Allegra Stratton (2:31)

Yeah, we're really lucky to have one of the authors of that exclusive Executive editor for the global deals team, Aaron Kirschfield. Hi Aaron.

Aaron Kirchfeld (2:38)

Hi.

Allegra Stratton (2:39)

And we have lemon chiffon cake if you want to like podcast.

Francine Lacqua (2:45)

We should make it actually break big news. We give you a lemon sheep. Exactly To Come on the podcast.

Aaron Kirchfeld (2:51)

I'll be back.

Francine Lacqua (2:53)

Welcome to the City of London.

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The City.

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Welcome to in the City. Stand clear of the doors, please. Just start by setting out the story that you broke.

Aaron Kirchfeld (3:23)

So the story we broke, it was a pretty exciting weekend for us. It actually started as I was watching my 5 year old daughter taking swim lessons and I thought I should use this quiet moment to make a couple calls on a tip that Elliot, one of the most feared and aggressive activists in the world, had built a stake in bp. And to our surprise, we made a couple calls and figured out this tip is indeed true and realized that this is a huge development. Why is that? That's because probably for the last decade that I've been covering deals we've been talking about will BP be bought at some stage or taken over? And you know, anyone in Davos would have talked about it recently. It's the big topic because bp, you know, this storied oil major is struggling big time. Stocks way down, all of its rivals are doing better. So everyone is asking the question, what is their future? Can they make it alone or could they become a target? So the fact that activists like Elliot would get involved could be a huge trigger for something big. So we were pretty excited this weekend when we got the story out.

Francine Lacqua (4:25)

So Aaron, why is it in such a vulnerable position?

Aaron Kirchfeld (4:27)

So BP several years ago, under their former CEO, made a bet, a bet that at the time seemed quite smart, and that was that the world was pivoting away from fossil fuels towards renewables, net zero. Well, fast forward, as we've seen from many of the oil majors, that is no longer the priority. And the priority, the big companies like Exxon Shell are actually being celebrated by their success in oil, in gas. And everyone is a little bit, or a little bit is a understatement, is quite down on BP because they had pivoted away so strong from oil and gas, expanded into renewables, into wind, into battery storages, things that were quite hot topics, but shareholders have not rewarded them for that. So now there's a bit of a, you know, an important juncture for the new CEO to figure out what is the future of bp? What where do they need to pivot towards and away from?

Allegra Stratton (5:20)

So they had famously changed their name to Beyond. Well, they said they'd become Beyond Petroleum. Now the joke is what it's backing petroleum or back to petroleum which, which do you prefer?

Aaron Kirchfeld (5:30)

I mean, investors definitely want back to petroleum. So. And I think that the big question is on the 26th, the new CEO is going to unveil a new strategy and he there's the expectations are ridiculously high, they're going to be hard to meet and, but everyone knows whatever they decide in terms of concrete terms, it will be pivot away from renewables and more back to the roots. Oil and gas, as you say.

Allegra Stratton (5:57)

You've been watching this for 10 years. Naturally, the BP Beyond Petroleum, it doesn't go back longer than that. Right. It was a huge shift by the company. It wasn't just the last few years of net zero, it's been going on for a lot longer. I'm just wondering such a profound rejection, 25 years or more of a shift in the company, not just.

Aaron Kirchfeld (6:17)

No. I think the reality is whether it was carmakers, oil majors, everyone thought the direction of travel was towards net zero renewables. And that trend probably won't end. But the reality is right now, those who have stuck to oil and gas, to coal, they're the ones being rewarded because the appetite for that, whether it's in India, China, even the US is simply not going away. And now obviously with the reelection of Donald Trump, who's famous slogan is drill baby, drill, those drilling and drilling more are the ones getting the investor interest. So bp, like many corporates, they're adjusting to the new reality.

Francine Lacqua (6:56)

Yeah, and to be fair, I mean, I covered oil and BP for years actually with also the former CEO that then had to step down in disgrace and they always got a hard time from either front. They were never really considered that green. And I know personally, on a personal level, he was always like, well, I'm still seen as big bad oil, even we're trying to pivot. And my share price at the time didn't reflect that and now they're too green. So I think it's probably like a tough one to put in the middle.

Allegra Stratton (7:23)

Aaron.

Aaron Kirchfeld (7:24)

It's been a tough 15 years really for them because they had obviously the Deepwater Horizon spill in the Gulf of Mexico, which they have now called the Gulf of America in their latest earnings release, interestingly, on a side note. And then obviously, as you mentioned, the CEO had to step down for some personal misconduct and the, the failed transition to net zero. So they really are facing headwinds on a lot of fronts.

