If you are an investor in Barclays shares you are going to be razor-focused on the news that activist fund Sherborne has built up a significant stake in Barclays stock. Like most activist investors, Sherborne makes money from investing in a company and forcing through changes that will improve financial and operating performance. If there is a company that needs this, Barclays is it.
Like a number of other names in banking, Barclays has really been a non-event since the Great Financial Crisis, and also like a number of other names in banking, it looks cheap. Edward Bramson clearly feels that Barclays is looking cheap, given the prevailing discount to book, or net asset value.
Bramson has made a name for himself by waging several corporate campaigns that have helped to improve the operations of the companies he has targeted as well as their share price. Good examples have included his intervention in 3i and the Electra Private Equity investment trust. He has also had success with the likes of Elementis, Spirent and F&C Asset Management.
Barclays shares responded positively to the news. On an asset value basis Barclays does look cheap with a P/E of 9.8 and and price book of 0.79x.
“This suggests investors feel the bank is underperforming relative to its potential so it will be interesting to see how deeply Mr Bramson and his colleagues delve into the classic activist investor playbook and how Barclays responds, especially as the bank already has a lot on its plate, with the whistle-blowing case involving chief executive Jes Staley, the Serious Fraud Office investigation…and an ongoing fight with the US Department of Justice over allegations of mis-selling of mortgage-backed securities,” observes Russ Mould, investor director at AJ Bell.
What to expect from Edward Bramson
Activist investors approach targets if they feel they can improve the value of their shares. They generally tend to focus on changing the target’s strategy and/or corporate structure, addressing the capital structure, looking at operational performance and even kicking the tires on corporate governance.
One possible scenario could see Barclays spinning off its under-performing investment banking arm. These were all the rage in the 2000s, at least pre-Lehmans, because they could be very profitable for a bank. Now they are almost a liability, laden as they are with expensive regulations and capital adequacy requirements.
Activists also sometimes press for special dividends, increased dividends and share buy backs. Barclays is already targeting an increase in its ordinary dividend from 3.0p to 6.5p in 2018, but this yield is still some way below that of HSBC or Lloyds. Bear in mind Lloyds is already running a share buy back program.
What makes Sherborne a turnaround specialist?
Sherborne describes itself as a ‘turnaround investment firm’ and features some very experienced private equity professionals as part of its team. Some of them have careers in the City stretching back to the 1970s. The company targets listed firms in both the US and Europe. Barclays is a very big fish for Sherborne to take on, but it has had experience with other large targets like 3i. Investors can expect to see plenty more news surrounding Bramson as he and his team seek to engage with other big shareholders in Barclays to get some changes made. Given his track record and results, we’d cautiously move Barclays onto the buy list.