Wednesday, 21 March 2018

Melrose / GKN bid - is the hedge fund long/short trade unwinding?

As you'll have noticed, I've been following the Melrose bid for GKN with interest. In particular I've been looking at hedge fund activity around the bid, and the short Melrose / long GKN arbitrage trade. As I've blogged previously, one of the key players in this is Davidson Kempner, which at the start of March on its own had a short position of 3.02%. Even last week on the 15th it was at 2.55% according to the FCA's list of disclosed shorts (which shows anything above 0.5%).

The total short positions on the FCA list hit about 13.5% last week, making it (I think) the second most heavily shorted stock in that list. But according to IHS Markit data in this City AM story (which suggests investors are shorting Melrose in the hope the bid fails, which I don't think is right, but hey) the actual total short positions might be over 20%. That's an amazing amount really - about a quarter of Carillion shares were being sold short when it was in real trouble.

Well, today I checked the FCA list and the total of Melrose short positions they report is down to 11.6% (so now about the fourth most shorted stock in the list). And Davidson Kempner is no longer in the list.

When I had a quick look for market disclosures I found that the firm had reduced both its long position in GKN and its short position in Melrose this week. Assuming it had a long position in GKN roughly equivalent to its short in Melrose, this may mark the departure of quite a big investor with a big interest in the bid going ahead.

This is worth keeping an eye on. The total shorts in the FCA list have bumped around a bit, so the departure of one big player may not mean that much, or herald a wider retreat from the long/short trade. But it looks... interesting. I'll have a dig into who else is moving - Sand Grove has built up a big short position for example.

Just a thought, but if you wanted to speculate against the speculators this might be time go long Melrose. If the bid fails while between 10% and 20% of Melrose stock is sold short, and the price starts climbing, there's going to be some hedge funds buying back a lot of shares, quickly.

Thursday, 15 March 2018

ITF recommends shareholders vote against ICTSI directors

ITF recommends shareholders vote against ICTSI directors

The International Transport Workers’ Federation (ITF) today released a shareholder advisory note detailing governance issues at International Container Terminal Services Inc. (ICTSI). 
The ITF is recommending that ICTSI shareholders vote against directors Stephen A. Paradies and Jon Aboitiz at ICTSI’s 2018 Annual Stockholders’ Meeting on 19 April 2018. The ITF believes that these directors bear meaningful responsibility for major governance and operational issues at the company.
Paddy Crumlin, president of the ITF and vice-chair of the ITUC’s Committee on Workers Capital (CWC) said: “ICTSI has grown over the last decade. This growth has been accompanied by a failure to put in place decent and sustainable governance structures in line with accepted international best-practice.
“Proxy advisor Institutional Shareholder Services (ISS), the ASEAN Corporate Governance Scorecard and the Philippines’ Securities and Exchange Commission (SEC) all recommend that firms have at least three independent directors. Yet ICTSI only has two independent directors, out of a board of seven.
“The fact that the Razon family hold over 60 per cent of the voting rights at ICTSI, the lack of board independence should be a major concern for shareholders.”
The ITF notes that even ICTSI’s own documents highlights this as a risk to outside shareholders:
"…the Razon Family exercises control over or has significant ability to influence major policy decisions of the Company, including its overall strategic and investment decisions, dividend plans, issuances of securities, adjustments to its capital structure, mergers, liquidation or other reorganisation and amendments to its Articles of Incorporation and By-laws.
"If the interests of the Razon family conflict with the interests of other shareholders of the Company, there can be no assurance that the Razon Family would not cause the Company to take action in a matter which might differ from the interests of the other shareholders.”
Paddy Crumlin added: “The Board Risk Oversight Committee, chaired by Mr. Paradies, has failed to ensure that ICTSI’s internal controls are significant enough to avoid major operational issues, including major port disputes and relationships with censured regimes.
“In the last 18 months, ICTSI has seen protracted disputes at five terminals, disputes that have directly affected multiple port stakeholders, including governments, global brands and shipping lines. 40 per cent of ICTSI’s ports are operated with partnerships involving regimes that are either internationally censured or under investigation for crimes against humanity.
“These directors seem to have been unsuccessful in guiding the company towards outcomes that are better for all shareholders. We call on shareholders to vote against these directors and send a message to ICTSI management that these governance issues must be addressed.”
The ITF believes greater board independence will help ensure that minority shareholder interests are safeguarded. Additionally, the Philippines SEC recommends that directors with more than nine years of Board membership should not be considered independent. If this recommendation was rigorously enforced at ICTSI, none of its directors would qualify as independent. 
View the proxy statement here 
For more information
Contact Luke Menzies, ITF Asia Pacific | +61 433 889 844 |  
The ITF is a global union federation of over 700 transport unions, representing over 19 million transport workers from 150 countries. The ITF advises union benefit funds and their trustees on matters of corporate governance and other policy issues. The ITF is interested in the long-term success of ICTSI, its employees, and other key stakeholders. The CWC connects labour union organizations around the world to advance the responsible investment agenda on the global stage.

