Monday, 23 April 2018

Merger arbitrage in practice: Sand Grove Capital

Given the renewed interest in financial market activity around mergers and acquisitions, I thought it might be interesting to have a look at the regulatory disclosures for one of the funds that has caught my eye lately.

I hadn't heard of Sand Grove Capital until recently, but it ended up taking a sizeable (almost 3% at one point) short position in Melrose Industries in the run-up to the acceptance of its bid for GKN.


There's a similar story in the GVC/Ladbrokes takeover. Here is Sand Grove long Ladbrokes 2.1% on 19th March using CFDs and short GVC 1.87% also using CFDs on the same day. 

And we see the same thing with Tesco/Booker. Here is Sand Grove long Booker 1.17% using CFDs on 7 Feb and short Tesco 0.22% using CFDs on 8 Feb.


Obviously, their main approach is to gain exposure through derivatives. On a quick search I could only find one disclosure - in respect of Revolution Bars - where there was an actual shareholding. This was reduced later, according to reports, when a takeover was rebuffed.

Stewardship

What I couldn't see on the Sand Grove Capital website was a a Stewardship Code statement. Just as a reminder, the FCA Conduct of Business rules say:
firm, other than a venture capital firm, which is managing investments for a professional client that is not a natural person must disclose clearly on its website, or if it does not have a website in another accessible form:
  1. (1) 
    the nature of its commitment to the Financial Reporting Council’s Stewardship Code; or
  1. (2) 
    where it does not commit to the Code, its alternative investment strategy.
I can't see a statement on the website, but, weirdly, you can access a statement via this site which does third party hosting for regulatory disclosures. The Sand Grove statement is here. If you can't be bothered read it, here's the key bit:
The Firm manages event-driven strategies involving a variety of asset classes, global jurisdictions and timeframes, and approaches companies and their managements on a case-by-case basis. Therefore, while the Firm supports the principles of the Code, it does not consider it appropriate to conform to the Code at this time. 
If you stick the second sentence into Google you get a few other hits for hedge funds that coincidentally came up with the same set of words. Spooky.

Wednesday, 18 April 2018

No, Elliott is not Whitbread's largest shareholder

With the Melrose bid for GKN almost complete, our old friends Elliott are back in the news again, this time targeting Whitbread, where it looks like they will be pushing for Costa to be spun off. Cue lots of headlines, many of them identifying Elliott's stake making it Whitbread's "largest shareholder".

Well, now, you see, actually, err.... no.

If you read Elliott's statement carefully, that's not quite what they say. What they actually say is that they have "an economic interest in excess of 6% of the Company". They do not say they hold 6% of Whitbread shares.

There's a very good reason for this - they actually hold 0.01% of Whitbread shares. Here is the RNS statement that shows that they hold just 18,707 shares, but they also have a load of CFDs. Notably Elliott has secured voting rights, so in practice they are going to have real power.

But they are not Whitbread's largest shareholder or anything close to it. And we are doing Elliott's PR work for them if we erroneously describe them as such.

PS - Jim Moore has a good piece on the way that passive institutions allow firms like Elliott to do their thing.

Tuesday, 17 April 2018

ISS and US pension funds vote against ICTSI directors

Proxy advisors and shareholders endorse voting against non-independent ICTSI Directors in line with ITF recommendations

Global proxy advisors and shareholders have recommended voting against the re-election of non-independent Directors of Filipino port operator International Container Terminal Services Inc. (ICTSI) at the company’s upcoming Annual Stockholders’ Meeting on the 19th of April 2018.
Recommendations from the world’s largest proxy advisory service Institutional Shareholder Services (ISS), and the voting decisions of major global shareholders, support significant corporate governance concerns raised by the International Transport Workers’ Federation (ITF) in analysis released last month.
Paddy Crumlin, ITF President and Vice-Chair of the International Trade Union Confederation’s (ITUC) Committee on Workers Capital (CWC) said today: “ISS, the world’s largest proxy advisory service, advised shareholders to vote against the re-election of four current ICTSI Directors, including Directors Stephen A. Paradies and Jon Aboitiz who the ITF recommended shareholders vote against over their alleged contribution to major governance and operational issues at the company, and non-independence.
“ISS identified that ICTSI’s Board does not comply with the Filipino Government’s Securities and Exchange Commission’s Code of Corporate Governance for Publicly-Listed Companies.
“Failures identified include a lack of board independence, a failure to have a separate Chair and CEO, a lack of independent directors on the audit committee, and a lack of independent directors on the corporate governance committee.
“The ISS recommendations again send the message that ICTSI must put in place decent and sustainable governance structures in line with accepted international best-practice in order to avoid major operational issues, including protracted disputes that the ITF has observed across the company’s terminals, and relationships with censured regimes.”
Shareholders including United States pension funds have also publicly disclosed their voting intentions and are opposing the election of the Directors the ITF has highlighted. CalSTRS has disclosed that the fund has voted against the entire Board, including ICTSI Chairman and President, Enrique Razon, while CalPERS, one of the world’s largest pension funds, has voted against all but two members of the Board.
“The vote of the US pension funds is a clear vote for greater Board independence.
“These Directors have failed to ensure that ICTSI’s internal governance structures are strong and enough to avoid major operational issues. Only last week, international unions came together in Melbourne to condemn the company’s ongoing failure to resolve labour issues across their global network, including at their flagship terminal, Victoria International Container Terminal.
“The ITF calls on all ICTSI shareholders to vote in line with recommendations to send a message to ICTSI management that they must urgently make changes to their Board to ensure outcomes that are better for all shareholders,” Crumlin added.
For more information
Luke Menzies, ITF Asia Pacific | +61 433 889 844 | votenoICTSI@itf.org.uk  

