In a market where just about every stock looks fully priced, Elliott Management Corp. says it's spotted several cases where a management shake-up could unlock big gains for shareholders.
Given Elliott's track record, investors who don't mind risk – or conflict – may want to bet on the chance that the big New York-based hedge fund is right.
Elliott's newest target is BHP Billiton Ltd., the world's largest miner, which received a letter on Monday outlining the fund's aggressive makeover proposal.
Yet another high-profile target is Arconic Inc., the New York-based maker of car and airplane parts that was carved out of aluminum giant Alcoa late last year.
Elliott wants to oust Arconic's chief executive and install its own candidate with a mandate to radically improve the company's profitability.
Elliott has never shied away from a fight.
Founded in 1977 by financier Paul Singer, it has generated a steady stream of double-digit returns, and turned Mr. Singer into a billionaire, by making bold bets on risky and often contentious assets.
For instance, it engaged in a 15-year court brawl with the government of Argentina over hundreds of millions of dollars in government bonds that the South American country had stopped paying interest on. That case was settled last year, with Elliott reaping a $2.6-billion (U.S.) windfall, according to Forbes.
At the moment, the activist hedge fund, which has $31-billion under management, is locked in battles with several companies, including Marathon Petroleum Corp., NRG Energy Inc. and Samsung Electronics Co., as well as BHP and Arconic.
An investor could do worse than investing in a basket of these stocks. To my mind, though, the two most attractive propositions are BHP and Arconic.
Both are big, dividend-paying companies with established businesses trading at reasonable valuations. If Elliott is wrong about their potential, the downside appears limited. In contrast, the upside could be lucrative.
Helpfully, Elliott posts its investment thesis for each company online. At newarconic.com, it argues that Klaus Kleinfeld, chief executive at Arconic, and four directors should be shown the door.
The hedge fund says new management could help Arconic achieve similar margins to its major rival, Precision Castparts. Combine that with some cost cutting and Elliott says Arconic is worth $32 to $46 a share, compared with its current price under $27.
At valueunlockplanforbhp.com, Elliott unveils a similarly muscular argument for a three-pronged overhaul of the miner.
It begins by calling on BHP to end its dual-listed company structure – a complicated tangle that involves both British and Australian legal entities. Elliott would like BHP to unify itself into a single corporation, based in Australia. Among other advantages, the move could help BHP cut taxes.
Elliott also argues that BHP should hive off its U.S. petroleum assets and list them separately, a move that Elliott believes would result in a higher valuation for the business. Finally, Elliott calls for a policy of enhancing shareholder returns through share-buyback plans.
These moves, taken together, could provide current BHP shareholders with an increase in value of roughly 50 per cent, Elliott figures.
Are its estimates reasonable? That is difficult to tell without a lot of research. It's possible that Elliott has done its math wrong. It's also possible that it won't be able to summon enough support from other shareholders to win approval for its proposals.
Still, Elliott has an impressive record. Given how much of its own money it has riding on the outcomes of these corporate battles, it seems sure of its reasoning.
In a letter last month, it calculated that it has $1.6-billion invested in Arconic and controls slightly more than 13 per cent of the company. On Monday, it estimated that it also controls 4.1 per cent of BHP Billiton PLC, a company with a market capitalization of nearly £78-billion ($128-billion Canadian).
Other investors may want to pay attention. In a market where opportunities are scarce, going to war with Elliott could be a rewarding proposition.
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