More on GKN / Melrose

So it's been quite a few days in terms of GKN's continued attempt to fend of Melrose Industries' hostile bid.

Last week saw Melrose get overwhelming shareholder approval for its bid. It will be interesting to dig into Q1 voting disclosures once they are online to see how these votes break down. By that stage we will know if the bid has been successful.

But in the last 24 hours we have seen a significant intervention as Airbus has basically said it would find it almost impossible to do business with GKN in the event of it being taken over by Melrose. That has to be material for shareholders planning on remaining invested in GKN.

In terms of shareholders, Aviva has gone early - before the Airbus news - saying that it supports the Melrose bid, but Jupiter has come out against it. Meanwhile the speculators are still a-speculating. Total disclosed short positions in Melrose slumped back down to about 11.5% earlier this week, but then went back over 13%. I reckon some hedge funds must be getting the jitters.

And there continues to be lots of churn in the GKN register. Check out notifications here and here for example. At one point BoA/Merrill Lynch had almost 13%. To be clear, the banks are not holding all of the shares for themselves. A lot of this will be related hedge fund money - maybe borrowing the stock, maybe getting exposure through derivatives. These are the people that will help decide the fate of GKN workers.  

For what it's worth, I think there is a good chance that the bid will fail now. If it does some of the people who have sought to speculate on the deal are going to lose a fair bit of money,

Wednesday, 14 March 2018

Duplicate Stewardship Code statements

A month or so back, I blogged that I had found several hedge funds using similar blurb in their Stewardship Code statements. This was off the back of digging into Carillion a bit. Then, when I looked a bit deeper at the GKN / Melrose bid, I found more of the same.

So I went and had a proper trawl, and in the end found 34 examples of managers using versions of the same text. So we added this list to our submission to the FRC's consultation on the UK Corporate Governance Code and Stewardship Code, which is here. I now know there are more out there.

We've picked up a bit of media interest off the back of this, which is welcome. Hopefully we can use this to develop some ideas about what needs changing under the next Labour government.

As a starter, I would question why any firm that can have a significant impact on the future of an investee firm should be allowed to get away with not saying anything meaningful. The Code itself might be tightened to capture issues such as: how managers approach stewardship where they have both long and short positions in the same company (on the long side they'll want to address causes of any underperformance, but not on the short side), managers shorting their own clients, approach to M&A issues and political donations.

But that's for another day....

Monday, 5 March 2018

Two interesting things

1. There are two different pieces about shareholder primacy, and why it might be a bad idea, in the FT today. One from the City editor of the FT and one from Rana Foroohar. Meanwhile Theresa May (remember her?) has criticised directors getting paid in way that is based on returns to shareholders.

