The gloves are off in Tokyo as one of Britain’s most unloved but widely championed activist investors, The Children’s Investment Fund, goes full-frontal in its assault on Electric Power Development Co, the Japanese electric power wholesaler and nuclear energy company known locally as J-Power.
It’s one of those vicious but complex corporate battles that can easily lose the initiated with its arcane twists and inside detail — in this case, far more than the average reader probably needs or wants to know.
But in the broader context, it’s worthwhile - and possibly highly instructive for other activist investors - to watch TCI’s pugilistic strategy, and its aggressive courting of publicity to help its cause, in its various investments around the world.
TCI, as Financial News notes, has a reputation for publicly attacking corporate management. Its public demands last year for change at ABN Amro, where it owned more than 1 per cent of the shares, led to the Dutch bank being taken over by a consortium led by RBS. This year, US congressmen criticised TCI’s demands for business change at national railroad CSX while Tokyo blocked the fund’s plans to increase its stake in Japanese nuclear energy company J-Power, a decision it is contesting.
Last year, it also lost its campaign to block the merger of the NYSE and Euronext. And now, it has taken a stake of almost 1 per cent in the CME Group and a smaller stake in New York Mercantile Exchange Group as the two trading groups struggle to persuade shareholders to back their proposed $9bn merger.
TCI’s intentions in relation to CME are not clear. It may be a simple bet, notes Financial News, that CME shares are undervalued after a sharp fall this year, and that any recovery will drag up the value of Nymex shares. But who knows? In TCI’s combative world, it may again, lead to a full-on brawl.
In Japan, TCI has essentially been trying to double its stake in J-Power from 9.9 per cent to 20 per cent, as well as promote various internal changes including bringing in external board members. These moves, TCI says, are all in the name of better corporate governance in Japan. Actually, we tend to think - like all of TCI’s forays into the corporate wrestling ring - they’re more about money.
TCI on Wednesday said it would launch a proxy battle against J-Power, demanding higher dividends and a limit on cross-shareholdings. The move comes a week after Japan’s government ordered the fund to drop its plan to double its holding, citing national security concerns about possible stable power supplies and the like.
The order marked the first foreign investment Tokyo has rejected on the grounds of national security — and was unusual in a Japanese sector (electric power) which has been comparatively open.
As the Nihon Keizai Shimbun observed, the launch of TCI’s proxy battle is the latest twist in a long-running dispute that has put Japanese attitudes to corporate governance under the international spotlight, with critics of J-Power and the government saying it reflects badly on Japan’s level of attractiveness to international investors.
Unsurprisingly, though, TCI’s moves are highly divisive — and cut across Japanese-Western lines within the investment banking community in Tokyo and elsewhere. Some analysts believe TCI is fighting the good fight. Others — including some with key western investment banks - side with Japanese arguments and say J-Power would be “mad” to bow to TCI’s demands.
In a statement Wednesday, TCI said, “Management’s lack of respect for genuine shareholders has left TCI with no alternative but to solicit proxies from shareholders…” And, just to send that extra chill through J-Power’s management, it added: “Many of J-Power’s large shareholders have privately acknowledged to TCI that our proposals are reasonable and in the best interests of J-Power.”
Further afield, TCI’s position bears closer scrutiny — despite its assiduous cultivation of Western media and its carefully honed image as a “noble activist” fighting the good fight against closed, inward-looking regimes and spreading the word on better corporate governance.
Consider how TCI’s effort to portray itself as an underdog fighting for ideals in Japan contrasts with its image in the US, where it is embroiled in an increasingly ugly battle with CSX Corp, the rail company in which it owns about 12.3 per cent stake.
The dispute includes a law suit and increasingly public arguments between CSX and TCI, which is trying to to get five directors onto the 12-member CSX board — among other attempted changes.
Ahead of a trial Wednesday over CSX’s allegations that TCI had violated securities law, CSX said TCI had offered “an endless stream of ill-conceived suggestions - including an LBO at $50 per share and a ‘junk’ recapitalisation - which, if implemented, we believe would be damaging to the company and would deprive shareholders of significant value”. Last month, TCI accused the rail company of a litany of securities law violations including illegally enriching its directors.
TCI is generating a lot of heat and light. It has also generated impressive returns in the past. With more than $10bn under management, TCI in 2006 made more than 40 per cent returns, while in 2005 it returned more than 50 per cent.
But it remains to be seen how effective its “don’t mess with us” approach has been in the past year. As one observer remarked: “If I was a TCI investor I’d care much more about my returns than how often they got onto the front pages”.
