International Policy Digest

Business /21 Oct 2020
10.21.20

Xavier Niel and Léon Bressler’s Gambit the Latest Misguided Move from Activist Investors

In the latest heated corporate battle, French telecom magnate Xavier Niel and entrepreneur Léon Bressler are mounting a slick campaign against Unibail-Rodamco-Westfield (URW), the shopping mall group which Bressler headed from 1992 to 2006. Specifically, the pair, representing a coalition of investors with a combined stake of 4.1% in URW, are exhorting fellow shareholders to vote against a €3.5 billion rights issue at the company’s general meeting on November 10.

While it’s unclear whether Niel and Bressler will be able to rustle up the 35% of shareholders needed to scupper the rights issue, they’re going to great lengths to try and impose their vision of how the company should be run, deploying a strategy lifted straight from the playbook of Anglo-Saxon activist investors. Niel and Bressler have rolled out a campaign site criticizing URW’s plan to shore up the company’s financial situation and streamline its business portfolio, dubbed RESET, and recommending an alternative plan they call REFOCUS, centred around their conviction that URW should sell its US assets to pay down its debt.

Niel and Bressler, who are also seeking seats on URW’s board for themselves, have denied that they are acting as activist investors—but their aggressive manoeuvring threatens to replicate the errors which countless activist investors have committed by prioritising short-term gain over long-term growth. Indeed, despite Niel and Bressler’s attempts to anchor the strategic about-face they are proposing in both emotional terms—URW should become a purely “European champion,” they argue—and in economic ones, the activists’ plan rests on some faulty assumptions and is likely to cause more problems than it resolves.

Niel and Bressler’s consortium has argued that URW’s acquisition of mall operator Westfield has depressed the company’s share price and caused the firm to underperform compared to its peers. In fact, however, less than a quarter of the stock market losses URW has suffered can be attributed to its purchase of Westfield, with external factors including the COVID-19 pandemic making up the rest. Furthermore, as URW CEO Christophe Cuvillier noted in a recent interview in the French press, the activists have argued that URW has sufficient liquidity to make it through the current economic downturn without the rights issue—but have conflated the firm’s €3.4 billion in cash on hand and its €9.3 billion in lines of credit, which frequently need to be refinanced. It’s difficult, too, to see how Westfield’s US properties—a portfolio of higher-end shopping centres—could be sold off under the current circumstances at anything close to their true value.

The REFOCUS scheme which Niel and Bressler are pushing is a risky bet, as the Wall Street Journal noted—but they’re far from the only activist agitators to fall into the trap of prioritising short-term shareholder value over long-term stability, occasionally with disastrous consequences. One of the most quintessential examples is the once-iconic American retailer Sears, which was driven into the ground after activist investor Eddie Lampert took over as CEO.

Sears was already in financial trouble when Lampert came on board—but the tactics which he imported from his hedge fund activism stood no chance of turning around its sinking fortunes. Lampert’s entire focus was on eking out value for shareholders at the expense of everything else—from the employees whom he micromanaged to the customers he alienated through programmes like the Shop Your Way rewards scheme, which led to long queues at checkout but allowed the company to collect customers’ personal information which it then sold to third parties.

Lampert set strict curbs on any capital expenditure that didn’t directly translate into a bump in share price and instead spent billions on buying back shares, which left the company with infrastructure in a deplorable state—outdated stores with leaking ceilings and cracked floors. Lampert’s solution, to sell off the company’s core assets en masse, enriched him and his hedge fund but only hastened the firm’s demise. To make matters worse, Sears stores became chronically understaffed under Lampert’s penny-pinching tenure, sparking scenes of frustrated customers leaving the store empty-handed because they couldn’t find anyone to ring up their purchases.

This dubious strategy paid off in the short term, at least in terms of the only metric which Lampert cared about—the company’s share price. Sears’ stock price soared in the first years after Lampert took over, making him an estimated $1.9 billion through a 20 percent hedge fund performance fee. Lampert’s gross mismanagement—in particular, his disastrous error of trying to run the retailer as if it were a hedge fund—eventually drove the firm into bankruptcy and earned Lampert a lawsuit alleging that he stripped the company of its crown jewel assets in order to enrich himself and a handful of other investors.

Activist investors mostly laid low in the early months of the coronavirus pandemic, but Niel and Bressler’s bid to shake up URW’s strategy is a strong indication that these investors and hedge funds are once again ready to engage in aggressive action. Just last week, the National Law Review predicted an uptick in activist investment in the retail sector over the next few months, anticipating that activists will try and take advantage of share prices depressed by the pandemic to pick up stock at historically-low prices and press for board seats and strategic shifts. More long-term shareholders have only to look at past examples such as Sears’ spectacular implosion to remember why yielding to the temptation of a fire-sale of valuable assets and refusing to free up capital for badly needed investments can be a catastrophic mistake.