IN THE NEWS

🏰 Hedge Funds Fight for Influence over Disney

Disney’s latest thriller is captivating audiences, but it’s not a product of the company’s motion-picture studios. Instead, this is a behind-the-scenes battle between moneyed interests vying for influence over the Magic Kingdom.

• “Activist” hedge funds try to build influence over companies, forcing reforms they believe are necessary to promote better shareholder returns. Disney has three of them competing for leverage over its board of directors.

What’s happening: On Wednesday, ValueAct Capital and Blackwells Capital moved to support Disney against a challenge from a third activist investor, Trian Fund Management.

• This follows bitter disputes over who should be Disney’s top boss after CEO Bob Iger led the company for 15 years, retired in 2020, and then returned to help Disney navigate choppy waters as it pivots into the streaming business.
• As large shareholders, each hedge fund wants to nominate directors to the board who reflect their views on what Disney’s strategy should be going forward.

Why it matters:

ValueAct and Blackwells have seemingly made peace with Disney, agreeing to support its nominees at the next annual shareholder meeting (where Disney investors will vote on the next board).

• For Trian, the hedge fund said it welcomes other shareholders working to “fix this iconic but wayward company.”

No fairytale ending: But Trian, which owns about $3 billion of Disney stock and is managed by billionaire Nelson Peltz, wants to nominate Peltz to the board. Peltz thinks Disney has botched its CEO succession plans and worries that Bob Iger is too close with the current board, which is supposed to check his power.

The other activist hedge funds, Blackwells and ValueAct, are seemingly aligning with Bob Iger to fend off Peltz’s bid for boardroom power. While Blackwells has agreed that a fresh board at Disney is necessary, the hedge fund has objected to Trian’s more hostile tactics.

• In a statement, Blackwells said, “Shareholders deserve the opportunity to continue supporting Disney’s turnaround and transformation efforts under the leadership of the current board and CEO.”
• Adding that Peltz’s effort “is driven by animus against Mr. Iger, and an ego-driven urge to claim credit for a transformation already underway.”

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👟 After Reviving Old Spice, Can This CEO Help Van’s Next?

The man tasked with reviving Vans’ $11.6 billion parent company, VF, penned a Dr. Seuss-like poem entitled, “The Secret to Success: Avoid it.”

“SUCCESS makes you fearful,
Of losing your place,
Of gambling with stature,
Of losing your face.” 

Shareholders may or may not love that message. But new VF CEO Bracken Darrell is urging executives to churn out new styles and eschew older shoe and clothing lines while embarking on $300 million in cost cuts and 500 job cuts.

Darrell has the unenviable position of inheriting a major brand well past its glory days. VF, which owns Vans, The North Face, and Timberland, needs a jolt after declining sales and a stock falling about 75% since late 2021 — making it one of the S&P 500’s worst-performing stocks.

• As Debt soared to $6.7 billion, Darrell slashed the dividend by 70%.
• “Vans caught a wave,” Darrell said, referencing how Vans once outfitted Rihanna and David Beckham. “That’s a dream, but if you’ve misdiagnosed why it grew, it can be a nightmare on the way down.”

Failure to innovate: The clothing business is notoriously difficult, and many investors stay far from it. But Vans, founded in 1899 as a glove and mitten factory, grew throughout the last century. From 2000 to 2016, VF’s revenue doubled. Profits quadrupled.

• But stop us if you’ve heard this a million times: The company didn’t innovate in the years since. It spun off its jean business, moved headquarters from North Carolina to Denver, and couldn’t keep costs down. Meanwhile, the brand tried to gain widespread popularity, losing sight of its skater-oriented customers.
• Here’s Darrell: “Inside all of us, there’s a little bit of an underdog, a little bit of an outsider. I think we got so big that we, we ended up kind of catering to other people that were just purely into fashion — which was not bad — but we kind of lost our way on really making sure, always appealing to that slightly mischievous, fun side that we all have inside.”

Why it matters:

VF isn’t alone. Gap Inc. has struggled mightily — its stock has fallen 20% over the past years. Nike has done better than most footwear/apparel companies but has underperformed the S&P 500 in the past few years.

• Darrell is on the clock to get things right as activist investors urge him to keep cutting costs. He’s also focused on selling more comfortable shoes, not its hallmark 1970s style.
• Maybe the poem’s message will strike a cord. Darrell visits stores to talk to customers directly and shares his cell phone number with employees. He’s pushing executives to develop new products fast, or else VF will keep losing its place — and face.

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🏠 Welcome to the Neighborhoods Designed by Wall Street

Folks, Wall Street is coming to Main Street.

Rent growth is stronger for single-family homes than apartments, and Wall Street is looking to capitalize: Landlords are sometimes buying up entire blocks, practically entire neighborhoods. Some of the country’s biggest investors are bullish — OK, very bullish — on family homes.

In short: As it’s harder for the average American to buy a house — high rates, fewer homes for sale, high prices — Wall Street investors have been buying up homes to rent out.

• To be fair, America’s rental market is still about the mom-and-pop landlords that own a few properties. They buy nearly 20% of all U.S. family homes for sale.
• Meanwhile, institutional investors own 55% of all U.S. apartments. But they’re buying up family homes as a better bet in the years ahead. Rent prices have risen steadily for single-family homes, and home tenants stick around longer (four years on average) than those in apartments (two or three years).

Build-to-rent: Take Blackrock, which has racked up tens of thousands of family homes since 2008.

• The process is time-consuming, expensive, and inefficient. Plus, the lack of housing inventory is making the practice virtually impossible.
• So, Wall Street is building new neighborhoods of family homes where people rent. Think of a college town where many residents rent. But a new trend has developed where institutional investors team up to create “build-to-rent” communities.
• There are about 900 such neighborhoods with an average of 140 homes, and 10% of new housing construction is designed for build-to-rent.

Why it matters:

The build-to-rent trend is a big win for investors because they can place all their rental homes in one place rather than have them scattered throughout a city or region.

• They can also streamline handyman and other services, and institutional investors build homes with wide hallways and stairways to protect the paintwork when tenants move in and out. They use hard-wearing countertops and flooring to reduce renovation costs and attract tenants.
• One firm, New York real-estate investment trust American Homes 4 Rent, is building over 2,000 new homes. Invitation Homes is one of its competitors. Both are outperforming struggling apartment REITs such as Equity Residential.

Economists say the U.S. is short about 3 million homes, so many are welcoming Wall Street’s new residential frontier. As The Wall Street Journal reports, “The only downside might be a lack of charm in these new, rationalized neighborhoods.”

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TRIVIA ANSWER

526,000. That’s how many electric vehicles BYD sold last quarter, compared with 485,000 for Tesla. Less than 10% of BYD’s cars are sold outside China, though.