Having failed in its first attempt to parachute in new Board members at Electra Private Equity, Edward Bransom’s Sherborne Investors is having another go, but why is a turnaround specialist targeting one of the best performing private equity investment trusts and what are they hoping to achieve?
Sherborne has requested an EGM (emergency general meeting) to put to shareholders a proposal to appoint Edward Bramson and Ian Brindle as Directors of Electra. What is confusing investors about Sherborne’s ongoing campaign is their raison d’être is to get involved in struggling companies and turn them around, but to describe Electra as struggling is far fetched when you look at the performance of the trust, which invests directly in businesses, most of which it owns outright such as restaurant chain TGI Fridays and caravan park operator Park Resorts. Over 1, 3, 5 and 10 years Electra has produced total returns (share price growth + dividends/buybacks) of +22%, +95%, +153% and +218% respectively, these returns are substantially ahead of its index of listed private equity peers, and ahead of the FTSE All-Share index which has produced total returns of +7%, +35%, +49% and +111% over the same time frame.
This means that Electra has produced an annualised total return of 13.7% per annum over the past decade compared with a return of 5.9% per annum for the FTSE All Share. We reviewed the trust recently and you can read that here.
Bramson last attempted at gain board seats in October last year but was defeated in a vote to shareholders. Since then he has increased his stake from around 20% to a smidgen under 30%, and added to that he has support from some shareholders, including some who have profitably backed him with previous turnaround investments. Through owning convertible bonds, Bramson actually has control over 31.05% of the shares; in last year’s vote he received backing from 38.2% of votes cast, including his own 20% stake. This represented 31% of the overall share capital because not all shareholders voted, and means that now that he has direct control over 31.05% of the voting rights, and if not all shareholders vote again, he is in with a much greater chance this time of winning. Sherborne has now spent around £300 million building its Electra stake.
Sherborne tactics have changed this time. At last October’s EGM, they were seeking to replace one of the existing directors, Geoffrey Cullinan, as well as seeking to lead a ‘strategic review of the company’. However, the latest proposition does not specify any proposed role for Sherborne’s representatives.
The Electra Board has responded to Bramson’s latest move with a clear cut no. There have been a total of five meetings between the company and Mr Bramson since his last proposal was defeated. All along the Board has privately confirmed to Mr Bramson their unanimity in opposing his plans, and they’ve now made this opposition public.
They have stated their believe that the board should be independent of any significant shareholder, and that the management of the trust by Electra Partners, who are a separate entity from the trust, is in the best interests of all shareholders.
The Board wrote to Sherborne on 12th August, and said that they “remained convinced that the interests of all shareholders are best served by the combination of a Board that is wholly non-executive and independent of any significant shareholder”.
They continued: “At the same time the Board took into consideration your stated objectives as an investor (to turnaround undervalued businesses)…. we do not believe Electra requires “an operating turnaround” either at the plc level or within individual portfolio companies.
“Finally and despite repeated requests, we have heard nothing from you on where you saw opportunities to improve the operational performance of any of our portfolio companies. For all these reasons, the Board has decided unanimously not to offer you and Ian Brindle board representation”.
The Electra Board carried out its own ‘strategic review’ following the Sherborne defeat that resulted in fees being cut by around £7 million. In addition, debt of £145m was repaid, resulting in a reduction in financing costs of around £4m.
Finally, a dividend policy was introduced with a commitment to distribute 3% of net assets per annum.
JPMoprgan Cazenove analyst Christopher Brown said “It is totally unclear to us what Mr Bramson’s objectives are given Sherborne’s turnaround investment mandate and the fact that Electra is not in need of a turnaround, in our view. Its long term track record, shown below, speaks for itself”.
JPM Cazenove think the vote will be close because of Sherborne’s increased control over the voting rights. They continue to have a Buy rating on Electra’s shares.
Numis also thinks the chances of Sherborne succeeding this time are far greater, and would likely succeed if the same shareholder turnout last time was repeated again. They also noted however that shareholders in Electra have “been beneficiaries of Sherborne’s activism, both in terms of support for the share price as a result of Sherborne’s stake building, and by encouraging the Board to respond to valid shareholder concerns”. The continued “Sherborne needs to provide more detail on how it believes that it can enhance value from Electra’s portfolio in order to gain support from shareholders outside its fan club”.
Even if he doesn’t win this time, with such a large shareholding he will be able to call for EGMs in the future repeatedly with the realistic hope of eventually succeeding in his aims. This makes it more likely than not that the Electra Board will make an accommodation with Sherborne, the question is what would this look like? I don’t have the answer but options could include Sherborne gaining the two Board seats it’s after, though the Board has made public their opposition to this. They could offer to buy Sherborne out, but they are likely to only agree to this at a substantial profit, and a £300 million stake is an expensive solution. An outside third party buyer could be another option but there is no evidence of interest there as yet.
Perhaps if Sherborne came clean to shareholders and shared with them their plans for the trust other than the scant ‘making operational changes’ shareholders might be better equipped to make an informed decision. Whatever the outcome, the strong performance of Electra even since last year’s EGM makes the case made by Sherborne in favour of change even weaker.