Irenic Capital, an activist hedge fund, has built an equity stake of roughly 4% in Big Yellow Group, the UK-based self-storage company. Irenic has spent months privately urging the board of Big Yellow Group to explore a sale, arguing the company’s shares are undervalued.
Big Yellow’s shares have fallen about 25% over the past year and is valued near to a six-year low, despite solid annual results. Blackstone made an approach as a potential buyer last October, but talks collapsed: Big Yellow Group claimed Blackstone’s offer undervalued the company and that it would continue to consider options to maximise shareholder value.
Analysis
An activist investor is one that buys a significant but minority equity stake in a publicly traded company (like Big Yellow Group) in order to influence the company’s management. This sort of activism in UK-listed companies often follows a pattern: a share price weakened by market conditions, a failed buyer offer that sets a price expectation, and then investors like Irenic pressing the board to run a sale process.
The board is not obliged to sell. Its directors’ duties require it to act in the interests of shareholders as a whole, which includes judging whether an offer reflects the company’s value. The issue, though, is that a board rejecting offers, or refusing to engage, must be able to justify that decision to shareholders.
What does this mean for the sector?
- Unsuccessful buyer offers can become a pricing benchmark that shareholders hold the board to, so how a board handles a first approach shapes later dynamics
- Cheap valuations in the UK property market and a wave of consolidation will likely draw more activist investors to real estate companies
- Company directors are under pressure to offer up suitable alternatives for share value maximisation if they are unwilling to consider a sale where share performance is weak
How to use this in applications
Application
Public M&A teams would advise Big Yellow on the Takeover Code if a potential buyer emerges. The Takeover Code is the primary rulebook governing public acquisitions in the UK. For example, a rule is that once an offer is in contemplation, the board’s freedom to act is restricted.
Corporate governance teams would advise the board on engaging with its shareholders, and on its directors’ duties when weighing a sale. Under section 172 of the Companies Act 2006, directors must act in the way they consider most likely to promote the company’s success for its members as a whole, and under Takeover Code principles they must not deny shareholders the chance to decide on the merits of a bid.
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