Friday, 13 April 2018

IEA report on GKN/Melrose / old Takeover Panel comments

The Institute of Economic Affairs has stuck a report out today on the Melrose bid for GKN. Very broadly it says that there is nothing to get worked up about. Most importantly, a headline message is "leave it to the shareholders"

Interestingly, the report doesn't really look at how the bid got over the line as a technical process. I think this is important, because when you get into the detail it reveals quite a lot that suggesting that this is just about "shareholders" deciding doesn't really clarify.

For example, the report talks about a "vote" on the deal. Yet there was only a vote by Melrose shareholders to authorise the bid, GKN shareholders did not vote. If they had voted that would have raised its own questions, but because GKN shareholders had to accept the Melrose offer or not the dynamics were different.

Also the report does not distinguish between shareholders and other investors, and in particular does not look at how the hedge funds operate. For example:
This brings us to the third type of objection that the takeover has been decided by shareholders – including ‘rapacious hedge funds’ – who just want to make a quick profit regardless of the long-term implications for the business, let alone for the wider economy. This argument doesn’t stack up either. ....It seems odd to complain about ‘rapacious hedge funds’ making a quick profit if they do so by selling back to ‘long-term investors’, especially as they had presumably bought from ‘long-term investors’ who had lost faith in GKN’s management. 

To reiterate, the merger arb funds were largely not shareholders, they held derivatives (primarily CFDs as far as I can see) linked to shares. Hence I do not think they could "accept" the deal themselves, rather the counterparty (a bank) would have done this. Again, if you look at Elliott's carefully-worded statement about the bid it talks about having an "economic interest" in GKN shares, not holding shares, and says it will "support" rather rather "accept" the bid.

The hedge funds by and large don't seem to have bought shares from long-term holders, and so won't be selling back to them either. They built up derivative exposure with the help of banks (who did presumably buy the shares off institutions).

If the IEA does not think the hedge funds were out for a quick buck, let's keep an eye on hedge fund exposure to both companies once the deal is done. What we can see, even since the result was announced, is a further surge in the short position in Melrose on the part of some who are/were also long GKN through derivatives. The publicly disclosed short positions (0.5% and up in the FCA list) are now nearly at 17%. IHS Markit reckons one third of Melrose shares are on loan.

That does not look like a bet on the long-term success of Melrose to me. Rather it looks like an inherently short-term trade intended to take advantage of an expected drop in the share price when it has to cough up for GKN. Exactly what greater purpose this serves I am unclear, but then Adam Smith's hand is invisible.

As to the actual mechanics of how bids work when there is a lot of derivative action, I found this old Takeover Panel paper which sought to deal with these sorts of issues. I've dug out a couple of bits of commentary on what actually happens (some of this was in response to claims that derivative holders don't really have an influence.
First, the Code Committee believes that, notwithstanding the contractual arrangements between them, a counterparty will usually know the derivative investor’s likely wishes and therefore it would be na├»ve to assume that the counterparty (who has no economic interest in any hedge securities it holds but who does have an ongoing client relationship with the investor) will act without having some regard to those wishes. In addition, as indicated in paragraph 3.3 of PCP 2005/1, the Code Committee understands that it is frequently the expectation of a long derivative investor, notwithstanding the terms of the documentation, that his counterparty will ensure that the securities to which the derivative is referenced are available to be voted by the counterparty and/or sold to the investor on closing out the contract. If the counterparty does not hold any such securities (because, for example, its book is balanced by an offsetting short derivative), the investor would normally expect the counterparty to acquire the necessary securities, even if that resulted in a cost to the counterparty.…..the Panel continues to encounter situations where holders of long derivative positions behave as if they were shareholders and, more importantly, situations where investment bank counterparties enquire of investors with long derivative positions as to their preferences in terms of bid outcomes in order that the counterparties may take those preferences into account;
This is pretty much how I thought things work (NB it's an old paper, so perhaps practice has changed a bit). Essentially the huge funds act like shareholders even when they are not, and expect counter parties to help them, perhaps even when this isn't actually in the contract. Now again, you can argue that none of this really matters, and many "free market" types would. But it certainly makes the argument about "leaving it to the shareholders" more complicated. Do we mean "leave it to the counterparties"?

