Directors under pressure as rebels with a cause turn up the heat

As appetite for risk returns, activist investors are flexing their muscles again, writes Kristy Dorsey

DESPITE presiding over a substantial recovery at National Express, chief executive David Finch is facing calls for several of his fellow board members to step down.

Demands from hedge fund Elliott Advisors also include a potential merger with Perth-based Stagecoach or a full-blown break-up of the transport group to wring maximum returns for shareholders.

Finch may count his company a bit unfortunate for having attracted this unwanted attention, but National Express is certainly not alone.

The list of quoted firms coming under pressure from activist investors is steadily growing as the vultures that made themselves scarce during the credit crunch return.

So far this year, rebel shareholders have ousted senior board members at F&C Asset Management and Mecom, two high-profile spats that reflect the renewed sense of purpose across the activist sector.

Others coming under pressure include Kesa Electricals and Alliance Trust.

Kenneth Heinz, president of Hedge Fund Research, says 2011 should prove an "exciting year" as activists return to the fore. Research from his company shows that after losing more than $16.5 billion (10.1bn) in 2008-09, net assets at activist funds around the globe grew by nearly 1bn in 2010 to reach 28.7bn as investors regained their appetite for risk.

Heinz says this resurgence has been driven in part by a recovery in corporate credit markets, which has made financing more readily available.

Meanwhile, the trend for corporate transactions has remained steady, despite volatile swings in equity markets.

Another significant factor is an increasing boldness among all types of shareholders. Having sat by while companies cut dividends and conserved cash through the recession, investors are now growing impatient for their rewards.

"Shareholders are getting restless and are beginning to consider what a company should do to add value," says Heinz.

Returns for shareholders are at the crux of the fight at 123-year-old Alliance Trust. The Isle of Man-based activist fund Laxey Partners is seeking to force Dundee's Alliance to agree to a so-called discount control mechanism (DCM) - a system that would automatically trigger a buy-back when the share price discount hits 10 per cent against net asset value.

Alliance has seen off activists before, and chief executive Katherine Garrett-Cox shows no sign of voluntarily bowing to pressure this time around. Even so, Laxey has succeeded in forcing a vote on a DCM resolution at Alliance's AGM on 20 May, where the war of words will reach a showdown.

Laxey, which owns 1.7 per cent of Alliance, claims that 13 per cent of the trust's shareholder base is accounted for by activists. According to some brokers in the Square Mile, other hedge funds have been on the phone about Alliance and the potential value that could be unlocked.But unless the activists swell in numbers before next month's showdown, few in the City expect the vultures to get their claws on the prize this time. However, some believe that won't signal the end of the rebel campaign.

The situation is even less clear at National Express, where Elliott Advisors has stepped up its campaign to wrest control from Finch and his fellow board members.

While Elliott has not criticised Finch himself, it claims that the chief executive needs fresh views in the form of three new non-executive directors to provide guidance.

Elliott, which owns 17.5 per cent of National's shares, is lobbying to have its candidates installed at the transport group's annual meeting on 10 May and has set out a plan to radically reshape the firm by focusing on the US, seeking a merger with Brian Souter's Stagecoach, or even a break up.

It claims it is supported by Spain's Cosmen family, which owns 17.4 per cent of the group.

Some analysts say National Express will struggle to deliver significant short term growth from its existing businesses but Elliott's radical plans have also been greeted with some scepticism in the Square Mile,

Even so, the vultures seem bent on forcing a shake-up.