Warren Buffett once observed that: “When a management with a reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact”. Activist funds, such as Crystal Amber Fund (CRS), question this. They believe that they can unlock value in underperforming businesses through applying better management practices.
In 2018 De La Rue (DLAR) had a torrid year. The group had printed EU British burgundy passports in Gateshead for years, but it lost the contract. A German competitor bid less, and Franco-Dutch company bid even lower, so now ironically, post-Brexit blue passports are printed in Paris. De La Rue’s businesses seemed to have lost traction. Richard Bernstein, who advises Crystal Amber on investments, believed that poor management was to blame. The fund began building a meaningful stake and challenged the top team to improve its leadership and oversight. In May 2019, after its third profit warning in less than two years, partially due to Venezuela having to renege on an £18mn bill because of US sanctions, the group announced that its long-serving chief executive would be leaving. Its chairman was ousted soon afterwards.
Kevin Loosemore took over chairing De La Rue in October 2019, backed by Bernstein, as was Clive Vacher, the new chief executive. Loosemore was already the executive chairman of Micro Focus (MCRO), which he’d built up by buying ageing software companies and squeezing them for cash, but his purchase of software assets from Hewlett Packard Enterprise for £6.5bn had proved disastrous. Micro Focus's shares slumped when he resigned early in 2020, although profit warnings and a previous £12mn sale of half his stake in it had hardly helped. The two new De La Rue directors hammered out a three-year turnaround plan based on trimming costs and seizing growth opportunities. Then came the pandemic, and the lack of cash flow, large pension deficit and high debt pushed the group close to collapse. By May 2020, the share price had sunk to below 40p – a dramatic decline from the £10 that it almost reached in late 2013.
Confidence was restored by a £100mn rights issue and by 2021, Crystal Amber was praising the group for its “strong competitive positions in high return businesses and attractive growth opportunities”. The activist investor thought De La Rue, with its 30 per cent market share of global commercial banknote printing, was “well placed to capitalise on the structural shift towards polymer notes”. And the new contracts announced on its higher-margin authentication division made its “£100mn target revenue for FY22 well underpinned”.
Famous last words. In January this year, the profit warnings resumed. With unfortunate timing, the third one came in November. This was days before a shareholder meeting on 2 December, which De La Rue had called because Crystal Amber was pressing Loosemore to resign. It said it wanted the matter settled, but just to play safe, this was presented as an ordinary resolution, rather than a special one: it required only half the votes cast to pass, rather than three-quarters.
Crystal Amber said it wanted Loosemore gone because he had sent Bernstein an email that the latter viewed as defamatory. The activist called this another example of his poor judgement, which it alleged was preventing De La Rue from delivering on its turnaround plan, then nearing the end of its three years. Another grievance is that despite owning a significant stake in De La Rue for some years, it has been denied a seat on the board. Its call for Loosemore’s resignation, but not Vacher’s, hints at perceived tensions within the top team. “Cost-cutting is not a long-term strategy,” it said. What would success look like? “Crystal Amber has found De La Rue unable to communicate a strategy for growth.”
At the meeting, shareholders plumped for the devil they knew: 83 per cent of the votes cast backed Loosemore. Crystal Amber was unbowed. It was still of the view that “Loosemore's actions and ability are an impediment to the release and return of shareholder value”. It drew attention to a cautious warning by EY of “material uncertainty” about the company as a going concern (an auditor comment that De La Rue’s directors had challenged at the time) and renewed its call for the group to "seek to participate in industry consolidation without delay", code for either being taken over or breaking up – it has said that the authentication division alone is worth more than the value that the market places on the group as a whole.
With hindsight, Crystal Amber’s investments in De La Rue were badly timed. It continues to believe that the share price seriously undermines the group’s potential, but it seems to have given up hope of the current leadership ever unlocking it. Maybe Warren Buffett’s pearl of wisdom was right after all.
