Our reservations about this strategy were one of the reasons why Fidelity was not a shareholder.
On March 13 this year it was announced that Nelson Peltz, a well-known American activist investor, had bought a 3.0 per cent stake. Two days later the company announced it intended to separate the beverage business from the core confectionery business. One interpretation was that Cadbury's had been considering the split for some time and it was the arrival of Mr Peltz on the register that forced them to announce this early. However, to my knowledge nothing the company had said indicated this. Indeed, in a call with analysts on February 20 this year Cadbury Schweppes was sticking firmly to its strategy. Answering questions about a rumoured initial public offering or break-up, Ken Hanna, finance director, said: "We said last October at our investor seminar that we saw these two businesses working well together. So that is where we are." No room for doubt there.
Mr Peltz had connections with Cadbury as he sold it the Snapple business in 2000 for $1.45bn, a business he had bought three years earlier for $300m. Generally Mr Peltz, who is now 64 and a billionaire, has done very well from his business ventures and stock market escapades. He has been in the news recently over a proxy fight with Heinz, the US food company. However, I remember him from his unsuccessful investment in a listed UK property company called Mount Leigh, in which Fidelity Special Situations Trust was an investor. It was one of my worst investments ever. Mr Peltz and his partner bought a 22.5 per cent stake in 1990 from its founder at 200p and went on the board. A year or so later they sold 50 per cent of their stake at 100p before a profit warning and a rescue rights issue. The issue was not enough and Mount Leigh later went bankrupt. Mr Peltz was publicly censured by the London Stock Exchange for his actions.
I believe what happened at Cadbury Schweppes could represent a come-on to every corporate raider or activist investor. It suggests they need to buy only a very small stake to be the catalyst for a significant change of strategy. Fidelity's policy is always to have its conversations about a company's policy with its directors in private. Normally we have found this to be most effective. It would be rare for us to try to influence a company's policy with only a 3.0 per cent stake unless there was broad agreement with other shareholders about a change of direction.
In my view, the board should have canvassed a wider group of shareholders before apparently reversing a long held strategy, seemingly at the behest of a single shareholder. It looked as if they were afraid to have a public fight with an activist who had generally succeeded in getting his way. Whether it was the case or not here, in general boards should not be pushed into action by single shareholders, however outspoken. Despite the fact that a board would prefer not to, sometimes it is necessary to resist an activist shareholder even though this can be very time-consuming for management, involving many meetings and perhaps pressure from the media. I have no issue with the company changing its strategy; it is healthy to do so. I do have an issue with the manner in which this appeared to happen.
Mr Peltz must be delighted that he decided to return to our shores, despite his dressing down of 16 years ago. A world where a 3.0 per cent activist shareholder could have this degree of influence on the board of a listed UK business is a different one from the one I have known for the past 35 years. I do not think the relationship between UK companies and their shareholders will ever be quite the same again.
The uniter is manager of Fidelity Special Situations Fund. FT Syndication Service
OCCASIONALLY in this business you come across events that change the investment landscape - an episode that alters the relationship between shareholders and the companies in which they invest. I believe such an event happened in March this year and it relates to Cadbury Schweppes.
First, some background: Cadbury Schweppes has two distinct activities confectionery and beverages. It controls some of the oldest brand names, such as Cadbury Dairy Milk, and has made a number of significant acquisitions including Canada Dry, Dr Pepper, 7Up and Snapple to build up its portfolio. During the past 25 years the company has changed the geographic and product mix, mainly through acquisitions and disposals. A key transaction in early 2006 was the sale of its European beverage business to leave a regional drinks operation that serves only the US and Australian markets. In contrast, the confectionery business is the largest in the world. It is the number one or two in 22 of the top 50 confectionery markets in the world.
In the past few years, however, there has been a shift in consumer habits to healthier eating. Chocolate and sweet fizzy drinks are not as much in demand. This change and some more one-off problems led to the shares being poor relative performers during much of 2006 and the early part of 2007.
Following the sale of the European beverage business, investors and analysts began to question keeping the global confectionery and regional beverage business together. However, in conference calls and meetings executives were robust in defending the logic of an integrated group. The 2006 accounts contain no hint that a split might be an option. Our reservations about this strategy were one of the reasons why Fidelity was not a shareholder.
On March 13 this year it was announced that Nelson Peltz, a well-known American activist investor, had bought a 3.0 per cent stake. Two days later the company announced it intended to separate the beverage business from the core confectionery business. One interpretation was that Cadbury's had been considering the split for some time and it was the arrival of Mr Peltz on the register that forced them to announce this early. However, to my knowledge nothing the company had said indicated this. Indeed, in a call with analysts on February 20 this year Cadbury Schweppes was sticking firmly to its strategy. Answering questions about a rumoured initial public offering or break-up, Ken Hanna, finance director, said: "We said last October at our investor seminar that we saw these two businesses working well together. So that is where we are." No room for doubt there.
Mr Peltz had connections with Cadbury as he sold it the Snapple business in 2000 for $1.45bn, a business he had bought three years earlier for $300m. Generally Mr Peltz, who is now 64 and a billionaire, has done very well from his business ventures and stock market escapades. He has been in the news recently over a proxy fight with Heinz, the US food company. However, I remember him from his unsuccessful investment in a listed UK property company called Mount Leigh, in which Fidelity Special Situations Trust was an investor. It was one of my worst investments ever. Mr Peltz and his partner bought a 22.5 per cent stake in 1990 from its founder at 200p and went on the board. A year or so later they sold 50 per cent of their stake at 100p before a profit warning and a rescue rights issue. The issue was not enough and Mount Leigh later went bankrupt. Mr Peltz was publicly censured by the London Stock Exchange for his actions.
I believe what happened at Cadbury Schweppes could represent a come-on to every corporate raider or activist investor. It suggests they need to buy only a very small stake to be the catalyst for a significant change of strategy. Fidelity's policy is always to have its conversations about a company's policy with its directors in private. Normally we have found this to be most effective. It would be rare for us to try to influence a company's policy with only a 3.0 per cent stake unless there was broad agreement with other shareholders about a change of direction.
In my view, the board should have canvassed a wider group of shareholders before apparently reversing a long held strategy, seemingly at the behest of a single shareholder. It looked as if they were afraid to have a public fight with an activist who had generally succeeded in getting his way. Whether it was the case or not here, in general boards should not be pushed into action by single shareholders, however outspoken. Despite the fact that a board would prefer not to, sometimes it is necessary to resist an activist shareholder even though this can be very time-consuming for management, involving many meetings and perhaps pressure from the media. I have no issue with the company changing its strategy; it is healthy to do so. I do have an issue with the manner in which this appeared to happen.
Mr Peltz must be delighted that he decided to return to our shores, despite his dressing down of 16 years ago. A world where a 3.0 per cent activist shareholder could have this degree of influence on the board of a listed UK business is a different one from the one I have known for the past 35 years. I do not think the relationship between UK companies and their shareholders will ever be quite the same again.
The uniter is manager of Fidelity Special Situations Fund. FT Syndication Service