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- orangekrush2010
BlackRock, the enormous American asset manager with over $4.6 trillion of assets under management, has waged its first significant activist campaign around the G-Resources Group, a Hong Kong company that owned a gold mine. It may be Hong Kong, and it may be only one campaign, but companies should be fearful.
That the words activism and BlackRock are mentioned together is deep with symbolism. BlackRock has historically shied away from openly challenging companies. Indeed, Laurence D. Fink, BlackRock’s chairman and chief executive, has become a thought leader in the pushback against what he terms “short-term” activism. Only in February, Mr. Fink wrote to hundreds of chief executives to warn against what he termed short-term activism like share buybacks and dividends, calling on them instead to focus on “long-term value creation.”
Illustrative of BlackRock’s reputation as the pro-company asset manager, one of its own shareholders is proposing a proxy resolution to force the asset manager to be more openly confrontational about the executive pay at the companies held in its funds’ portfolios. The shareholder contends that BlackRock’s proxy voting behavior is inconsistent with long-termism. From July 2014 to June 2015, BlackRock’s funds voted yes in 99 percent of shareholder “say on pay” votes for companies in the Standard & Poor’s 500-stock index, higher than the 90 percent average support for such votes at other fund companies.
So the battle over G-Resources is significant because it may be a sign of things to come.
G-Resources is a company listed in Hong Kong but organized under the laws of Bermuda. It was formed to develop the Martabe gold mine in Indonesia. The road has been bumpy for the company as the price of gold has fluctuated. But there was never any doubt that gold was its main business with perhaps a sideline in silver. Only two years ago, G-Resources raised $156 million to bolster its working capital and focus on developing the mine.
G-Resources’ life as a mining company ended in November 2015, when it agreed to sell the mine to a consortium led by EMR Capital, the hedge fund Farallon Capital and two Indonesian investors for $775 million. EMR is a private equity firm focused on natural resources investing. Its chairman is Owen Hegarty, who is also perhaps not-so-coincidentally the executive vice chairman of G-Resources. The price of the mine was basically at its net asset value, which is a common way to price gold mines.
It was not a gangbuster price, but money was actually not the source of this dispute, nor was Mr. Hegarty’s involvement.
BlackRock’s activism arose out of G-Resource’s pledge to live beyond the sale of its main asset. Instead of distributing the proceeds of the sale to G-Resources shareholders, the company announced that it would use the money to enter into the “principal investment” and “financial services” business. The members of the management team, hired to run a gold mine, would continue in office, now ready to be financial company executives.
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One might expect this maneuver to raise shareholder eyebrows. Why would a gold management team be qualified to build a finance company from scratch? Even if this were a wonderfully qualified management team for this task, G-Resources shareholders presumably invested in a gold mining company to gain exposure to the asset.
In an age when conglomerates are dead, it is hard to see a company pivoting in this manner. I haven’t seen a maneuver like this since the days of the Internet bubble when the Zapata Corporation, a fish oil company, changed its name to Zapata and announced it was selling its business and entering the Internet, bidding on Excite. The stock rose 98 percent in one day.
It’s here where BlackRock stepped in. According to Standard & Poor’s CapitalIQ, BlackRock collectively owns 9.2 percent of G-Resources.
Because this was a sale of almost all of G-Resources’ assets, the company needed shareholder approval to sell the mine.
With a vote looming, BlackRock set itself up as a typical activist. It created a website and wrote a letter. Then BlackRock campaigned against this acquisition, making the pretty reasonable point that it had invested in G-Resources in 2009 to invest in a gold mine. BlackRock also complained that G-Resources “has not provided adequate disclosure and explanations to shareholders on its change of strategy,” as well as even details on “how funds from the sale of the mine will be used effectively.”
BlackRock fought a typical activist campaign, lobbying shareholders. It also was able to get the two largest proxy advisory services, Institutional Shareholder Services and Glass Lewis, to recommend against the same transaction. Although, because the proxy advisory services tend to work with their clients – the institutional shareholders – and BlackRock is the biggest, the recommendation was not a surprise.
BlackRock was a first-time loser, though. At the time of the meeting, Pru Bennett, who heads BlackRock’s Asia-Pacific business and led the campaign, stated that G-Resources’ business was “opaque” and BlackRock needed to act pursuant to its “fiduciary duties.” It didn’t work. Last month, 59 percent of G-Resources voting shareholders voted yes, while 41 percent voted no.
BlackRock most likely got all of the outside institutional shareholders on its side, but still it lost. This is the peril of stock ownership outside the United States. Many companies have a shareholder base that is less activist focused.
Still, management appeared chastened. In comments made at the meeting, the executive director, Hui Richard Rui stated that the company would consider paying out part of the sale proceeds as a dividend, a direct appeal to BlackRock.
BlackRock has run its first significant activist campaign, and that means something. Activists, however short- or long-termist, have beaten an extremely well-worn path for how to influence companies.
That BlackRock is using that path shows how worn it is; BlackRock is now willing to challenge management openly when the line is crossed.
BlackRock’s move also means something for shareholder activism itself. In the 1980s, private equity arose from nowhere to become one of the most treasured asset classes.
But is shareholder activism an asset class or just a way of life? With low barriers to entry, almost anyone can do it. That this activism took place in Hong Kong shows that activism through institutional shareholders is likely to have a greater global effect than hedge fund activism, which needs more liquid markets to function and is often looking for a quick hit.
But the real key is whether institutional investors simply decide to cut out the middleman and start doing their own activism. For now, G-Resources is an outlier with a clear case. But the likely future is for institutional investors to become the activists themselves throughout the world.
And so, this seems like only a single case, but BlackRock is bound to do more. Companies beware.
