Panalpina (ticker: PWTN) is a Swiss-listed global third-party logistics provider that we have been following for a considerable time. As we identified two years ago, the logistics industry is reasonably fragmented and various companies have been active in trying to consolidate the industry, growing larger in order to generate economies of scale.
We believe that poor corporate governance tends to lead to less than optimal outcomes for shareholders and, conversely, improvements get rewarded by improved market valuations over the long-term. Panalpina is an example of an investment which required us to undertake active private and public engagement with other stakeholders in order to protect minority shareholder rights and which had a positive impact on the value of our investment.
The catalyst for our investment in late November 2018 was two-fold. Firstly, the value of the shares had fallen to the lower end of a well-established trading range and appeared to be reasonably attractive in comparison to its peers.
Source: Bloomberg, Team Analysis. Past performance is not indicative of future performance.
Secondly, governance is a key aspect of ESG research and analysis and when the Company made an announcement regarding positive changes to its corporate governance, we interpreted this as a significant catalyst, increasing the probability that the Company may become a takeover target.
Panalpina’s corporate governance reflected the history of its ownership. Having IPO’d in 2005, the previous owner, a Charitable Foundation, remained the largest shareholder (46%). We assumed it had considerable influence over the new Company’s Articles of Association (the Articles) which defined shareholder rights and the Company’s governance mechanisms. Additionally, the Chairman and Vice-Chairman of the Company’s Board of Directors (the Board) were also members of the Board of Trustees of the main shareholder. It appeared that the major shareholder, although owning a little less than a majority of the shares, could effectively control the Company.
After a period of relatively poor operational performance, Panalpina’s second-largest shareholder, made critical comments about the Company’s performance and governance, calling for the dismissal of the Chairman and his deputy. Concurrently, the third-largest shareholder also publicly called for change.
Not long thereafter, the Company announced that the Chairman would not seek re-election at the next AGM (in 2019) and that the Company intended to take an active role in industry consolidation. We interpreted this as flagging a significant and positive change to the Company’s corporate governance, and an increased probability that Panalpina becomes a takeover target.
In January, Danish company DSV, a larger global logistics company, announced that it had bid CHF 170 a share for Panalpina, an approach that the second largest shareholder publicly supported. After a few weeks, the Foundation commented that it rejected the bid but would not necessarily block a higher one. Panalpina’s management then commented that it wished to remain independent and was looking at a transformational deal. Days later, DSV stated that it had earlier increased its bid to CHF 180, a fact not disclosed by Panalpina. It appeared to us that the Company’s management was trying to block DSV’s approach by finding a more palatable alternative, more than likely with the support of their largest shareholder.
In February, the Foundation called for an Extraordinary General Meeting of shareholders (EGM) in order to change an aspect of the Company’s Articles. Panalpina’s Articles conferred some protection to minorities by limiting all shareholders to a maximum 5% voting right in any poll on the Company’s affairs. However, since the IPO, the Board had accepted that the Foundation had “grandfathered” rights that allowed it to vote its 46% interest regardless of the limitation in the Articles. The Foundation proposed a “one-share, one-vote” rule, arguing that this would represent an improvement in governance. In our opinion, such a move would only serve to legitimise the control the Foundation had historically exercised in contradiction of the formal corporate governance.
Although no other shareholder would likely support such a motion that would pass control of the Company without the payment of a premium, we expressed our concerns in writing to the Board. The Company’s Independent Directors duly responded noting that an Independent Committee without the conflicted Directors would decide on this issue ahead of the EGM. They also offered a simple defence of the purported grandfathered rights with “this is OK because this is how it was done in the past”.
We again wrote to the Board to highlight that it should appear obvious that the Articles were adopted to protect smaller minority shareholders from oppression from a dominant one. We noted resistance to this motion from other large shareholders who were also restricted in their voting, with one also actively and publicly campaigning against this change.
By this time, the formal papers for the EGM had been published including what we believed to be a misleading and deceptive claim that the concept of “grandfathering” was incorporated in the Articles. We therefore wrote to the Chairman of the Regulatory Board of the SIX Swiss Exchange expressing our opinion that the Company’s conduct was in breach of a specific requirement of its listing. In response, SIX publicly announced that it was reviewing our complaint and this generated interest and comment in local media and financial news services such as Bloomberg.
In March, Panalpina announced that it had accepted a new bid of CHF 196 per share from DSV and that the Foundation would tender all of its shares. Clearly our small economic interest in the company (<1%) was insufficient to have influenced the outcome of a vote on the governance matters, however, we are certain that our engagement on important points of corporate governance, alongside the efforts of other minority shareholders, was ultimately influential in bringing about the best outcome for all shareholders.
Subscribe now to get the latest reports and insights from
Morphic Asset Management.