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Eco-activists Didn't Force out Apache, a Foreign Hedge Fund Did

Behind the news that rocked BC's LNG dreams.

Andrea Rexer 6 Aug 2014TheTyee.ca

Andrea Rexer is a German journalist working for The Tyee for two months on a journalism grant (The Burns Fellowship). Back home she heads the Frankfurt office of one of Germany's biggest daily national newspapers, Sueddeutsche Zeitung. She covers economics and financials. Sueddeutsche Zeitung has 1.5 million readers daily and is considered a left-liberal newspaper. Andrea studied in Germany and Chile and has worked from Vienna/Austria, Buenos Aires/Argentina and several cities in Germany. In 2014 she earned the Ludwig Erhard prize for economic journalism.

Investing in oil and gas is a long-term engagement. Usually. But not for Apache. The U.S. company announced last week that it would pull out from B.C.'s second largest LNG project. The Kitimat project was a joint venture with Chevron and now its future is uncertain. Though Chevron has said it wants to find another partner, some analysts predict Apache's exit will end the project.

That's bad news for politicians who spoke up for the project like Premier Christy Clark and Kitimat Mayor Joanne Monaghan. Kitimat was not only the second largest LNG project in B.C., it was also the one furthest along: it already had approval to export.

The Kitimat setback is good news for opponents of LNG. Not long after the announcement, those opposed to Kitimat as an LNG port claimed Apache's exit a "victory." There is strong opposition to the project by groups who say the environmental cost of the project outweighs any possible economic benefit.

But even though the people behind the pullout are activists, these activists are different than you may think. They are no ecologists.

Forcing Apache to abandon its investment in the Kitimat project is Jana Partners, a hedge fund that holds a minority stake in Apache.

How can a minority stakeholder force its will upon a whole company? The answer is that Jana Partners is one of the most famous "activist investors" in the financial world. Its activism is driven by a single goal; all it wants is a higher yield.

That Jana Partners is not an ecological investor becomes pretty clear when you look at the reason for backing away from Kitimat. Several newspapers reported Jana Partners wanted Apache not to abandon LNG investments, but merely to focus attention on LNG projects in the United States rather than spreading its activities in too many countries. That, concluded Jana Partners, was a more efficient way to earn a dollar.

'Aggressive investors'

Forcing larger investment partners to change their plans is quite typical of such activist investors. Some people call those kinds of hedge funds "aggressive investors" or even "corporate raiders." The industry is booming: In the last ten years such funds grew from 10 billion dollars in assets under management to 93 billion dollars. They represent a powerful part of the world of finance.

And they do use their power. Their strategy is to gain maximum influence on companies with minimum investment. They usually buy minority stakes in companies and then pressure companies to follow their will. Sometimes activist investors can use tactics that might seem ruthless. While not in the case of Jana's pressuring of Apache, in other instances CEOs complained about feeling blackmailed by "aggressive investors."

How could that be? How could a small partner owning only a small fraction of a company cause it -- like a tail wagging a dog -- to abruptly shift course? Investors hold certain powers of their own. They can let CEOs know if they don't comply with the minority partner's wishes, those investors will block other decisions or go public with critiques and thus undermine the value of the larger company. In some cases activist investors have even tried to force management to leave their posts.

Strong muscle, big returns

Among a list of quite prominent representatives of activist investors: Carl Icahn of Icahn Enterprises; David Einhorn of Greenlight Capital; Paul Singer of Elliot Management; Bill Ackman of Pershing Square. The financial crowd is applauding their success. A study by the U.S. banking group Citi found that "activist investors" made a 20 per cent average return since 2009 while other hedge funds averaged only a 7.5 per cent return. For investors in activist hedge funds, the last years have been quite successful.

But companies don't always feel comfortable when caught in their pincers.

One example is Agrium, a Calgary-based mining corporation. It had its own experience with Jana Partners. In 2013 Jana tried to push its own candidates on the board. The battle was fought in public, involving media and other shareholder groups. In the end Jana Partners lost the battle because the Agrium management managed to convince other shareholders to back their strategy. In early 2014 Jana Partners sold its stake in Agrium.

As in the battle around Agrium, activist investors like to fight in public. And that's where they resemble other activists. They use the public sphere to gain influence. They write open letters or leak information to journalists. Or they partner with shareholder organizations and convince them to go public with their arguments.

Their critiques about a company can be justified. There have been cases where activist investors have increased a company's value by pointing out poor strategies. Some studies show actions by activist investors improved shareholders' value in the long run.

Will Jana Partners, therefore, increase the value of Apache by forcing it to back away from the Kitimat LNG project? Could it be that Jana Partners might have inside knowledge, analysis or figures that would give reason for doubts about the project? The Tyee approached Jana Partners for its perspective, but it declined to answer.  [Tyee]

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