- Rising number of activist funds in Europe prepare to swoop
- Environmentally and socially focused campaigns increase
- U.K. remains most vulnerable to activist attack whilst activism in Germany is building momentum
London, 5 December 2022 - Global professional services firm Alvarez & Marsal ("A&M") today announces the findings of its latest analysis and predictor of shareholder activism in Europe for 2023, the "A&M Activist Alert", or "AAA".
The outlook predicts that as economic and financial visibility improves throughout 2023, there will be a wave of activism across Europe. In total, 144 companies have been identified as being at risk1 of activist attacks in the next 18 months.
In 2022, there has been a steady increase in the number of funds using activist strategies2 in Europe. A&M is currently tracking 96 funds, up from 93 in 2021 and 89 in 2020, a signal that activists and their increasingly 'constructivist' tactics are becoming more accepted across Europe. These new entrants are primarily from Europe, particularly the UK, marking a shift away from the US activist funds.
Environmentally and socially focused campaigns are also on track to rise 22% and 14% in 2022 com-pared to the previous year. Among these new entrants, there have been a growing number of activist funds emerging with strategies dedicated to the 'E' and 'S' of ESG.
Malcolm McKenzie, Managing Director and Chairman of European Corporate Transformation Services, said: "Activists have been steadily building momentum in recent years, with new market entrants and a growing focus on environmental and social demands. In the last few months, activists have been busy raising money, plot-ting their strategies and identifying targets for the year ahead. Corporates therefore need to act now and address areas of vulnerability before the wave of activism builds and threatens to overwhelm them in 2023. While the barbarians are not yet at the gate, they are watching and waiting on the hill."
Regional trends
- The AAA predicts that, while the U.K. will remain the preferred market for activists in Europe, the levels of activism in the immediate term will remain relatively subdued until the wave arrives in 2023. This reflects relatively strong performance by U.K. companies in 2022, including good shareholder returns and cashflow margins. However, forecast 2023 performance is looking weaker particularly around protecting revenues, managing indirect costs and driving returns on capital. This will give activists the impetus to strike, particularly as financial visibility improves.
- Germany remains the second biggest predicted market for activist funds, with 29 predicted tar-gets identified, an increase of one since May. This is driven by growing acceptance of sharehold-er activism among market participants, as well as the relative underperformance of German cor-porates in maintaining margins, generating cash and driving returns on invested capital.
- France remains an area of focus, with the number of targets unchanged at 23 since the mid-year outlook. Relative underperformance in sustaining revenues and shareholder returns, as well as weak returns on capital and cash margins, are expected to attract activist attention.
Sector trends
- After falling out of favour during the pandemic, consumer companies are firmly back in the spot-light, with 31 predicted targets. Underperformance across the board in Europe compared to global peers has made FMCG companies and clothing retail particularly vulnerable. How they respond to rising inflation and the cost-of-living crisis will also be under the microscope, with those that fail to adapt coming under growing pressure from all sides.
- The energy sector has the biggest percentage growth in the number of predicted targets - up by 25% from eight to 10 since the May update - thanks both to growing environmental activism and pressure to justify capital allocation decisions during a period of rapid revenue growth. In order to stave off activist attention, energy companies must balance demands for greater shareholder re-turns against expectations that they should increase production and accelerate investment in re-newables.
Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: "Having long been the favoured hunting ground for activists, UK companies have been performing better across several key metrics compared to their European peers, insulating them from some of the activist heat. However, forecasts for UK corporates in 2023 suggest average performance will decline relative to global peers meaning that boards here, and indeed across Europe, cannot be complacent. Investors will be closely scrutinising how these businesses cope with the cost-of-living, climate and energy crises. They will likely come under activist attack if they fail to respond and deliver."
Growing focus on Environmental, Social and M&A demands
Environmentally and socially focused campaigns are on track to increase by 22% and 14% respectively this year. The number of these campaigns are predicted to continue to grow in 2023 and into 2024, although tougher economic conditions will encourage more investors to focus on shorter-term financial performance, making it harder for "E" and "S" focused activists to gain traction for their demands from fellow shareholders.
Lower valuation multiples across Europe will lead to an upswing in M&A opportunities next year, which will create more targets for activists to intervene. In particular, we will see activists becoming involved in discussions about takeovers or disposals, as well as bumpitrage, where they pressure acquirers to improve their offers for target businesses. The UK and Germany have particularly depressed forward price/earnings ratios, meaning these markets are ripe for deal activity - and the activism that inevitably follows.
Malcolm McKenzie, Managing Director and Head of European Corporate Transformation Services, said: "Campaigns with an environmental or social angle continue to increase as a proportion of activism overall, and this trend shows no sign of slowing down. However, the success of this approach will be tested as the reces-sion bites and short-term financial performance becomes more of a focus potentially at the expense of broader sustainability and social concerns. As ever, though, boards need to strike the right balance be-tween these often-competing priorities to avoid being targeted. Activism driven by M&A opportunities and wider capital allocation demands is also expected to rise next year. Corporates should focus on optimis-ing capital allocation and, where possible, driving asset-light operating models to avoid activist attention."
Footnotes
1 Risk defined by inclusion in Red and Amber Lists from the AAA model, which highlights corporates facing heightened risk of activist targeting
2 Note: funds using activist tactics rather than "activist funds"
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