10 May Gabriel Radzyminski says activism is a tool to unlock value
Source: The Australian Financial Review.
By: Ben Harvey.
Any company will ultimately bend to the will of the majority of shareholders, says the market-beating fund manager.
Since founding Sandon Capital in 2009, Gabriel Radzyminski has built the asset manager and its market-beating returns on a mix of value investing and shareholder activism.
Radzyminski’s flagship Sandon Capital Activist Fund has returned 13.2 per cent a year after fees over the past five years, versus 10.2 per cent for the benchmark, the S&P/ASX 200 Index. In more than 11 years since its launch the fund has posted only one negative year, when hit by COVID-19, with a subsequent 49 per cent gain over the year to March 31 as it lapped the COVID-19 trough.
Radzyminski says Sandon is a strictly value-focused manager that uses activist strategies as a tool to unlock more value from its investments. “I think one of the key things for people to understand is that any company will ultimately bend to the will of the majority of shareholders,” he says.
“It’s almost like an immutable law of physics. The reason being that shareholders can ultimately remove the entire board with a simple majority of those who turn out to vote.”
Sandon’s activism is about exercising all its rights as an equity owner to influence the direction a company takes, according to Radzyminski. Primarily the manager is focused on identifying undervalued businesses and if activism can be used to grow value for all stakeholders, it’s all the better.
“If you think of it like a property, we’re trying to buy something that’s a bit of a fixer-upper. But that has potential. It’s the worst house on the best street.”
The fundie has launched more than 40 fixer-upper activist campaigns since 2009, with the typical modus operandi being to engage other shareholders and hopefully management for support.
“Some have been friendly and collaborative,” he says. “Others have been overtly hostile, where we’ve fought the board. So part of our approach is that we don’t simply accept the status quo.”
One example of a successful turnaround in value is Sandon’s 2015 investment in steel-maker BlueScope.
“At the time BlueScope was described as a pariah in the market. I think they were losing something like $100 million a year just from the Port Kembla blast furnace,” Radzyminski says.
“But we saw it as actually one of the cheapest and best steel companies in the world. Most Australian investors overlooked the fact they owned a 50 per cent stake in the North Star joint venture in the US with Cargill, which is arguably the single best North American steel asset that exists today.”
Radzyminski says “little old Sandon” argued BlueScope should mothball the loss-making Port Kembla furnace in New South Wales to unlock more value in the overall business.
As a value investor you’re trying to buy cheap, and you know that you’re not the only one out there hunting.
— Gabriel Radzyminski
“And so the company eventually came out with a plan where they put the gauntlet down to the employees to say look, we need to save X-hundred million dollars a year out of Port Kembla or we’re going to shut it down,” he says.
“It worked, and I think it’s one of the great unsung success stories of Australian industrial relations because the company, the unions, the employees and to a degree the state government all worked together to make those savings to keep the thing alive.”
Sandon eventually sold its BlueScope shares for “a few multiples of what it paid” after BlueScope’s management went on to buy Cargill out for 100 per cent ownership of the US North Star asset that drove BlueScope’s April 27 earnings upgrade, to the delight of investors.
Another side-effect of Sandon’s strict value discipline is that many of the companies it owns become takeover targets on the basis other asset managers, companies, or private equity players eventually recognise the same value and turnaround potential.
Tabcorp, Boral, Illuka Resources, CML Group, Fleetwood Corporation, Watpac Group and Gindalbie Metals are all businesses where Sandon as a shareholder has publicly argued restructures or asset sales would benefit all stakeholders.
“As a value investor you’re trying to buy cheap, and you know that you’re not the only one out there hunting,” Radzyminski says.
“We find a disproportionate number of companies in our portfolio end up [takeover targets] and part of it I think is the bargain-hunting ethos, but also we tend to think about companies more strategically.
“In terms of, are a company’s assets best owned by the company or might there be a more logical owner of those businesses? And in doing that it gives rise to different ways of thinking about value, whereas often people think of value relative to market price.”
In absolute return terms he says womenswear retailer City Chic has been its best investment. It bought into the business when it was Specialty Fashion Group and agitated for the May 2018 deal under which what’s now City Chic sold the Millers, Katies, Autograph and Rivers portfolio of businesses to Noni B for $31 million in cash.
“At the time the board was facing huge pressure from other shareholders to sell the City Chic assets because they were the good ones,” says the fundie.
“Whereas we felt, and the board agreed, that they were best off selling the underperforming assets. So when they made the recapitalisation proposal, we sponsored it. We think that gave the board a backstop and the confidence to resist the pressure to sell City Chic.”
If people aren’t doing the right thing and they need to be better, then they need to be encouraged or removed.
— Gabriel Radzyminski
Since the start of 2018 City Chic stock has risen more than 30-fold and the fundie says this shows how Sandon can offer boards support if they choose to accept it.
“We’re not always going to line up against a board,” he says. “We’re going to line up in favour of what are good ideas and sometimes that might be lining up against a board and management team, but at other times it might be lining up with them against other shareholders.”
While the activism makes the news, the founder says it’s the traditional value-investing principles of buying companies at a discount to their net present value that is at the core of Sandon’s approach.
“A value discrepancy usually exists for a reason,” he says. “We try and understand what the reason is and ask is there’s something we might be able to do about that. We’re pragmatic and want to target companies where we think there’s an opportunity, but also a good likelihood we’ll succeed.”
As a relatively small fund with around $200 million in assets under management Radzyminski admits “very few” companies respond to Sandon’s representations. In turn, it spends the bulk of its efforts persuading other shareholders as to the merits of what it proposes, rather than the companies themselves.
“You wouldn’t want to do this to make friends,” he says. “And I think that’s one of the challenges. There’s still a great reluctance in the investment community to get behind activism.
“Our approach tends to polarise people, and I think unfortunately it polarises more to the negative than the positive. But financial markets should be Darwinian and if people aren’t doing the right thing and they need to be better, then they need to be encouraged or removed.”
As to the future, Radzyminski says he’s created his dream job and isn’t going anywhere.
“It’s satisfying, rewarding, intellectually very, very stimulating. Last count the investment team, the directors and their families had north of $5 million invested in the various strategies,” he says.
This sounds like great alignment to an outsider. “You could say it’s alignment,” he says. “But for [research analyst] Campbell [Morgan] and I the main reason we want to invest is because we want the returns.”
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