Here is what John Paulson has: A formerly high-flying hedge fund, clients heading for the doors and a crumbling reputation. Here is what the founder of Paulson & Co. doesn’t have: A buyer for Detour Gold Corp.
Paulson & Co. is in the midst of a war of words with Detour, which owns a single open pit mine northeast of Timmins, Ont. The hedge fund wants the company sold, or at least the board of directors replaced. It owns 5.5 per cent of Detour and is threatening to launch a proxy contest if it doesn’t get its way.
Detour’s board acknowledges it is facing operational issues – expansion of the mine is running over budget and the company is searching for a new chief executive – but insists this is the wrong time to sell. Its share price spiked over the past week on expectations of a takeover.
The Paulson & Co. campaign is an extreme example of an activist investor who is all huff and puff and no blow your house down. As an outside observer, your takeaway from this showdown should be that the more you hear about a boardroom battle, the less likely you are to see the issues resolved and share prices improve.
Activist investors are now accepted players in boardrooms. Lawyers who work with these funds say approximately two thirds of campaigns are resolved quietly and privately, with boards and management teams accepting some or all of the outsider’s suggestions. If you see a director replaced in the middle of a term or a company unexpectedly announcing a division is up for sale, you’re likely seeing an activist at work behind the scenes.
So while activists are busy, the number of public spats is dropping. Fasken Martineau DuMoulin LLP tracks Canadian proxy battles and found the number of contests that went to a vote has been steadily declining over the past six years, from 23 proxy fights in 2012 to just eight last year. Activists won four of those eight showdowns.
Even if a company does respond to an activist by starting a strategic review aimed at selling the company – something Detour continues to resist – there is no guarantee a deal will result.
From the outside, it appears the real reasons for Paulson & Co.’s very public campaign against Detour stem from internal issues at the fund manager, which was founded in 1994. Mr. Paulson is justifiably famous for being very early and very right for investments that played on the collapse of the U.S. mortgage market and subsequent global financial crisis.
Lately, though, Paulson & Co. has struggled to spot the next big thing. Performance lagged in recent years and clients and employees departed as the firm’s assets dropped to US$9-billion this year from a peak of US$38-billion in 2011.
Gold stocks were meant to be Paulson & Co.’s next winning bet. The fund entered the sector loudly by taking stakes in mining companies and launching an organization called the Shareholders Gold Council with rival fund managers. The council is attempting to upgrade performance from the sector, in part by improving management.
However, bullion prices have been going sideways since Paulson & Co. entered the sector, and that’s meant most gold mining stocks have done the same. With fund performance continuing to lag, Paulson & Co. is trying to shake things up at Detour, where its stake in the company is currently worth approximately $120-million.
Detour is rolling out the standard game plan to deal with Paulson & Co.’s broadsides, hiring BMO Nesbitt Burns Inc. as its financial adviser, along with law firm McCarthy Tétrault LLP and Norton Rose Fulbright LLP.
While it is possible that Detour attracts a buyer – investment bank CIBC World Markets Inc. published a list of no less than 12 potential suitors on Thursday – investment bankers say the more likely outcome is that rival mining companies kick tires at Detour, but shy away from a takeover that would cost something in the range of $2.5-billion.
Paulson & Co. is unlikely to get the exit it wants at Detour, with the company sold at a premium price. That’s because effective institutional shareholders do their best work discreetly, engaging directly with boards and management teams to improve performance. The louder an activist investor is screaming, the less likely they are to get their way.
Andrew Willis