When activist shareholders go to war with a target company there is usually entertainment to be had (though probably not for the directors of the target) and often money to be made for investors. However, it may be a first when the activist says to the target, 'buy more of our products or else the chairman gets it in the neck'.
In a nutshell – and with just a little caricature – that is what’s happening at tiles retailer Topps Tiles (TPT). It faces a call to sack its chairman, appoint two of the activist’s nominees to the board and, in effect, to buy lots and lots more stuff from a Polish bathroom-equipment maker that the activist just happens to own. The activist is MS Galleon, a Vienna-based investor that seems to focus on Polish companies, and which has built a stake in Topps fractionally short of the 30 per cent threshold that would trigger a mandatory bid.
Galleon began building its stake in Topps in 2020. During 2021 – by which time its holding had risen to 20 per cent – Galleon suggested that the proportion of inventory Topps sourced from Cersanit, the Polish bathrooms specialist, should be about the same as its stake in Topps. That was an interesting – and even challenging – symmetry since, at that time, Topps sourced just 0.5 per cent of its stock from Cersanit, which in the 2020-21 financial year would have had a retail value of about £1mn. Even to raise that proportion to 20 per cent would be the equivalent of buying about £46mnn-worth of goods – great for the Polish end of the deal, not necessarily so good for the UK end.
Indeed, Topps’ bosses point out that the company’s internal rules forbid it from sourcing more than 10 per cent of inventories from one supplier – a sensible precaution. It adds that the activist’s proposals present a clear conflict of interest. On the one hand, the activist wants its Polish subsidiary to be a major supplier to Topps; on the other, if the activist gets its own people on Topps’ board, it would not be possible for them to act in the best interests of all shareholders.
Maybe it’s not that simple. It is permissible for a company’s directors to have conflicting interests so long as that is made clear and so long as it does not influence the company’s decision-making. Yet achieving that in practice is harder than in theory, especially in this case where the activist’s equity stake is so influential and its demands so obviously self-interested.
All that said, however, Galleon, the activist, has a point. All has not been well at Topps for some years and the decline – if decline it is – coincides quite neatly with the tenure of Topps’ chairman, Darren Shapland. Since he took the chair in February 2015, Topps' shares have lost 60 per cent of their value and have dropped 63 per cent relative to the FTSE All-Share index. True, much has happened in the intervening years that has been bad for retailers, particularly those with a limited online presence, such as Topps; and Shapland has never held an executive position at Topps. Even so, more influence might have been expected from a chairman whose CV in retailing was as impressive as Shapland’s. It peaked when he was finance director at J Sainsbury (SBRY) in the 2000s and subsequently included a short spell as chief executive of Lord Phil Harris’s Carpetland where he had earlier been the finance director.
Galleon seems keen to contrast Topps’ performance and share rating with Victorian Plumbing (VIC). Topps appears to come off second best. However, the comparison isn’t necessarily fair. Both companies make a living selling tiles and related stuff, but Victorian Plumbing is exclusively an online retailer while Topps is mostly the bricks-and-mortar variety. Consequently, it is to be expected that Topps’ measures of profitability and efficiency would be inferior since the online retailer, assuming it has built up a critical mass of sales, can happily run on lower overheads.
No matter. When shares in Topps were most recently in the Bearbull Income Portfolio (they were sold at 49p in mid-2020 as Covid bit and the dividend was axed) there was no shortage of value in relation to their price. I suspect it is much the same today, except the dividend has been restored; at the current 51p share price it yields 7.1 per cent, although that implies Topps is over-distributing. Even so, ahead of the fun and games at January’s annual meeting, Topps' shares may well be worth a punt, especially as the 2.6p final dividend is in the price until 22 December.