Francine Lacqua (7:47)

So Aaron, talk to us a little bit about the psychology of an activist investor. So Elliot is probably the most feared, right? Mainly because the founder is, I don't know if you'd call him a shark, but he's astute, he understand what he wants and he pushes hard. So what are they trying to do? I mean, they see a vulnerable company, they come in and they basically try and steer it so that the share price that they've bought goes up.

Aaron Kirchfeld (8:10)

Exactly. Elliot, as you say, probably the best known activist hedge fund in the world, they look for targets that they believe are undervalued. They believe BP is severely undervalued and they come up with a strategy that they then pitch or push on the management to make the stocks rebound. Now you can look at a long track record of their targets that can range from everything, like a breakup like Honeywell, which was just announced a few weeks ago, that can be management change. A lot of people are speculating that they might push out the chairman of BP who was behind the transition to net zero, and it could be asset sales, all sorts of levers they can pull when they pop up in the share registry. The boardrooms listen because they carry a lot of weight, they have a lot of money, they make big bets, multi billion dollar bets. And while in the US they can be more effective because they have more tools to replace the board with their own people, they still can have a lot of sway in the UK and Europe.

Allegra Stratton (9:12)

How long have they been active? You know, it's very noisy, this story now, but what are the high profile cases going back a few years? Because, I mean, clearly I've got a kind of lens of being interested in climate and so on, but if I think back a few years, you've got Engine one that performs a similar deal, but from the opposite perspective. So trying to force companies to be more esg, which we can all debate till the cows come home about how effective it was as a category, but nonetheless that seemed to be the dominant activist investor trend three years ago. Is it just that they were noisy and high profile, but actually there were other opposing deals going on? Yeah.

Aaron Kirchfeld (9:51)

So I'd say Enjin is a bit of a unique animal, this pressure to move towards esg. But interestingly, even in the uk, just in the last few weeks, Engine and Elliott invested in the same target in the uk, Smith's group, which is an industrial conglomerate and Smiths did announce a breakup. Now, people at Smiths would claim we were working on this review for months, has nothing to do with Engin and Elliot. Maybe just a coincidence, wink, wink. But so now it's interesting to see Engin and Elliott's interest converge.

Allegra Stratton (10:21)

So interesting.

Aaron Kirchfeld (10:22)

Yeah. So I think Elliott has targeted oil and gas companies before and in fact, yesterday they announced that they had built a huge stake, $2.5 billion in Phillips 66. And they are p break up big asset sales there. They've also built a stake in Suncor. So they've done oil and gas before, but it's never really been about we want you to become a green company. It's more about we want you to run your business more efficiently, get rid of the parts that you shouldn't keep that aren't as profitable. And really they just do the step, they push for the short term, steps that will boost the stock so that they can cash out.

Francine Lacqua (10:59)

A lot of the banks in the UK actually, or some of the banks had activist investors on their bank on their back.

Aaron Kirchfeld (11:04)

Yeah, I mean, HSBC had a big. Yeah, Barclays. So really in Europe, they target every sector. The thing is, activists are more. Are definitely more active in the us but it's also they're kind of running out of ideas in the US to a certain extent because there's so many activists and so many companies have already been targeted. So I think the idea is in the last few years, let's look to Europe, where companies might be more vulnerable and maybe it's less competitive. We can find unique targets that others haven't already already ID'd and see what changes we can push through. And we've definitely seen that over the past few years.

Francine Lacqua (11:37)

Aaron, I imagine if you're a chief executive, actually having a shareholder activist on your back is probably one of the worst things. I mean, it could make you better, but it's stressful. Do we know if the negotiations or the talks are friendly or do they even talk? What do we know about the BP case?

Aaron Kirchfeld (11:51)

We don't know much. What we do know is that BP has traditional advisors, Goldman, Morgan Stanley, Robbie Warshaw that it would normally work with. The reality is BP management knew they were vulnerable. So I would be shocked if they don't have a defense plan in the cupboard already. How to react if an Elliot or someone like Elliot appears. You're absolutely right. It makes boardroom CEOs nervous. But there's a catch to that theory because interestingly, CEOs sometimes have to make difficult decisions, whether that's job cuts, asset sales. Sometimes having an activist is actually a good thing because it gives you that leverage you need where you say, well, if we don't make these radical changes, it could be worse. And you see the same thing for institutional investors, the ones we would consider maybe slightly more passive or boring. And they actually might also. And we even receive some calls, they don't want to say it on the record, saying, we applaud that Elliot's there because we want BP to make changes. They're losing money on bp. They want the stock to rebound. And they're like, elliot will provide that catalyst. That's necessary.

Francine Lacqua (12:58)

What's the most efficient way of getting stuff you have, sometimes M and A deals. So if you see a vulnerable company, maybe a Shell, looks at BP and says, I want some of their assets, you could have a short seller, you could have an activist investor. How do you divvy this up? Who gets there first? Or is everyone looking at similar assets?

