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Potential Activist Targets Among Blue Harbour’s Latest Moves?

Clifton Robbins founded Blue Harbour Group in 2004, having previously served as managing member of General Atlantic Partners, LLC, a private equity firm, and as partner at Kohlberg Kravis Roberts & Co. Blue Harbour invests mainly in activist situations and, what differentiates it from other activist funds, is that Clifton Robbins invests only in companies whose management is receptive to his ideas and proposals. According to the fund’s latest 13F filing, it’s heavily invested in Adient PLC (NYSE:ADNT), a leading supplier of automotive seating, and Investors Bancorp, Inc. (NASDAQ:ISBC). In both cases, Blue Harbour Group is working with the management to unlock shareholder value. But this is not the main subject of this article. We have looked at some of the fund’s moves that went under the radar, looking for potential activist targets.

Clifton Robbins - Blue Harbour

First up is TreeHouse Foods Inc. (NYSE:THS), a private label food and beverage manufacturer. During the 2017 fourth quarter, Blue Harbour increased its stake by 18% to a little over 1 million shares. John A. Levin, the manager of Levin Capital Strategies, has also boosted his fund’s investment in TreeHouse Foods, taking it to 3.59 million shares.

TreeHouse Foods Inc. (NYSE:THS) stock has been battered in the past 12 months, having lost 54% of its value and having significantly underperformed its competitors. By comparison, J & J Snack Foods Corp (NASDAQ:JJSF) stock is up by 5.5% trailing twelve months, while Flowers Foods, Inc. (NYSE:FLO) shares have gained approximately 8.9% in the same period of time. Throughout 2017, TreeHouse Foods Inc. (NYSE:THS) failed to live up to analysts’ expectations as it continued to reorganize portfolio of brands. In 2016 the company acquired the private brands business from ConAgra Brands and in 2017 it sold its soup and infant feeding business to Riverbend Foods LLC. So far, the results have been poor. Following the release of the 2017 second quarter earnings report, the management of TreeHouse announced a new restructuring plan, which involved closing down two facilities and laying off 375 employees in the first phase. TreeHouse Foods has recently announced that it plans to close down a third facility in Visalia, California and lay off another 294 employees.

Given the poor results posted by TreeHouse Foods in the past year and the complexity of its restructuring plan, Blue Harbour Group could get involved, especially if the management of the company fails to stick to its proposed turnaround plan. The high level of competitiveness in the industry is also a signal that cash-rich competitor could be interested in taking over TreeHouse.

In another noteworthy move, Clifton Robbins and his team have boosted their stake in MEDNAX Inc (NYSE:MD), a provider of neonatal and radiology services. According to its latest regulatory filing, Blue Harbour Group held 4.11 million shares of MEDNAX at the end of 2017, up by 64% from the third quarter. In November 2017 Paul Singer and Elliott Management have disclosed a position in MEDNAX and their intention to engage in a dialogue with the management. According to its latest 13F filing, Elliott holds 2.47 million shares but its full exposure rises to roughly 7% when taking into account shares held by subsidiaries. Shortly after Elliott disclosed its stake in MEDNAX, several equity firms have approached the company about potential buyouts but so far no deal has materialized.

Although MEDNAX Inc (NYSE:MD) started off as a provider of neonatal care services, it has since expanded into the anesthesiology and radiology businesses through acquisitions, which had a major impact on revenue growth. The company reported $3.46 billion in revenue for 2017, up 60% from the $2.15 billion registered in 2013. What the management failed to do was to keep costs in line. Whereas the company’s net income constituted 13% of revenue in 2013, by 2017 it fell to 9.2%. MEDNAX’s failure to even maintain its profitability is reflected in the stock performance: shares are down 19% in the past 12 months and 34% down from its all-time high in 2015.

Blue Harbour Group has not yet submitted a 13D filing, so we don’t know its plans for MEDNAX Inc (NYSE:MD). However we cannot ignore the possibility of them teaming up with Paul Singer’s Elliott Management to sort things out at MEDNAX.

One curious new addition to Blue Harbour Group’s equity portfolio is Axalta Coating Systems Ltd (NYSE:AXTA). According to regulatory filings, the fund amassed 1.2 million shares during the fourth quarter. Warren Buffett’s Berkshire Hathaway is also invested in Axalta Coating Systems and is the largest shareholder with a position that amounts to 23 million shares, according to its latest 13F filing.

So, is there a case for activist involvement with Axalta Coating Systems Ltd (NYSE:AXTA)? For starters, the stock has been rather flat in the last 12 months, while its main competitor in the United States, PPG Industries Inc (NYSE:PPG), rose by 13% in the same period of time. Sherwin-Williams Co (NYSE:SHW), the largest producer of paints and coatings in the world following the takeover of Valspar Corporation, did even better: shares appreciated by 29.2% in the last 12 months.

In the past few years there was a flurry of mergers and acquisitions in the chemical industry as companies faced falling margins due to rising costs of raw material and sluggish demand growth. At the end of 2017, Axalta Coating Systems Ltd (NYSE:AXTA) was the subject of two M&A bids, both of which have been rejected. The company was first approached by Dutch rival AkzoNobel, which proposed a merger of equals. Their talks ended when Japanese group Nippon Paint submitted an all-cash takeover bid. In the end, however, the two companies did not reach an agreement as Axalta’s management held out for an improved offer. With the management confident the company can do just fine on its own, a potential collaboration with Robbins and his team to identify growth opportunities could be on the cards.

Disclosure: none.