LONDON Activist investors who take stakes in companies to push for major change are looking to capitalise on a slide in sterling following the Brexit vote to buy into British targets cheaply.
The amount of money invested by activist investors in British companies hit a nine-month high of 3.4 billion pounds ($4.2 billion) in September, according to data from London-based industry monitor Activist Insight.
That represents a 27 percent rise from June, when Britons voted to leave the European Union, with most of the investment - about 2 billion pounds - coming from abroad. Companies that activists have bought into, and driven boardroom change, include distribution and aviation group John Menzies and tool rental firm Speedy Hire.
Sterling has fallen nearly 18 percent against the dollar and about 15 percent versus the euro since the June 23 referendum, helping investors whose funds are held in those foreign currencies to buy into British firms for less.
The pound sank about 10 percent in a "flash crash" on Friday and, while it recovered much of that, the Bank of England's trade-weighted sterling index is near its lowest level on record.
"Pre-Brexit, we had about 10 percent of our assets in British companies and post (Brexit vote) now we're about 30 percent," said David Neuhauser, managing director of U.S.-based activist manager Livermore Partners, adding that the increased investment was down to sterling's weakness.
"If you see us make more investments, I see more in the UK than in the U.S."
He declined to say which companies Livermore had bought into. But he said its activism strategy included seeking targets where shareholder value could be boosted through a sale of the group, or spin-offs or sell-offs of units, and that he saw particular opportunities for this in Britain.
A continental European activist investor, with $2 billion in assets, also told Reuters that sterling's fall had created opportunities in British companies, which they sought to exploit.
"I was just computing the currency-adjusted earnings for some of our potential targets ... the currency has depreciated so we are looking at savings in the range of 15 percent on the companies I've been looking at," said the investor, who declined to be named as they did not want to reveal their positions.
The investor said they targeted companies where they saw a simple and quick fix to problems, typically where long-term shareholder returns lagged peers, management was focusing on a bad division of the business, or where there was an inefficient capital structure with too much cash or too little debt.
Investors can engage in activism for many reasons as they look to boost the value of their shares, sometimes in the face of resistance from the management of the company.
While some hedge funds and others are set up explicitly to engage in such activity to drive up the target stock for profit, long-term investors can decide to push for a change in strategy, which can include pushing a company towards being taken over.
The Activist Insight data covers investors who identify themselves as an activists and take stakes of over 5 percent - which must be publicly disclosed. Non-UK activists increased their aggregate investment by 30 percent since June to 1.98 billion pounds, according to the data, which did not identify the investors or target companies involved.
Activism campaigns launched since the referendum include German activist Shareholder Value Management's (SVM) push against the board of John Menzies in July, when it announced it had built up a 7 percent position.
SVM asked for John Menzies to split its businesses and hire an independent chair. A new chair was appointed a few weeks later. The activist continues to agitate for a split.
Bank of England policymaker Michael Saunders said on Tuesday that he would not be surprised if sterling fell further, warning a "bumpy" Brexit could sharply reduce British economic growth.
The declining currency has left some companies ripe for activists looking to push boards to create shareholder value by engaging in mergers and acquisitions.
Russ Mould, an investment director at stockbroker AJ Bell, said there were many companies in Britain that could be potential M&A targets, which he said often made such firms attractive to activist investors.
"There are several FTSE 250 firms which have strong competitive positions, decent balance sheets and global reach - facets which may tempt a bidder," he said, citing industrial software firm Aveva, precision instruments maker Spectris and engineer Renishaw.
Aveva, Spectris and Renishaw all declined to comment.
One investor who has already benefited from M&A has been U.S. activist hedge fund Elliott Associates, whose decision to gradually buy stock in Premier Farnell since June was rewarded by a bid from U.S. firm Avnet a month after the vote. It started to unwind its 6.5 percent position in August.
Elliott declined to discuss the investment or its activism strategy.
'ONE WEEK, 5 PCT CHEAPER'
While the share prices of many big British companies have been bolstered by sterling's weakness on account of their overseas earnings, insulating them from the effects of Brexit uncertainty, more domestically focused firms have fared worse.
The FTSE 250 mid-cap index has lagged the blue-chip FTSE 100 since the referendum, up 3.7 percent versus 11 percent, weighed down by falls in the value of a number of its more domestically-focused constituents, Thomson Reuters data shows.
This has meant that even British activist investors, whose funds are in sterling, have at times managed to buy into companies relatively cheaply because of their low valuations.
UK-based hedge fund Toscafund started buying into Speedy Hire in July and has built up a stake of about 19 percent. It launched a campaign in August seeking the chairman's resignation and for the company to appoint a new director of its choosing.
It was partly successful; while investors voted to support the chairman at the annual general meeting, Toscafund managed to get its nominee elected to the board.
Toscafund did not respond to requests for comment.
UK-listed fund firm Crystal Amber, which manages 200 million pounds in assets, has made gains of 34 percent since July 1, in part by buying up stock in commercial vehicle hire firm Northgate and Restaurant Group in the three days after the vote.
"We are very confident there are more opportunities post-Brexit," said Richard Bernstein, investment adviser to Crystal Amber. "There are a host of great British companies that this week alone have become 5 percent cheaper."
($1 = 0.8033 pounds)
(Additional reporting by Vikram Subhedar; Editing by Pravin Char)