UBS hopes to complete its takeover of Credit Suisse “as early as June 12,” which will create a giant Swiss bank with a balance sheet of $1.6 trillion.
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Company: UBS Group AG (UBS)
Business: UBS Group AG is a holding company based in Switzerland. It operates through UBS SA and its subsidiaries. The company operates as a wealth manager with focused asset management and investment banking capabilities. UBS consists of four divisions: global wealth management, personal and corporate banking, wealth management and investment banking.
Stock market value: $106.9 billion ($30.89 per share)
UBS shares year-to-date performance
Activist: Cevian Capital
Ownership percentage: 1.3%
Average cost: n / A
Comment from an activist: Cevian Capital is an international investment company that acquires significant stakes in publicly traded European companies, where long-term value can be enhanced through active ownership. Cevian Capital is a long-standing and active owner of European listed companies. He is often referred to as a “constructive activist” and is the largest and most experienced dedicated activist investor in Europe. The company was founded in 2002. Cevian’s strategy is to help its companies become better and more competitive over the long term, and to achieve a return on investment through an increase in the long-term real value of businesses. His work in businesses is usually supported by other owners and stakeholders.
What is happening
December 19, Cevian Capital announcement that it had acquired a stake of approximately $1.3 billion in UBS Group AG.
In the wings
Cevian has been a true pioneer of international activist investing for over 20 years. The company is considered the benchmark for activism in Europe. Cevian often takes large positions and has a very long-term investment horizon. The company will be an active shareholder but will also hold board seats in many of its largest portfolio positions. Currently, Cevian professionals serve on the boards of 10 portfolio companies in six different countries.
UBS is the world’s largest wealth manager, with unique market positions and financial strength, but is nonetheless seen and valued by many as an ordinary bank. The largest part of its business is wealth and asset management, which accounts for 60% of its global turnover. It is one of the largest wealth managers in the United States, but it is by far the largest wealth management company in the world, with three times the assets of the No. 2 company. In addition, 55% of its wealth management activities are located outside the American continent. Twenty percent of UBS’s revenue comes from Swiss retail and investment banks, where the company ranks first. Another 20% of its revenue comes from investment banking. But unlike many of its peers, investment banking at UBS is primarily used to support wealth and asset management. This is not a risky business. Thus, only 25% of UBS’s tangible equity comes from the investment bank, compared to 70% for Morgan Stanley. In other words, Morgan Stanley is a bank with a wealth management business, while UBS is a wealth manager with a banking business. One might expect a wealth manager’s stable, predictable, low-risk revenue to trade at a higher multiple than a banking business. Yet UBS trades at 1.2 times tangible book value, while Morgan Stanley trades at two times tangible book value.
In general, banks are currently trading at very attractive valuations in Europe – at a 50% discount to the market. UBS is an extremely undervalued, but high quality company with considerable upside potential. First, since the merger with Credit Suisse, the bank is in the process of restructuring, which is not attractive for short-term investors, but represents an opportunity for long-term investors like Cevian. Second, UBS’s performance could be improved: the company achieves a return on tangible equity of 14%, compared to 20% for Morgan Stanley. The integration of Credit Suisse and the optimization of performance create a very attractive investment for long-term investors. Cevian thinks this could lead to UBS shares trading at $58 from $30.89 today.
This is a large position for Cevian: $1.3 billion, or nearly 10% of the $14 billion it manages. Based on the company’s philosophy and history, Cevian has likely been building this position for several months, engaging constructively with management during this time. The company has not indicated that it is seeking a board seat at this time, meaning it is not seeking one at this time. However, Cevian is not the kind of activist who seeks a board seat just for the sake of it. If Cevian is not requesting a seat on the board of directors, this means that the company is currently in sync with management and is having constructive discussions with them on issues such as profit potential. Cevian will continue to discuss with management. If at some point in the future the company believes it can add value at the board level, then it will discuss board composition with the company. At ABB Groupthe activist company held an investment of approximately two years in front of the founder of Cevian, Lars Forberg went to the board. More than six years later, he is still on the board. If Cevian sits on the board of directors of UBS in the future, the activist investor will bring with him the experience and successes he has achieved in other banking companies, such as his current position in Nordea Bank.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.
