3i mans the barricades once more
Controversial corporate raider takes a tilt at Britain's oldest private equity firm
Tuesday 29 January 2013
Britain's oldest private equity firm, 3i, is again manning the barricades after it revealed that the American corporate raider Edward Bramson's Guernsey-based Sherborne Investors had snapped up a sizeable share stake in the 67-year-old firm.
Mr Bramson, 61, a Londoner who moved to New York in 1975, is a secretive investor who targets underperforming companies. His tactics are controversial because he regularly succeeds in taking control of boardrooms without launching full-scale takeover bids.
Just two years ago he grabbed effective control of F&C Asset Management. He staged a boardroom coup after building up a 17 per cent stake in the fund manager, managing to take control without a full-scale takeover bid. He ousted the chairman and eventually the chief executive. But since the coup F&C shares have risen little more than 10 per cent.
3i, which has a stock market value of £2.6bn, is a much larger target than F&C, but has already had a recent run-in and seen off another so-called activist investor. Last year Laxey Partners built up a small stake and demanded that 3i start selling down investments. But it withdrew its resolution before the annual meeting, following the veteran investment banker Simon Borrows' appointment as chief executive. He immediately cut 190 jobs and closed some of 3i's more far-flung offices across Europe.
From its roots as a way for UK banks to provide capital to smaller companies after the end of the Second World War to its flotation on the stock market in 1994, 3i was seen as part of the backbone of the British economy. But once it was floated, with a valuation of £1.5bn, the firm moved away from supporting fledgling businesses to a more profit-driven organisation. It expanded rapidly, opening offices across the globe, and backed companies from the Americas to India and Singapore.
Critics claimed it began to lose its way in the late 1990s, and was increasingly left behind by more fleet-of-foot independent private equity firms which mushroomed on both sides of the Atlantic.
Last summer Michael Queen, a veteran 3i man of 25 years, resigned as chief executive. Laxey Partners followed immediately with its attack, calling on the firm to halt all new investments, sell off assets and return cash to investors. It pointed out that for most of the preceding year 3i's share price had traded at between a 20 per cent to 40 per cent discount to the value of the assets it owned.
These range from the lingerie chain Agent Provocateur to the fashion retailer Hobbs and restaurants chain Giraffe in the UK and Phibro Animal Health in the US to power equipment maker Vijai Electricals in India.
In the year to March 2012, 3i managed to lose its investors £656m, or a negative return on its shareholders' funds of 19.5 per cent. Total assets under management, the key measure of private equity success, fell from £12.7bn to £10.5bn that year.
In a highly unusual move, 3i revealed it had discovered Sherborne and its stockbroker, Jefferies, began picking up shares in the private equity firm on 2 January. Shares were bought first by Sherborne and then sold to the broker, who bought even more, with the resulting 1.6 per cent stake on Jefferies' books on 22 January. That would have cost about £40m.
It is rare for a public company to flush out and then go public about a new shareholder on its books. Most leave it until the statutory 3 per cent stake level has been breached and made public. But in Mr Bramson's case 3i's management, using Mr Borrows' well-honed skills from his days as a top adviser on takeover bids, decided that forewarned was forearmed.
3i, which is being advised by Bank of America Merrill Lynch and Barclays, said that the average price for its shares in those three weeks had been 239p, which is considerably above its recent trading range. The shares gained 7.9p to 266.8p, a level they have not seen since August 2011.
Mr Bramson is still executive chairman of F&C Asset Management, but will hand over the reins to new chief executive Richard Wilson at the annual meeting in mid-March. In the meantime, the 3i campaign is understood to be led by Ian Brindle, a fellow Sherborne director and a former chairman of PricewaterhouseCoopers. Mr Brindle has sat alongside Mr Bramson on a number of UK companies which he has chaired following successful boardroom coups including the chemicals group Elementis, technology firm Spirent and marketing outfit 4imprint.
Sherborne was founded by Mr Bramson in 1986. According to its website, it invests in "companies which we believe have the potential to increase their profits substantially but which have underperformed for an extended period of time".
Last November Sherborne raised £207m from investors through an offering of shares in a new vehicle, Sherborne Investors (Guernsey) B, on the junior AIM stock market, saying it planned to buy up to 30 per cent of a UK company it considered undervalued.
That amount would only secure it an 8 per cent stake in 3i.
But Mr Bramson has some serious backers, including the insurer Aviva, which took a 19 per cent stake in Sherborne Investors (Guernsey) B, the US financial services group Ameriprise with 14 per cent, fund manager Fidelity with 7 per cent and London wealth management firm Ruffer with a 6 per cent stake.
Mr Bramson and Sherborne declined to comment.
Finance provider: Changing shape of 3i
* 3i was formed in 1945 as the Industrial and Commercial Finance Corporation by UK banks to provide capital for small and medium companies that could not raise loans.
* Became the largest supplier of growth capital to unquoted companies in the UK by the 1960s.
* Renamed Investors In Industry, banks sold their shareholdings and floated on the stock market in 1994 with a value of £1.5bn.
* Expanded into Europe and then America and Asia in the 1990s and 2000s. Critics said it became too short-term profit driven.
* Underwent cost-cutting last year after investment banker Simon Borrows became chief executive.
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