Activist hedge funds cry foul over FirstGroup, Just Eat Takeaway. Bosses, other investors, must tune them out

FirstGroup’s CEO, Matthew Gregory, flatly denied his decision to step down came in response to any pressure from US hedge fund Coast Capital – which a day earlier had called for him to do just that – when I talked to him about the unveiling of the group’s results.

Gregory, in the post for less than three years, said he’d done the job he set out to do when he was promoted from the role of finance director, having sold off the company’s US bus businesses. The deal has left a primarily UK focussed bus and train operator.

All the same, I doubt he’ll be sorry to be shot of Coast when he officially hands the steering wheel over to David Martin, his chairman, who’ll drive the business while a successor is sought.

Coast has been a thorn in his side for some time. It’s one of those American activist investors that take sizeable stakes in companies (in First’s case, around 15 per cent) and then make a lot of demands.

One of things Coast was angling for was the sale of First’s US businesses. Gregory got £3.3bn for them from a Swedish outfit, and the price tag compared handily with the “sum of the parts” valuation of £2.95bn analysts at UBS had put on the operations when they initiated coverage prior to the deal’s announcement.

But Coast decided the deal wasn’t to its liking, huffing and puffing about the sale process, complaining about the “destruction of value” and describing the transaction as “terrible”. Wah!

To be fair, it wasn’t alone. Corporate governance watchdog Glass Lewis was also unimpressed. Ditto Schroders, a widely respected City fund manager.

Timing was one of the problems cited, given the pandemic, but said timing also helped stave off a ratings agency downgrade and helped to clean up the group’s shaky looking balance sheet and pension issues. First is now making profits again and appears handily positioned in its chosen markets. And the majority of shareholders – 61 per cent – supported the deal. That’s democracy for you.

Coast could at any time over the last couple of years have forced FirstGroup’s hand by tabling a bid with a view to undertaking the corporate surgery it advocated itself. If there was a better deal to be had, this would have allowed the hedge fund manager to find it. Gregory would have been out a lot earlier. So would the two other directors Coast still wants shot of.

But that isn’t how this sort of activist works. They dive in and make a lot of noise in the hope of making a quick turn. Trouble is, it doesn’t always work favourably. That’s when the sparks really start to fly, as they have at First.

A similar situation is unfolding at Just Eat Takeaway.

Cat Rock Power, another spiky hedge fund with shares in both Just Eat and Takeaway.com, started angling for a merger of the pair a couple of years ago, which it secured. It’s also now huffing and puffing because the results haven’t been to its liking (the group’s shares have been on the slide).

Apparently this is down to “broken communication” with investors. But maybe it was just because the merger wasn’t the panacea it was held out to be. Maybe the pandemic caused some indigestion.

We’re told Just Eat Takeaway is now at risk from a hostile takeover. Just not one from Cat Power.

I’m not actually advocating either company put their money where their substantial mouths reside. There are actually too many private equity firms only too willing to do just that before gutting the companies they buy. They’ve left a trail of corporate devastation in their wake. Just look at what happened to poor Debenhams.

But this type of activist is scarcely any more welcome.

They have little constructive to offer. Their corporate solutions are often questionable from the perspective of those with a longer term view. They rarely have anything much say about companies which dump on their workers, pump unjustified rewards into their CEOs’ pockets as a result of poor governance, or despoil the environment.

Investors should always keep a close eye on CEOs. But bosses who are prepared to tune out the siren calls of noisy hedge funds should be able to count on the backing of more traditional institutions that are in it for the long haul when they do.