Equally folks on the Left could argue that to the extent that we do leave it shareholders to determine bid outcomes, those "shareholders" should be people who both hold shares and have an economic interest in them (i.e. only having one or the other means you don't qualify).  

Thursday, 12 April 2018

Wolfgang Streeck

Belated realised that I never blogged about How Will Capitalism End by Wolfgang Streeck, which I read some time last year. There are loads of interesting ideas in there, even if don't agree with some of it. Anyway, here's a little excerpt from the introduction:

"[U]nder financialised capitalism the private vice of greed in no longer magically converted into a public virtue - depriving capitalism of even its last, consequentialist moral justification. Stylizing owners and managers of capital as trustees of society has lost any remaining credibility, their much-publicised exercises in philanthropy notwithstanding. A pervasive cynicism has become deeply engrained in the collective common sense, which has come as a matter of course to regard capitalism as nothing but an institutionalised opportunity for the well-connected super-rich to become even richer. Corruption... is considered a fact of life, and so is steadily growing inequality and the monopolisation of political influence by a small self-serving oligarchy and its army of wealth defence specialists. Converting public trust into private cash has become routine and is seen as such, effectively rendering the social order morally defenceless in possible future moments of open contestation. Elite calls for trust and appeals to shared values can no longer be expected to resonate with a populace nursed on materialistic-utilitarian self-descriptions of a society in which everything is and ought to be for sale. Morally defenceless as they have rendered themselves, political and economic elites will require great creativity if things came to a head and they had to mobilise legitimacy for themselves and the social order they represent. One symptom of growing instability of the democratic-capitalist system is the rise of so-called populist parties, of both the Left and the Right, feeding on and fortifying a deeply emotional rejection of existing social elites."  

Saturday, 7 April 2018

Some reasons centrists continue to fail

Simon Wren-Lewis has a good blog up on Social Europe on the mistakes that centrists make. I've been thinking along similar lines, albeit with the aid of other people...!

1. Centrism is failing because is attacking its opponents morally rather than politically.

I'll be honest, I don't have a clear idea what many self-described centrists really believe in beyond the "wrongness" of others. While this may help as a way of forming an identity, I genuinely think this is a problem, not strength. Chantal Mouffe is very good on this:

"[T]he weakening of the discourses  constructing political identities in terms of left and right has not meant the disappearance of the need for a we/they distinction. Such a distinction is still very much alive; however, today it is increasingly established through a moral vocabulary. We could say that the distinction between left and right has been replaced by the one between right and wrong. This indicates that the adversarial model of politics is still with us, but the main difference is that now politics is played out in the moral register, using the vocabulary of good and evil to distinguish between 'we the good democrats' and 'they the evil ones'.
"This can be seen, for instance, in the reactions to the rise of right-wing populist parties, where moral condemnation has generally replaced a properly political type of struggle. Instead of trying to grasp the reasons for the success of right-wing parties, the 'good' democratic parties have often limited themselves to calling for a 'cordon sanitaire' to be established in order to stop what they see as the return of the 'brown plague'.
"To construct a political antagonism in this way is what I call the 'moralisation of politics'. This is something that were can see at work in many different areas nowadays: the inability to formulate the problems facing society in a political way and to envisage political solutions to these problems leads to framing an increasing number of issues in moral terms. This is, of course, not good for democracy because when the opponents are not defined in a political but a moral way, they cannot be seen as adversaries, but only as enemies."
It's hard not to think of the Democrats, and Hillary Clinton in particular, when reading this, though the interview is from 2007. I would also add that centrists also attack political opponents to their left, not just to the right, in moral terms. It is very striking that most of the attacks on Labour are focused on the "wrongness" of Corbyn or McDonnell in moral terms. Even now there is very little attempt to understand why they, and specifically the policies they articulate, are popular.

And finally what sort of message does the discussion, coming primarily from centrists as far as I can seen, of "open" and "closed" approaches to politics send? I am yet to see anyone using this division identify themselves as "closed", nor is there much suggestion that the "open" can learn from the "closed".

2. Centrists can look like populists on policy

It's pretty unenlightening to point this out, but populists simplify and deny complexity. Certain things are obviously "wrong" and the solutions are equally obvious. But centrists can often do this too, and in quite unattractive terms. Whereas populists invoke the people's will (which only they can represent), centrists will tend to invoke the superiority of technocracy - "what matters is what works". The impression is that there is a very narrow channel within which policy can operate. There are "right" ideas and "mad" ones. There is a frequent implication that you have to be pretty stupid to not accept the technocratic position on issues.

