As Europe slowly emerges from the global financial crisis, we believe favorable macroeconomic conditions and a dramatic shift in the fundamentals of how businesses are managed is underway. There is a focus on unlocking shareholder value with a more aggressive tone than we have previously seen. We believe this is leading to dynamic, company-specific opportunities across the continent.
Conditions are such that select European corporations are poised to take advantage of a generational opportunity to grow their companies to the next level as they make the most of low interest rates, the euro's precipitous drop against most currencies (especially the dollar), and weaker energy prices.
Over the last 12 months we have met with over 100 European management teams. A common theme was that growth was clearly emerging in their companies on a division by division basis. While there was no consensus on which sectors were showing across-the-board strength, we noticed many more positive developments in aggregate than managers saw in their own narrow operational sphere. The recovery is obviously not yet all-inclusive, but we believe it is definitely breaking out.
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Most importantly, however, a new value-focused corporate mentality influenced by U.S. shareholder activism has taken shape.
Since the start of the financial crisis, shareholder activism has risen in Europe and around the world, with
global shareholder campaigns increasing by 62% since 2010. Once considered pariahs, activist shareholders are at work across the continent, seeking to spur change and create value.
In fact, the acceptance of shareholder activism in Europe is largely the result of corporations who for years disregarded investors' calls for structural reform. In today's post-crisis environment, lip service promising change is no longer tolerated.
The root causes of activism are diverse: Activists are targeting companies that have underperformed significantly compared to peers. These activists are pushing aggressive transactions or strategic plans among companies that possess a diverse set of assets under which a split-up could improve strategic focus and bring stronger financial results.
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Though the underlying circumstances are varied, the common motivation is unmistakable: Creating shareholder value. Companies that are unwieldy, undermanaged and over-leveraged are ripe targets for change.
Investors are not voting with their feet as much as in the past. They now realize that as shareholders they are owners in a business and can and should push the companies to stay focused on value creation.
Merger and acquisition activity is another significant force serving to re-make the European corporate landscape. M&A activity for European targets
totaled $869.8 billion during 2014, an increase of 55% compared to the level of activity seen in 2013.
Further, some European companies that have successfully cut costs and increased margins are out of options to grow the bottom line because top-line growth isn't yet materializing. A logical step for these companies to create shareholder value is to spin off lower margin or non-core businesses into separate companies, leaving the parent company with an even better margin profile and, ideally a higher valuation and stock price.
Spinoffs are also becoming more common across Europe. With recent examples including Abengoa, Osram, Royal Dutch Shell and Metso, these transactions make for a rich source of ideas to evaluate. Companies resulting from spinoffs can be extremely attractive situations, as they are generally not well understood parts of larger companies that can come to the market extremely mispriced.
Globally, there were 60 spinoffs with an initial market value of $150 billion in 2014, compared with 37 with an initial market value of $86 billion in 2013, according to Spinoff Research. This represents the highest annual total since 2000.
We believe that an increase in activist campaigns in Europe in 2015 will spur increased spin-off activity in the region from the 32 spinoffs the region saw in 2014.
We believe there is a confluence of events that collectively make this an exceptional time to be investing in Europe – the price of oil has dropped, the euro has weakened, interest rates are at generational lows and company valuations are very attractive.
Any one of these events could have a positive impact on certain companies, but the collective effect, coupled with quantitative easing, is so substantial that investors must focus now to take advantage of this compelling investment opportunity.
Though the European opportunity is coming into sharper focus every day, we believe we are still in its “early innings.” Undeniably, investors who didn't have a stake on the continent over the past two years have missed some considerable gains. But, we believe there is much more to come.
David Marcus is co-founder, CEO and CIO of Evermore Global Advisors, and portfolio manager of The Evermore Global Value portfolio.
