FRANKFURT (Reuters) - Activist investor Elliott sees scope for cost cuts at food processing machinery maker GEA (G1AG.DE) and thinks its current restructuring plan is not good enough, a person close to the fund manager said on Wednesday.
Elliott Management isn’t planning on ousting the current leadership of GEA or pushing for a break-up, the source added, after the fund manager revealed a 3.01 percent stake in the German firm which sent GEA’s shares up nearly 7 percent.
“A break-up of GEA is not part of Elliott’s investment thesis,” the person said, adding that the investor saw no need for the company to accelerate its international expansion.
“It is about internal housekeeping. There is tremendous potential for margin improvements,” the person said, adding that Elliott is aiming for a constructive dialogue with the current management.
Elliott, which owns stakes in European companies such as Akzo Nobel, BHP Billiton and AC Milan, declined to comment.
Another activist investor Albert Frere took a 3 percent stake in GEA in August.
GEA, which has grown through a number of acquisitions in recent years, is in the midst of a restructuring program, which Elliott views as poorly executed and communicated, the source said.
A spokesman for GEA, which has issued two profit warnings over the last twelve months, said that the company has been in contact with Elliott as part of its normal investor relations.
While large job cuts are not part of Elliott’s plans for now, it does see scope in GEA shutting some of its 65 sites, eking out savings in procurement and investing in more profitable parts of the business, the source said.
It also sees capacity for GEA to return cash to shareholders by expanding its share buy-back program to more than 500 million euros annually, the source said.
Analysts at Barclays pointed out that Elliott’s investment came after four quarters of disappointments, which has seen GEA’s stock decline by 21 percent over the last year, while the sector index .SXNP rose by the same amount.
“GEA is the most-shorted stock among our European capital goods names,” Barclays said in a note to clients.
With tailwinds from surging demand for capital goods and increasing dairy prices - dairy products machinery is a main GEA product line - the company is seen having the potential to get back on track, according to analysts.
“The underlying business quality is still excellent in our view and should enable GEA to considerably expand margins again in the coming years,” analysts at Hauck & Aufhaeuser said.
Elliott sees potential for GEA to increase its EBIT margin by 4 percentage points and achieve its medium-term margin guidance of 13 to 16 percent, the source familiar with the matter said.
In Elliott’s view, the closure of sites, improvement at GEA’s services business and cheaper procurement could help achieve that goal, the source added.
GEA’s operating EBIT margin stood at 8.9 percent in the second quarter of 2017.
While Elliott is not pushing to oust current executives, it is seeking clarity on succession planning, the person added.
GEA Chief Executive Juerg Oleas’ mandate runs until December 2019.
Reporting by Arno Schuetze; Additional reporting by Tom Kaeckenhoff; Editing by Victoria Bryan and Elaine Hardcastle