Jan-Werner Muller has made this kind of point recently:
"[A]t least as far as the current wave of populism is concerned, I would say that it is the particular approach to the Eurocrisis - for shorthand, technocracy - that is crucial for understanding the present-day rise of populism.
"In a curious way, the two mirror each other. Technocracy holds that there is only one correct policy solution; populism claims that there is only one authentic will of the people... For neither technocrats nor populists is there any need for democratic debate. In a sense both are curiously apolitical. Hence it is plausible to assume that one might pave the way for the other, because each legitimises the belief that there is no real room for disagreement. After all, each holds that there is one correct policy solution and only one authentic popular will respectively."
This really resonates with me. One of the things I found dispiriting about the dog end of the Labour government was the rigidity of much centre-left thinking on policy in my area (capital markets, corporate governance etc). But more recently this has really hit home in respect of foreign policy. It is really something to see the herd instinct of the commentariat whenever there is a conflict or possibility of one. Basically the opposition is expected to outsource its position to that of the government, otherwise it is betraying the country. As if there are only ever obvious and "correct" positions to adopt in foreign policy.

3. Centrists still can't tell us what they got wrong

As I've blogged etc before, one of the biggest problems for centrists is not being able to come up with a good explanation of what was bad in the Blair/Brown/Cameron/Osborne era. The ability of some people to switch directly from Labour to the Tories during that period (Dan Hodges even hilariously named David Cameron "leader of the British left" in one article) shows that they didn't really perceive much difference between what was on offer or believe that much needed changing.

Very broadly, social liberalism plus leaving the economy alone was ok. For many centrists, the financial crisis didn't challenge any beliefs, and hence they were quickly signed up to austerity and cutting public services to pay for private sector failings. When even people like Dominic Cummings identify the impact of the crisis as a major factor in Brexit, you might think that people whose only interest is in "what works" might pay more attention.

Yet even now, despite the rise of Corbyn, Brexit etc they really struggle to articulate what might have gone wrong. And certainly austerity and the excesses of the finance sector do not form a significant part of their analysis. Many clearly believe that the rejection of centrism is what has gone wrong. So the crisis is really that the public have lost the "right" answers that were already obvious, the idiots. In fact, according to one recent piece, the obvious answer to the current crisis can be located back in the 2010 Labour leadership election: David Miliband. Ho hum.


To state the obvious, a mixture of moralising, denial of alternatives and an inability to reflect on failure is perhaps not an attractive mix. Yet barely a day goes past when opponents are not described as morally reprehensible, or implied to be idiots for diverging from obvious policy solutions, all the while giving of a strong whiff of superiority. It's no mystery why they aren't winning.

Wednesday, 4 April 2018

Just a bit more on GKN

Here are a couple of things I noticed over the past few days. Anyone sharing my interest in this should have a read of John Collingridge's great piece looking at the end of the bid process. There are some really interesting nuggets in there.

For example, it appears that both LGIM and Blackrock backed the Melrose bid:


Neither manager has made any public statement as far as I am aware, something I increasingly think is going to have to change in future bid situations. Note the claim that LGIM didn't get back to GKN - I would a bit surprised if this is true. Incidentally, I don't think anyone "voted" their shares, they accepted the bid.

Blackrock's position is obviously also of interest given that this was a big call since Larry Fink's letter to corporates saying don't just think about the money. The other major stakeholder group in GKN - employees - was opposed to this deal along with management. If Blackrock still approved the bid, this gives us an idea of how that guidance may play out in practice.

The other really interesting bit in the article is the suggestion that Melrose was scrabbling around at the last minute to make sure it got over the 50%+ acceptance level:


This suggests that the result was very close indeed. 50m shares out of a total float of 1.72bn is 2.9%. If total acceptances were 52.3% then if these shares had not been pledged Melrose would have been short of the necessary level of acceptances. However, as I blogged previously, the hedge funds didn't largely hold shares, which makes me really curious about this. Was this a question of a bank counterparty having to pony up the shares, or did the hedge fund have to ultimately acquire shares to pledge them? If the latter did this change the expected returns from their trade - if so Melrose owe them one. And a missing 50m shares really narrows the possibles list down - how many hedge funds had a total position of 2.9% (or more)? This deserves more digging.

Finally, it's worth noting the total disclosed short positions in Melrose in the FCA list have gone back UP - over 13%, and some new names in the list (although they could have been sitting under the 0.5% level reported by the FCA). Note several of the positions date from 29th or 30th March - the day of the bid and the day after. Melrose's share price actually went up slightly post the bid result. Anyway, I'll keep an eye on it.