Nelson Peltz Likes the Look of American Plumbing
(Bloomberg Opinion) -- Nelson Peltz’s latest investment target is a big, slow-moving target with a massive bullseye on its back. The renowned U.S. activist has zoned in on Ferguson Plc, a plumbers’ merchant formerly known as Wolseley. His gripe is that the company trades at a stubborn discount to American peers. The snag is that remedies aren’t easy to administer.
Ferguson is among the handful of U.K.-domiciled, London-listed blue-chips that aren’t really British companies. Some – such as BTG Plc or Firstgroup Plc – have already attracted takeover or activist interest. North America generates 87% of Ferguson’s revenue; the company recently changed its name to that of its U.S. subsidiary; it reports in dollars.
The one un-American characteristic is the valuation. Ferguson has traded at a consistent discount to U.S. peers such as Home Depot Inc. and Lowe’s Cos Inc. The obvious explanation is that the company is listed on the wrong exchange, which makes it harder to attract its natural investor base. But that’s not the only interpretation. The valuation may also reflect a lack of faith in Ferguson’s strategy or management, or some challenges unique to its business. Either way, the discount slightly narrowed on Thursday after the disclosure that various Peltz funds had amassed a 6% stake. This pushed the stock up 6%, valuing the group at 13 billion pounds ($16 billion).
It is hard to know whether Ferguson would get a higher valuation if it just moved its listing. Markets may not be 100% efficient, but capital is global and location can’t be the only explanation for the lack of investor love here. True, some funds are restricted geographically in where they can put money but that’s unlikely to be a huge factor in holding back demand for Ferguson shares.
Such restrictions on funds might, though, be an obstacle to engineering a move for Ferguson. Unilever Plc’s plan to simplify its Anglo-Dutch structure into a single Netherlands company would have seen it lose its spot on the FTSE 100. That irked index investors and those with mandates to hold U.K. stocks who would have been forced to sell their shares. The plan foundered.
Unilever wasn’t a one-off. Re-domiciling headquarters or listings has long been controversial. The textbook case is the thwarted migration of car parts maker LucasVarity back in the late 1990s from the U.K. to the U.S. For these changes, existing investors generally demand a premium. The cleanest way to achieve a move is to take the company private, then relist it.
More pertinent are worries about the company’s resilience in the face of a U.S. slowdown. U.S. organic growth is slowing from a recent high single-digit percentage clip, while margins have barely improved since 2015, UBS analysts point out. The share price seems to be assuming that Ferguson’s long-run sustainable operating margin is just 5%, according to independent research provider Willis Welby, which argues that this is overly pessimistic.
Peltz’s pitch is that he likes to engage with the management of his portfolio companies. Ferguson has responded diplomatically that it looks forward to dialogue, as it does with all shareholders. The mere presence of such a big name has got people excited. The tougher job will be convincing investors that the company’s equity story – twinning organic growth with a strategy of acquiring competitors – is still a winner. That case has yet to be made.
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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.
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