Aaron Kirchfeld (13:18)

So in the case of bp, and we wrote this recently, several of the big rivals, even before Elliot showed up, before we broke that story, have been running. The number is sitting there waiting, who makes the first move? And the interesting thing about BP is it's really a crown jewel of British corporate history. So imagine this scenario. What if one of the big Americans, whether it be Exxon, Chevron, and this is all theoretical, what if they made a move? Do you think the British government would sit there and let that happen? Big question mark. What I could see in theory, what could they do? Well, they have national security laws that they could try to use, but can you imagine Trump getting on the phone and saying, hey, how about our special relationship? How about the trade deal you want to do? Exactly, so you better let us through. I think the more realistic scenario could be they would make a call to Shell, which is the most obvious partner, another British major that has had way better fortunes. Shares have gone up as BP's has gone down. And they could say, we want you to do a deal and create a true British champion. Because if you combine them, you would have one of the biggest oil majors and they could really go neck and neck with the Exxons of the world.

Francine Lacqua (14:33)

When you look at activist investors, are they. I mean, you mentioned that actually a lot of them are looking more at the uk. Is it easier to change things for a UK company, a British based company, than it is for Europe?

Aaron Kirchfeld (14:45)

So I think UK is definitely the most attractive European market. We saw that in the data last year. I think it's a mix of maybe some of the rules make it easier, but I think it's mostly, and this applies to overall M and A, not just activism. The UK is always the, well, usually the most attractive and most active market. And that's because I think investors here are more receptive to M and A. You don't get government involvement as much. We all know what happens in France when you try to buy a French company. Everyone cites the famous example of Danone, when Pepsi was looking at Danone yogurt, all of a sudden overnight became a nationally strategic asset and the deal never happened. And everyone knows it's all about pricing. Yeah, it is. Yogurt's important. I won't disagree. Whereas the UK has always been more receptive to takeover. And so I think in terms of simplicity, lack of political blowback, also some of the corporate governance rules, the UK is always the easiest target after the us, I would argue. So that's why we see a lot of activity here and then for any government. You know, as you'll know, the UK has to straddle this fine line between we want to build national champions, but we also want to be open to the world. And so blocking deals would send obviously the wrong message. And that's another reason, I think, why people think, if I'm going to do a deal, let's go to the uk.

Allegra Stratton (16:04)

A little focus on the underdog. Those bits of the business that BP will now be encouraged to sell. As the global deals editor, I know it's not trendy, I know it's not Trump compliant with drill baby drill to be thinking about solar and wind. A couple of years ago they were seen to be good bets. Of course, the return on investment is not what it is with oil and gas for now, but long term, you know, they do have a kind of longevity to them that oil and gas does not have.

Aaron Kirchfeld (16:34)

Absolutely. I think, you know, 10 years from now we'll be having a different conversation.

Allegra Stratton (16:38)

Exactly. And this is slightly frustrating.

Aaron Kirchfeld (16:40)

This is the irony of all of this. Absolutely. But I think for now, you know, there's a very good chance that Elliott could or demand that BP sell exactly those businesses. So they own a solar energy and battery storage business, they've built a huge EV charging network and they also have a big retail business, whether that be truck stops or every American knows the BP gas stations, I think you call them petrol stations over here. Correct. And they'll probably press them to sell that kind of non core. And really just someone will pick them up quite cheap. Yeah, someone could pick them up quite cheap. And I think you're absolutely right. In the short term, those renewable type assets are the ones that investors don't want BP or others to hold. But I think in the long term they might regret that. But when you have Elliot knocking on your door, you're thinking more short term than long.

Francine Lacqua (17:32)

Term, in the short term. I mean, I can't ask you who's next, but do you think we'll see more activist investors come in?

Aaron Kirchfeld (17:39)

I do. I think we'll see more. And I think the big trend that we saw last year and that will continue this year is the push for simplification. So all these big conglomerates, let's think of Unilever, they're selling their ice cream business, Ben and Jerry's Reckitt, they're selling their home care business, all the cleaning products I love using at home. And the reality is the investors are rewarding those moves. I've been doing this long enough to know the pendulum swings back and forth. Right now the pendulum is swinging towards simplification focus. And that's what BP needs to do. But again, in five years from now, we'll be talking about how companies need to diversify. Exactly. Which I guess is good for business, for bankers and for M and A reporters.

Francine Lacqua (18:18)

Aaron, thank.

Allegra Stratton (18:21)

You.

Francine Lacqua (18:26)

Thanks for listening to this week's in the City from Bloomberg. This episode was hosted by me, Francine Lacqua with Allegra Stratton. In the City is produced by Samar Saadi and Moses Anda with sound design by Blake Maples. Brendan Francis Newman is our Executive Producer. Special thanks to Erin Kirchfeld. Please subscribe, rate and review wherever you listen to podcasts.

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