Shareholder Activism Rises Down Under; The Most Recent Target Is Seen as a Test of Activism Efficacy for Larger Companies

Shareholder Activism Rises Down Under

The Most Recent Target Is Seen as a Test of Activism Efficacy for Larger Companies

ROSS KELLY

Dec. 2, 2013 6:35 a.m. ET

Shareholder activism, made popular in the U.S. by the likes of Carl Icahn and Dan Loeb, is taking root in Australia as investors bristle over years of poor returns and conservative capital management. Washington H. Soul Pattinson SOL.AU -1.03% & Co., Australia’s second-oldest listed company, is the latest to find itself in the cross hairs of investors who think management isn’t doing enough to generate value. In October, the 110-year-old company, which has interests in businesses ranging from pharmaceutical retailing to coal mining, became the subject of an assault by two of its largest shareholders: Australian fund manager PerpetualLtd. PPT.AU -1.21% and investment banker Mark Carnegie.Mr. Carnegie is leading the push for investors to act more aggressively, having spearheaded unsuccessful attempts to break up national carrier Qantas Airways Ltd.QAN.AU +0.82% and newspaper publisher Fairfax Media Ltd. FXJ.AU 0.00%

But he isn’t alone. New Hope Corp. NHC.AU +1.72% , one of Australia’s biggest coal miners, led a shareholder revolt against the board of unconventional gas producer Dart Energy Ltd. DTE.AU -9.09% —which it has a 16% stake in—that led to the ouster of four directors, including the chairman.

Singapore-based Cashel Capital Partners launched a US$50 million fund in September specifically to buy stakes of up to 20% in companies that it can use to lobby for change. In Australia, once a shareholder’s stake exceeds 20% of a company’s total, it must make a full takeover bid.

Cashel Managing Director Angus Mason said a slowdown in Australia’s once-booming resources sector is exposing lax productivity at companies that could be managed better.

“When the revenue line isn’t growing, people start looking at other things to poke a stick at,” Mr. Mason said.

Potential targets of shareholder activism are paying attention, and so are consultants.Goldman Sachs, GS +1.10% for example, is tapping expertise it has garnered in New York to provide advice to clients in Australia.

“Activism has become commonplace in the U.S. and is becoming increasingly global,” said Nick Sims, head of mergers and acquisitions for Goldman Sachs in Australia. “How it will evolve in Australia is unclear at this stage, but we are encouraging our clients to be prepared just in case.”

In Australia, shareholders owning more than 5% of a company are able to to call meetings and propose resolutions—including moves to remove directors. This gives them a potentially effective channel for change, said Gabriel Radzyminski, managing director of Sydney-based Sandon Capital.

Sandon, an activist advisory and investment firm, expects to complete fundraising later this week to establish an activist fund with up to 100 million Australian dollars (US$91 million).

“One of the things that we question, though, is whether there is genuinely a lot of scope for hard activism at the very large end of the market,” Mr. Radzyminski said.

Soul Pattinson, with a market capitalization of A$3.5 billion, is a relatively large target, making Perpetual and Mr. Carnegie’s effort a litmus test for just how far up the food chain corporate activism can go Down Under. And, unlike some of the smaller recent targets, the company’s performance isn’t exactly problematic: Its share price hit a record in October and it is up 5.6% in the year to date.

Perpetual and Mr. Carnegie are concerned that Soul Pattinson’s heavy cross-ownership levels with affiliates, including building materials group Brickworks Ltd. BKW.AU -1.53%and Internet service provider TPG Telecom Ltd. TPM.AU +1.45% , are locking value away from investors.

They are pushing for the stakes to be unwound, which could return more than A$1 billion to shareholders. An outcome has been pushed back indefinitely after Brickworks launched a court action over what it says were deficiencies in the claims against it.

“We believe that the proposals are incomplete, inaccurate and unwarranted based on the significant outperformance delivered by both companies over more than 40 years,” a spokesman for Soul Pattinson said.

According to Mr. Carnegie, Australia’s legal system favors companies over shareholders, presenting more obstacles for activist investors to navigate, including strict provisions in takeover rules that limit the ability of shareholders to act in concert.

Still, Mr. Carnegie hopes that the high-profile Soul Pattison dispute will help blaze a trail for others.

“If somebody cracks the code, they’re really going to be able to go all the way,” he said.