In 2015, there was a record number of activist shareholder campaigns in the United States. Although activist hedge funds targeted companies across numerous industries, several retail companies found themselves in activists’ crosshairs. These included companies such as fast-food restaurant chains, convenience store operators, auto parts retailers and department store retailers.
Although companies whose stock prices trail their peers are always at increased risk of shareholder activism, activists also cited the following factors at various retail companies: below-industry average margins, suboptimal returns on new stores or other announced business strategies, corporate strategy in light of industry changes, and corporate governance concerns.
In their campaigns, activists advocated the following strategies:
- capital allocation (i.e., increased dividends and stock repurchases);
- spin-offs of certain businesses, particularly operations in challenging markets (i.e., China) or not related to core geographic areas;
- mergers & acquisitions – typically advocating for a sale of the company to a larger competitor but sometimes suggesting acquisitions or “mergers of equals” in furtherance of industry consolidation;
- spin-offs of real estate owned by the retailer; and
- operational changes to improve business performance, including changes in management.
Many of these campaigns resulted in board representation for the hedge funds. And in some cases, there was a change in senior management.
Retail companies should be prepared for shareholder activism, particularly where industry consolidation is taking place and an M&A transaction could produce an immediate short-term return for activists. Recent articles on shareholder activism include Responding to Activist Hedge Funds and Threatened Proxy Contests and Court Addresses Director’s Conflict of Interest From Hedge Fund’s Short-Term Investment Strategy.