I know I keep saying this, but I really feel that the ground is shifting, and that public policy will shift away from its 1990s focus on shareholders (and trying to make them act as a proxy for the public). There are people on Left and Right who think shareholders just aren't up to the job, for often quite different reasons. But what comes next is far from clear, hence that's where we on the Left should be busy.

2. There is a really interesting idea from Joe Dromey here: auto-enrolment into union membership (based on the experience of pensions). I can think of a couple of issues here. Part of the justification for pensions AE was that many people said that they should be saving but weren't getting around to it. So AE was helping them do what they thought they should be doing. I'm not sure we are quite in the same place with unions. Second, which union should you be enrolled into where there isn't one active?

But these are quibbles, I really like the idea. And it cuts very much with the grain from all the behavioural stuff that you should make things that you want people to do as easy as possible (which is why the Tories want to making joining a union harder, and don't want to make voting in a ballot easier).

Wednesday, 28 February 2018

Melrose / GKN battle continues

Quite a lot of news on the Melrose bid for GKN today.

Unite, which is campaigning strongly against the bid, held a rally and series of meetings at parliament. It is pleasing to see that a lot of Labour MPs are speaking out against the bid too, and it is also attracting scrutiny from the BEIS committee.

As usual, my eye is drawn to what is going on regarding the ownership of the companies involved. On that point, today we've seen two proxy adviser recommendations become public. On the one hand, ISS has come out and given Melrose the thumbs up. According to Reuters, ISS is quite chirpy about it:
“Given the sensible strategic rationale, (Melrose‘s) turnaround track record and reasonable valuation, approval of the acquisition is warranted,” ISS said in a note circulated to clients last week.
On the other, PIRC has come out against the deal:
PIRC has highlighted to investors that Melrose’s decision to go hostile means that it “has not benefited from the co-operation of the GKN board”.
The adviser also said that “significant political and other considerations, including security concerns” have been raised and that Melrose has reported annual losses two years running.
Meanwhile.... speculators gonna speculate. Following up on my last blog, I've been keeping an eye on the total disclosed short position in Melrose. And they've gone up to 11.67%. From a quick skim I think that makes Melrose the 3rd most shorted UK stock in the FCA list currently, after Provident Financial and Debenhams. What is really noticeable is the position held by Davidson Kempner, which has shot up over the past month or so and now stands at 2.46%. Elliott Capital has also built up a position quickly, now at 1.7%. 

I have little doubt that a number of those shorting Melrose are also taking corresponding long positions in GKN. I think the disclosures from the like of HSBC, Bank of America and (more recently) Goldman Sachs probably relate to underlying investors building up an economic interest in GKN, in some cases through derivatives.  

I know M&A arbitrage is a fact of life these days, but it makes me wonder what we should be doing with the takeover rules. I don't believe these sorts of investors have any long-term interest in either GKN or Melrose, they are just trying to skim value off the process of the deal and its likely impact on the values of the shares of each. Yet the deal itself will have an impact - in fact already is having an impact - on the lives of thousands of GKN workers. It seems nuts that we prioritise the interests of the speculators.

Finally, I think there is an important link here with "stewardship". After all, surely one of the genuinely important roles an investor has is influencing the change of ownership of a company. So I thought I'd have a look for Stewardship Code statements for some of investors that are in the mix. 

Here are a few bits from the statement from AQR Capital (which is short Melrose, long GKN) says:
From the introduction 
The Firm uses quantitative tools in a systematic process to build diversified and risk-controlled portfolios. The process does not typically involve subjective assessments of underlying companies or direct contact with the companies in which it invests.  
In relation to principle 3 
AQR’s investment approach, as a quantitative investment manager, is systematic and does not typically involve subjective assessments of underlying companies. AQR’s proprietary quantitative systems analyse various factors, combining them with estimates of transaction costs to arrive at daily investment decisions. All investment decisions are generated by AQR’s quantitative systems, other than in rare instances where the Risk Management Committee deems the circumstances to be exceptional. AQR does not invest in companies with a view to actively intervening in their management. 
I think the firm is pretty straight up about what it does and does not do. What is more, I found the statement very easily.

