The Smart Money Is Chasing Euro Deals

Investors from both sides of the pond are on an Easter egg hunt for potential plays

Its name may sound soft and comforting. But the Children's Investment Fund, a London-based hedge fund better known as TCI, is more like a pebble in the shoe of Europe Inc. Just ask ABN Amro (ABN ). Under assault from dissident shareholders led by TCI, the Dutch bank confirmed on Mar. 20 that it is in talks to join Barclays PLC (BCS ) in a potential $80 billion deal that would be Europe's biggest-ever cross-border banking merger; ABN Amro had been seeking a suitor to fend off TCI, which owns about 1% of the bank's stock.

The episode underscores the growing boldness of hedge funds and other activist shareholders in corporate Europe. They're buying stakes in some of the Continent's biggest blue chips—from banks and retailers to consumer giants such as Cadbury Schweppes PLC (CSG )—and then pushing the companies to streamline operations and shed underperforming assets. "Europe is like an Easter egg hunt" for this crowd, says Chris Young, a researcher at U.S.-based Institutional Shareholder Services Inc.

Why now, when value-hungry investors have been sniffing around the Old World for years? One reason is that while aggressive players such as TCI provide the spark, their efforts are now being fueled by institutional investors. Two major Dutch pension funds, for instance, endorsed TCI's calls for a breakup of ABN Amro. And big shareholders in Deutsche Börse, including funds run by Fidelity Investments and Merrill Lynch & Co. (MER ) (MER ), allied with TCI and New York hedge fund Atticus Capital to block the Frankfurt market's attempted merger with the London Stock Exchange in 2005. In both cases, the hedge funds' arguments were amplified by the support of money managers with big stakes in the companies.

Now, some mainstream European funds are taking the lead in shareholder fights. German travel agency TUI on Mar. 19 said it will merge with Britain's First Choice Holidays PLC and then list in London, a move prompted by activist shareholders including Hermes, the pension fund manager for BT Group PLC (BT ), and DWS, Deutsche Bank's (DB ) money-management arm. In a parallel to the ABN Amro drama, TUI agreed to forge the link in response to dissident shareholders who wanted to break the company up. More and more, "investors are willing to vote with their money and put some muscle behind those decisions," says Thomas J. Barrack Jr., who heads California-based real estate fund Colony Capital.

Plenty of the pebbles in corporate Europe's shoes come from across the Atlantic. Colony recently joined luxury magnate Bernard Arnault in taking a 9.8% stake in French retailer Carrefour. Together, they are pressing for a sell-off of some of its real estate assets. U.S. hedge fund Trian, headed by veteran raider Nelson Peltz, spurred drinks-and-candy giant Cadbury Schweppes to cut itself in two after taking a 3% stake in the company recently. And last year a shareholder revolt led by New York-based Knight Vinke Asset Management triggered the $9.6 billion sale of Dutch group VNU to a group of private-equity investors including Kohlberg Kravis Roberts and the Carlyle Group.

Unlike the U.S., where most big companies long ago yielded to restructuring demands, the Continent still has plenty of tempting targets. Consumer giant Unilever, for instance, has been mooted as takeover bait because it is less streamlined than American rival Procter & Gamble Co (PG ). (PG ) and has resisted shareholder pressure to split the company. ABN Amro is in similar straits. Its stock has stagnated for seven years as it lagged rivals in cutting costs and focusing its business. Enter TCI (the "children" in the name refers to a charity run by founder Christopher Hohn's wife that gets a share of management fees). The press-shy Hohn issued a statement saying TCI was "encouraged" by news of ABN Amro's talks with Barclays, which produced a healthy 10% bounce in the Dutch bank's share price. But TCI warned that the talks should not preclude other bids "to produce the best results for shareholders." Little comfort there.

By Carol Matlack, with Jack Ewing in Frankfurt and Kerry Capell in London

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