When Royal Dutch/Shell Group (RD) shocked the markets early last year by announcing that it would downgrade a big chunk of its oil reserves, investors began agitating for the company to institute radical corporate reforms. One leader was a then-obscure fund manager named Eric Knight, who rallied larger shareholders to the cause. Taking on a corporate behemoth such as Shell looked like a recipe for frustration -- especially since Knight's investment fund, Knight Vinke Institutional Partners LLC, held a relatively tiny $70 million position in the $200 billion market-cap company.
But Knight was unusually persistent and persuasive. Last fall, when Shell said that it would propose a merger of its Anglo and Dutch wings under a single board and CEO, ending a century-old structure, Knight got a lot of the credit. "His goading of us at the start was right on the button," says a source close to Shell. "He said exactly what needed to be said."
Now, Knight is at it again. The 45-year-old fund manager, a veteran of Merrill Lynch & Co. (MER) and Virgin Islands-based Sterling Investment Group, which also targeted underperforming companies, has taken on what many think is an even more quixotic challenge: the restructuring of French conglomerate Suez Group (SZE), which has more than $50 billion in sales. Knight argues that Suez, now a hodgepodge of electric-utility, water, and environmental companies, should be streamlined. So far analysts have largely panned his approach as an ill-timed tilt at a company that is already fixing its problems. Knight vows to press ahead. "The Suez structure today just doesn't make sense," he says. "It needs to be fixed, and we're open minded about the solution."
Who is Eric Knight? Born in Amsterdam, he has Dutch, Italian, British, and Swedish ancestors and degrees from both Cambridge University and the Massachusetts Institute of Technology's Sloan School of Management. Knight Vinke, launched in 2003, has its headquarters in New York, yet its founder spends much of his time in Monaco and Switzerland, or traveling the Continent, bringing his own brand of shareholder activism to Corporate Europe. With $200 million on tap from the California Public Employees' Retirement System (CalPERS) and $100 million more from other investors, Knight is hunting for companies whose corporate governance or structure is weighing on the stock price. Knight collects 1% to 1.5% in management fees from investors and reaps 20% performance fees on any profits he earns.
The Etonian Knight, who is fluent in German, Italian, French, and English, exudes Old-World cool. "We are not launching personal crusades," he says. In fact, in the midst of the Shell battle, Knight recalls, Jeroen van der Veer, the CEO, thanked him for being so polite.
Knight doesn't scream, and he doesn't take huge positions. Instead he quietly tries to convince the large pension funds and other institutional shareholders that dominate European corporate ownership to band together and pressure company boards and management to act in the interest of investors. Unless boards are pushed, he says, "companies will be managed by groups of people who are all part of the same club and scratch each others' backs."
To support his arguments, Knight develops fat, figure-filled briefing books on the companies he targets and then lobbies hard for reform. In the Shell battle, he helped assemble a phalanx of major shareholders for a presentation to management; met with top executives, including former CEO Philip Watts and his successor, van der Veer, and even testified in July before the U.S. House of Representatives Committee on Financial Services.
In the case of Suez, he argues that its 50.08% stake in Belgian utility Electrabel, which has a $23.5 billion market capitalization, "creates no value for Suez or Electrabel shareholders." Electrabel, he says, would be better off freed of the Paris-listed company's complicated debt structure. Knight thinks Suez' various parts are worth some $38 billion, vs. its current $26 billion market cap.
Some see Suez as a curious target. Since hitting a 52-week low of $19.50 in August, its share price has been rising steadily, thanks to debt reduction and a decision to focus on electric power in Europe. Some speculate that Knight is a stalking horse for savvy Belgian investor Albert Frère, who controls 7.2% of Suez stock through Groupe Bruxelles Lambert (GBL) and is vice-chairman of Suez. Knight once worked for Frère's Pargesa Group. Certainly, if Knight recruits the Belgian to his side, he has a far better shot at shaking up Suez. Executives at GBL could not be reached for comment. A Suez board member says the breakup would not add value.
Knight says he is being contacted by Suez shareholders interested in his argument, but analysts are skeptical that he can muster enough clout to muscle well-connected Suez CEO Gérard Mestrallet. If the Electrabel stake were spun off, Suez would be reduced to a French mid-cap. "That is very difficult for political reasons," says Eric Lopez, an analyst at Credit Suisse First Boston (CSR) in London.
Still, Knight seems to have made a specialty out of taking on politically well-connected European companies. Tito Tettamanti, a financier based in Lugano, Switzerland, with whom Knight worked at Sterling before leaving two years ago to found his own shop, says Knight "has a lot of guts." Investors also say that he has found the right formula to rally shareholders. He tirelessly makes the rounds of institutions in London, Frankfurt, Amsterdam, and elsewhere. And he keeps other fund managers' names out of the newspapers. "Eric is finding the right balance between aggression and being part of the investment mainstream," says one.
Even before the Shell campaign, Knight had shown he could get results. In 2001, as managing director of a Sterling subsidiary called SSP-Special Situations Partners, he led the fight to oust Milan Panic as CEO of ICN Pharmaceuticals (now Valeant Pharmaceuticals International (VRX)) in Costa Mesa, Calif. "I think the thing that impressed me most was his level of sophistication," says David H. Batchelder, a principal at Relational Investors LLC, a $3.6 billion activist fund that worked with Knight on ICN.
The bottom line? Knight Vinke's investments are up about 20% since he began investing last year. Ted White, a fund manager at CalPERS who works closely with Knight, says he is "doing fine."
Some interpret the recent ouster of CalPERS Board President Sean Harrigan as a sign that the big pension fund ($180 billion invested) will lower its profile and dole out less money to activist investors. Knight isn't worried. Indeed, he and his partners, Patrick J. Dewez and Louise Curran, are looking for fresh game. He's coy about future targets, but mentions Deutsche Bank (DB), which has long disappointed investors, and Norsk Hydro (NHY), a curious amalgam of an aluminum maker and an oil-and-gas company. One thing is certain: Executives at any company whose name passes Eric Knight's lips are bound to be squirming in their chairs.
By Stanley Reed in London, with John Rossant in Paris and Christopher Palmeri in Los Angeles