The move by hedge fund Elliott Management to shake up BHP was a classic shareholder activist tactic.
The result, after Elliott presented an alternative future for BHP with significant capital returns to shareholders, was that BHP’s share price jumped 4.6%.
Elliott has 4.1% of the UK-listed BHP Billiton Plc and the BHP board of directors will be hearing more from the hedge fund.
This type of activism, more common in the US, is in its infancy in Australia but is increasing.
Credit Suisse analysts Hasan Tevfik, Damien Boey and Chris Parks have just identified a group of Australian companies ripe for activists.
“Global hedge-fund activists have outperformed almost all other equity strategies over the last 10 years,” the analysts write in a note to clients.
Credit Suisse calculates the 10 biggest global activist funds have more than US$200 billion in assets under management.
“While activism is a fledgling investment strategy for Aussie fund managers, there is encouraging momentum,” the analsyts write.
“We suspect growing pressure to justify fees will mean more fund managers will employ activism. After all, activism is hard to replicate by a low-cost passive fund.
“For now, global activists will potentially play a more important role in agitating for change in Australia.”
Activists generally follow one of more of these strategies:
1. Corporate governance changes. This is about gaining seats on the board of directors and more control over the company.
2. Capital returns. Shareholders love these. An activist could rally shareholders, saying the company is undervalued and would be be worth more if it bought back more shares.
3. Selling the entire company. Putting the businesss in play as a takeover target, pushing up the share price.
4. Blocking an acquisition. This is to stopo someone else getting to a ricjh prize at a cheap price.
5. Selling an asset. Such sales hidden value, often not reflected in the share price. In the case of BHP, Elliott Management would argue, this is the oil assets.
6. Operational gains. This is about making the target more efficient and by cutting costs.
The Australian ASX-listed companies identified by Credit Suisse as potential targets for global activists could be a combined $A80 billion value opportunity.
They include companies with underleveraged balance sheets such as CSR, Resmed and Rio Tinto.
And then there are shares trading at a considerable discount to their sum-of-the-parts such as Myer and Woolworths.
Here are the companies Credit Suisse identified as possible activist targets:
And this second group trade at a discount to the sum-of-their-parts (NOTE: Credit Suissse first built the potential target list in 2014. Asciano and Toll are no longer ASX-listed):