The battle for control of natural gas producer EQT, which began as long ago as October, ended this week with a clean sweep for the dissidents. The Rice Investment Group won all seven seats it was seeking, allowing it to call a board meeting that appointed its leader, Toby Rice, as CEO on the same day as the annual meeting. Certified results of the meeting announced Wednesday showed 80% of the votes were cast for change.
As only the second U.S. proxy contest this year where a dissident triumphed, and the biggest haul of board seats won by an activist at a U.S. company with a market cap of more than $1 billion since Starboard Value swept the board of Darden Restaurants in 2014, the campaign is so clearly anomalous that it warrants review on its own merits. Yet the fact that another owner-operator failed even with a minority slate at PDC Energy earlier this year provides some helpful contrasts.
One thing that both companies had in common was poor performance. In the year to PDC’s May 29 meeting, shares were down 52%; over a similar period, EQT stock was down 47%. How then, did the Rice Investment Group team achieve twice as much support as Kimmeridge Energy Management at PDC – 80% of the votes, as opposed to 40%?
The endorsement of all seven Rice nominees by Institutional Shareholder Services (ISS) may have been a significant moment in the campaign. But while it was probably necessary, it was hardly sufficient. Kimmeridge also received the backing of ISS for two of its three nominees.
A big tailwind at EQT was the active nature of the shareholder base and its willingness to voice support for change. The Rice team secured support before the vote from D.E. Shaw Investment Management, Kensico Capital Management, Elliott Management, and T. Rowe Price Associates, which also happened to be the largest shareholder. Collectively, and with the Rice Investment Group’s 3.1% stake, that accounted for well over 20% of the vote. Kimmeridge, which complained after its defeat about the pro-management tendency of passive investors, did not have such an advantage. PDC’s largest active manager, Fidelity Management & Research, owned just 5.6% of the stock.
But perhaps the biggest difference was that the Rice Investment Group team came with a 100-day plan to run the company, as befits their majority slate. According to a survey of active managers by investor advisory firm SquareWell Partners that was released this week, 53% and 47% said strategic and operational activism were kinds they would typically support, compared to 21% for M&A activism. Both sides of the fight talked incessantly about cash flow and costs, becoming increasingly technical as the campaign wore on.
Ultimately, however, EQT faced the disadvantage of having to admit that it botched the acquisition of Rice Energy in 2017, about which some investors had expressed doubts at the time. Despite CEO Rob McNally’s claim that he had implemented a culture shift since taking the helm in November, there was an in-built skepticism to his defense that Rice Energy had not exactly been a cash cow.
CEO-targeting activism took a backseat at large caps after the seminal Arconic campaign in 2017, with its long-term prospects somewhat murky. In this case, it seems despite EQT’s repeated allegations that 37-year-old Toby Rice lacked the temperament to be CEO, investors decided there was little harm in changing horses.
The post-proxy season business of keeping companies on track is coming into greater focus with several developments this week. In Canada, Medison Biotech kept heaping pressure on Knight Therapeutics and Hudbay Minerals CEO Alan Hair quit to make way for Waterton Global Resource Management’s nominee, Peter Kukielski. In Europe, Deutsche Bank, ThyssenKrupp, and Nestlé have plenty to do before they can justify a break. For American companies, a slowdown in both settlements and proxy contests may not mean a quieter summer. M&A is up, and with it, M&A activism. That could be their main battleground for the next few months.
Quote of the week comes from Mary Winston, interim CEO of Bed Bath & Beyond, who said on Wednesday as the company announced its quarterly earnings that there was a recognition of the need for a “fundamental change” in approach.
“We have set four key near-term priorities that include stabilizing and driving top-line growth; resetting the cost structure; reviewing and optimizing the company's asset base, including our portfolio of retail banners; and refining our organization structure,” she said. “The board and management team are aligned on these priorities, and we are committed to completing a deep review of the business to prioritize and drive forward the most meaningful initiatives to improve performance.”