All Access

All-Access Weekly Digest

Standard

Retail Deals

Retail Deals Alerts

Alert

Retail Deals Thought Bubble

Thought Bubble

mustard

BFD Expert Voices - Retail Deals

BFD Expert Voices

Several major retailers face key shareholder votes that could change their futures, under pressure from activist investor campaigns. 

In our special proxy season edition, we look at the factors driving these proxy fights and spotlight some of the major contests ahead. 

Deconstructing the dissidents 

Illustration of high contrast office buildings and the words "Proxy Season."

Data: Insightia; Note: "Successful" includes partially successful campaigns; Chart: Kavya Beheraj/Axios 

Kohl's, Big Lots and US Foods all are in activist investor crosshairs, under pressure to put themselves up for sale. SpartanNash, IAA and Hasbro face similar threats. 

Be smart: Activists have grown in number over the years, but they fail more than they succeed in retail and consumer company campaigns.

How it works: The chart above, based on data from research and media firm Insightia, tracks the number of activist demands (sell the company, fire the CEO, refresh the board, etc.) made per year and the outcome. 

The global data indicates that institutional investors (think BlackRock, State Street and Vanguard, aka, the Big Three), even after taking return hits owning consumer-related shares, are inclined to back management teams more often than not. 

Yes, but: An activist can still sway investors toward their case for change. In proxy fights, this is known as losing the battle but winning the war.  A fund may back management but the dissident's case remains close to mind. 

"With a proxy fight, activists [will] get their thesis out," Kristen Rossi, global head of consumer retail investment banking at Morgan Stanley, says. "Institutional investors care about [the activist’s] thesis and whether it's supportable."

The bottom line: Even with a poor showing in the retail-consumer space, these shareholders will continue to pick through companies in this sector for value creation. 

Boards and management teams, if they haven't been targeted yet, should assume a dissident will come knocking at some point. 

1 big thing: Consumer companies in the crosshairs

Kohl's is the activist campaign to watch most closely. Shareholders vote Wednesday on whether to support management or to back activist Macellum on a board shakeup that's aimed at forcing a sale process.

Why it's the BFD: Bidders have emerged during the proxy fight, which is unusual. 

Suitors include Hudson's Bay and a joint bid from Simon Property Group and Brookfield Asset Management. 

T. Rowe Price, with a more than 5% stake, has already said it's backing the Kohl's slate of 13 directors. It stands to reason that the Big Three are likely feeling the same, focusing more on the immediate need to assess the bids for the company rather than shaking up the board. 

Yes, but: If Kohl's gets sold, Macellum looks like a value creator for sparking the process. If the company goes it alone, Macellum has at least proved to its own investors that it isn't afraid to take its cause all the way. 

What we're watching: It's still possible that Macellum gets a board seat or more from the campaign, helped in part by the support of proxy adviser ISS, which backed two of Macellum's nominees. 

Regardless of what the vote outcome is, Kohl's will have to eventually say whether it's moving ahead to accept a takeover offer or going it alone.

2. The BFD: Kohl's in focus

A Kohl's store in California. Photo: Getty Images

Bob Marese, president at proxy solicitation firm MacKenzie Partners, tells Axios that the pandemic made retail and consumer companies even more attractive to activists: 

"You have companies that are facing a lot of challenges — macro-economic, supply chain, inflation. These challenges create openings for activists. Certain companies are struggling in terms of filling jobs, and this is definitely weighing on businesses. 

Another development is that we've seen a bunch of new entrants into the activism space. They're launching campaigns but they're not household names. And then you have some of the old entrants, like Carl Icahn, pivoting in a different direction with his environmental campaign."

Of note: Food distributors US Foods and SpartanNash are examples of companies facing macro-economic pressures, particularly supply chain constraints, that activists have seized on as pressure points. 

New kid: The campaign to force Big Lots into an auction process is being led by Mill Road Capital, a firm not known as an activist investor. This proxy season, midsized Macellum and Ancora are leading the majority of activist campaigns across the retail/consumer space, a role historically played by the likes of giant activists Starboard Value or Trian Partners.

3. COVID capitalism

Illustration of a briefcase housed inside a transparent COVID cell shape

Don't overlook the property piece of these activist campaigns, says Alvarez & Marsal managing director Paul Aversano. Activists' interest in legacy brick-and-mortar retailers is due in part to the record value of their real estate, he said:

"They look for as many value-creation opportunities as they can find and this is one that’s always been there.

It's not advantageous to tie up capital in real estate if there's an alternative that has a greater return.

In that vein, the retailer should use the cash to finance acquisitions or pay down debt, for example, rather than pay out special dividends."

Of note: The Kohl's campaign exemplifies Aversano's point on real estate. The retailer owns a significant portion of its property, which typically sits inside malls or occupies huge swaths of land along busy intersections and state highways. 

Where companies like Kohl's see their real estate portfolio as a source of strength, activist investors see it as an under-utilized asset.

Macellum has argued, as have activists taking aim at other brick and mortar retailers, that the company should sell its real estate portfolio, take the cash, return it to shareholders, and then lease back the properties from the new owners.

What we're watching: Kohl's has resisted such a move, and that is what has led, in part, to Macellum's second campaign against the company. The real estate portfolio is also the reason for buyers' interest.  

4. Location, location, location

King of Prussia Mall, 1970s. Photo: Getty Images

Data: Axios Research; Table: Axios Visuals

5. Calendar: AGMs to watch

Carl Icahn is the most well-known activist shareholder on the planet. He's taken down CEOs, forced companies into auctions, and made billions of dollars in the process. 

Yes, but: Why he's decided to take up the cause of pigs this spring is a bit of a head-scratcher, though it's well known that the animal welfare issue is one that is near and dear to his daughter's heart. 

What we're watching: Usually shareholders put a cause like this onto a proposal at the AGM. Not Icahn. He's nominated two directors at both McDonald's AND Kroger to force the issue. 

Along the way, an interesting alliance has formed between Icahn, PETA and actress Pamela Anderson. 

6. Carl Icahn, Pamela Anderson, pigs, proxy fights

🐮 Danone is ending its partnership with Chinese dairy firm Mengnui, by selling its 25% stake in milk powder maker Yahili (in exchange for 100% of the Dumex Baby Food infant milk business) and its 20% stake in a joint venture. http://axios.link/FmTX 

• Swiftline, an e-commerce software provider, has acquired Charm.io and aims to raise $24m in a Series B round, Axios reports. http://axios.link/ziok

May 09, 2022

Deconstructing the dissidents