Nelson Peltz's billion-dollar loss on General Electric shows risk of big-cap activism

5 November 2018 4:39pm

31 October 2018. By Jason Booth.

Activist fund Trian, headed by legendary investor Nelson Peltz, is facing a paper loss of well over a billion dollars on its three-year-old bet on troubled conglomerate General Electric. The losses show that the so-called “big cap activism” popular with leading hedge funds doesn’t necessarily mean smaller risk, just bigger losses when things go wrong.

GE’s stock fell to around $10 per share this week, a nine-year low, following a weak earnings report and news that the company was cutting its dividend to just $0.01 per share and facing additional Securities and Exchange Commission and Justice Department investigations into accounting practices. GE’s shares have lost about half their value so far this year and are down almost 70 percent since the end of 2016.

This would seem an appropriate time for an activist investor to step up and demand change at the company and a seat on the board, but Trian is already there. Trian has owned between 8 and 10 percent of the company since 2015, according to regulatory filings. Trian co-founder Ed Garden has been on GE’s board since October 2017.

“As Ed Garden is on the GE board, we have no comment,” said a spokesperson for Trian when contacted by MLex, highlighting the fact that once on the board, normally vocal activists must restrict what they say.

Trian disclosed a $2.5 billion stake in GE on Oct. 5, 2015, making it one of the US conglomerate's top 10 shareholders. In the three months prior to disclosing its investment, GE’s shares were trading at around $26 per share. Trian also issued a bullish white paper explaining its investment rationale and predicting that GE's stock price could reach $45 a share by the end of 2017.

The fund expressed confidence in GE’s former CEO, noting that “Trian Principals Nelson Peltz and Ed Garden have a longstanding relationship with GE’s CEO Jeff Immelt.”

Since then, the company has posted tens of billions of dollars in writedowns, with Immelt being replaced by John Flannery, who has subsequently been replaced by Lawrence Culp.

At current prices, Trian’s 70.8 million shares in GE would be worth just over $700 million. In its first 13-F filing following its investment in 2015, Trian held 90.5 million shares at a valuation of $2.28 billion, or around $25 per share.

The repeated cuts in GE’s dividend will also cost the hedge fund. When GE was paying a quarterly dividend of 24 cents per share in mid 2017, Trian could count on quarterly income of around $17 million from its investment. After Tuesday’s announced dividend reduction to $0.01 per share a quarter, that income will fall to just over $700,000 per quarter.

— Allure of large caps —

In recent years, with hedge funds growing and needing to deploy bigger sums of money, large-caps such as General Motors, Nestle and ADP have become notable activist targets. More recently, Bill Ackman of Pershing Square disclosed a $900 million stake in Starbucks, while Third Point has invested almost $800 million in Campbell Soup and is attempting to replace the entire board and management team.

While the potential returns on these big-cap investments may not be as great as investing in smaller, less liquid companies, the potential downside was also seen to be less, especially in a market nearing peak valuations. Yet Trian’s investment in GE shows that large caps can become large-scale money traps.

With companies like GE, their very size, geographic scope and multiple business units make it hard for hedge funds with limited resources to conduct thorough due diligence. An entrenched corporate culture, often seen as an asset, can be hard to change. It’s notable that new GE CEO Lawrence Culp is the first outsider to ever head the 126-year-old company.

And as with GE, once a fund has committed a sizable portion of its assets and taken one or more seats on the board, getting out of a losing investment becomes increasingly difficult.

Facing such a heavy loss with GE, Trian will have to focus on making a success of its current biggest investment, the equally large and complex Procter and Gamble.

Peltz was appointed to the board of P&G in December 2017 following the most expensive proxy fight on record. At that time, Trian’s stake in P&G was worth just under $3.5 billion. It fell to less than $2.8 billion in May before rebounding, and today it is worth around $3.4 billion.

N.B. This article was prepared for an upcoming MLex news service covering activist investments. To express interest in a trial, contact customerservices@mlex.com.

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