One Hedge Fund Takes on the French Establishment

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(Bloomberg Opinion) -- A storied French media group is a challenging target for shareholder activism — especially when the agitator is a foreign hedge fund. But Lagardere SCA, owner of the Hachette publishing house, is facing real pressure from Amber Capital U.K. LLP. Stake building by media group Vivendi SA and, reportedly, French investor Marc Ladreit de Lacharriere suggests a chess game is about to start. Amber Capital’s case for stronger oversight gets more compelling by the day.

Lagardere has evolved from a conglomerate into a group with a twin focus on media and travel retail. The business mix may make sense now but the dealmaking needed to get there generated painful writedowns. Lagardere has underperformed the European media and retail sectors on a total shareholder return basis over the five years to Dec. 31, and the broader market over the last decade.

Amber convincingly blames the company’s so-called “commandite” partnership structure. This preserves de facto control for scion Arnaud Lagardere as general partner and managing partner, even though he owns only 7% of the stock. And it has sustained generous remuneration at Lagardere despite poor shareholder returns.

Because of the unusual corporate structure, the company’s supervisory board has limited sway. Amber, an investor since 2016, thinks directors could nevertheless have done more, in particular when reviewing the business’s high central costs and payments to Arnaud Lagardere’s personal company, which provides the executive team.

Ordinary shareholders can’t do much about all of this in a hurry. But they can change the supervisory board as a start. Amber is proposing a near-full slate to replace all but a couple of recent appointments, including former French President Nicolas Sarkozy.

What difference would that make? A refreshed board still couldn’t force a change in the management team. True, it would have the power to put Lagardere’s next managing partner nomination to a shareholder vote in 2021. But vetoing the nominee requires two-thirds backing from shareholders, according to proxy adviser ISS. A few investors friendly to the current management could block that move, assuming they amassed decent sized holdings. With Lagardere capitalized at just 2.3 billion euros ($2.5 billion), such blocking stakes are inexpensive for the French establishment.

Vivendi, in which billionaire Vincent Bollore controls a 29% stake, declared an 11% interest on Tuesday. Ladreit de Lacharriere has up to 3.5% of Lagardere, Le Figaro reported. They appear to be positioning as kingmakers. The risk for other shareholders is that their influence determines a strategy that goes against the interests of everyone else.

Nor could a refreshed board force the abolition of the commandite. Only Arnaud Lagardere himself can make that happen. But directors could try to persuade him to give up legal control and convert the company to the standard French corporate structure, the societe anonyme (SA). The obvious attraction for him would be if he’s offered an enlarged stake in the group in exchange.

Lagardere, as general partner, would lose some income provided by the old structure. But his shares would probably command a higher valuation, inflating both his existing holding and the extra stake. Other investors might be better off despite the modest dilution. With the company having suspended its dividend and cut pay in response to the Covid-19 pandemic, selling the commandite status may now be more attractive.

There’s a deal to be done. Amber’s resolutions provide the chance for ordinary shareholders to reform a structure that simply isn’t working for them. The commandite’s implicit trade-off is limited investor influence for higher performance. Yet returns have been terrible. Seeing Bollore and Ladreit de Lacharriere land on the register with unclear intentions reinforces the value of transforming Lagardere into a company where all shareholders have real power.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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