However I can't find a Stewardship Code statement for Empyrean Capital, and the Davidson Kempner statement (which took some finding) contains some of the cut and paste text to explain non-compliance that I blogged about previously:
The Firm pursues a multi-strategy investment approach, investing in strategies including distressed, event driven and equity long/short, merger arbitrage and convertible/volatility some of which will involve investments in global equities, including UK equities. The Code is therefore relevant to only some aspects of the Firm's trading. While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The Firm invests in a variety of asset classes and in a variety of jurisdictions globally and its approach in relation to the engagement with issuers and their management is therefore determined globally, on a group-wide basis, and will often vary on a case by case basis. That being the case, the Firm does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction or asset class.
In fact the text used by Davidson Kempner is very similar indeed to that used by Elliott:

The Firm pursues a multi-strategy investment approach, including strategies that involve investing in global equities, including UK equities. The Code is therefore only relevant to some aspects of the Firm's trading. While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The Firm invests in a variety of asset classes and in a variety of jurisdictions. The approach/policies of the Firm in relation to engagement with issuers and their management are therefore determined globally, on a group wide basis. The Firm takes a consistent global approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.
I guess this is what ownership and stewardship looks like in modern capital markets: generic blurb in regulatory disclosures.

Sunday, 18 February 2018

Melrose / GKN bid arbitrage: like flies round...

The Melrose bid for GKN is currently subject to a lot of scrutiny, and is actively being campaigned against by Unite.

What hasn't attracted much scrutiny so far (as far as I am aware) is the extent of speculative activity that is occurring, and as such is affecting the share ownership of both companies involved in the bid. As many people are probably aware, M&A has become quite fertile territory for "event driven" hedge funds, who look to skim off value based on their expectations of how deals usually play out.

Very simply, when there is a bid it is typical for shares in the acquirer to under perform (this could reflect the cost of the acquisition, but perhaps also expectations about how it will play out). On the other side, obviously shares in the target are pushed up when the likely offer is known, but may not totally capture the premium to the pre-bid price because of uncertainty as to whether the bid will be successful. So you will often find some investors are on both sides of the bid - short the acquirer, long the target.

This is happening with Melrose / GKN. The disclosed short interest in Melrose is now over 10%.

To be honest, I've never really followed these trades closely, so I don't know if having 10% of your shares shorted is particularly out of the ordinary. But it does represent a substantial chunk of money that has an interest in the bid going ahead, and being value destructive for Melrose.

Of those that are shorting Melrose, I can already see two investors - AQR and Blackrock - that are also long in GKN (for completeness, Blackrock will also be long Melrose via index funds etc).

Meanwhile, we can also see the impact on the GKN share register. Just in the past few days both Merrill Lynch (Bank of America) and HSBC have disclosed holdings in the company of over 5% (HSBC now has over 6%). When you dig into the detail you can see two things. First, the large majority of this does not NOT relate to traditional asset management (in HSBCs case, it is very clear it is primarily the bank). Secondly, much of the holding in both cases is accounted for by equity swaps.

That means that there are other counter parties out there with an economic interest in the performance of GKN shares, but who have chosen not to (or were not able to) acquire shares. Quite possibly there are counter parties to those swaps that are shorting Melrose. And again we are talking quite a big proportion of GKN's ownership - over 11% - being tied up in these two positions alone.

There are a couple of things that interest me here. First, how do Merrill Lynch and HSBC decide how to respond to the bid? Have they ceded that decision to the counter parties? If so the future of GKN would in part be decided by investors that we can't even see. If not what is the basis of their own decision, and in whose interests is it taken?

Second, it does seem to demonstrate just how far modern capital market activities are away from any notion of "ownership" or "stewardship". A large proportion of the share ownership of both companies is accounted for by investors whose primary interest is in the event of the bid, rather than the future of the companies concerned.