Cevian Capital takes a stake in UBS. How the activist’s track record with banks could help it build value

Business: UBS Group AG is a Switzerland-based holding company. It conducts its operations through UBS AG and its subsidiaries. The company operates as a wealth manager with focused asset management and investment banking capabilities. UBS is made up of four business divisions: global wealth management, personal and corporate banking, asset management, and investment banking.

Stock Market Value: $106.9B ($30.89 per share)

Percentage Ownership:  1.3%

Average Cost: n/a

Activist Commentary: Cevian Capital is an international investment firm acquiring significant ownership positions in publicly listed European companies, where long-term value can be enhanced through active ownership. Cevian Capital is a long-term, hands-on owner of European listed companies. It is often called a “constructive activist” and is the largest and most experienced dedicated activist investor in Europe. The firm was founded in 2002. Cevian’s strategy is to help its companies become better and more competitive over the long run, and to earn its return through an increase in the real long-term value of the companies. Its work at companies is typically supported by other owners and stakeholders.

On Dec. 19, Cevian Capital announced that it had built a roughly $1.3 billion stake in UBS Group AG.

Cevian is a true pioneer in international activist investing, having been doing it for more than 20 years. The firm is considered the gold standard for activism in Europe. Cevian often takes large positions and has a very long-term investment horizon. The firm will be an active shareholder but will also take board seats in many of its core portfolio positions. Currently, Cevian’s professionals serve on the boards of 10 portfolio companies in six different countries.

UBS is the largest global wealth manager with unique market positions and financial strength, yet it is viewed and priced by many as an ordinary bank. The largest part of its business is wealth and asset management, which makes up 60% of its global revenue. It is one of the largest wealth managers in the United States, but it is by far the largest wealth management firm in the world, with three times the assets of the No. 2 firm. Moreover, 55% of its wealth management business is outside of the Americas. Twenty percent of UBS’s revenue comes from Swiss retail and corporate banks, where the company is the No. 1 player. 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. It is not a risk-taking business. Accordingly, only 25% of UBS’s tangible equity is from investment banking, versus 70% for Morgan Stanley. To put it another way, Morgan Stanley is a bank with a wealth management business whereas UBS is a wealth manager with a banking business. You would expect the steady, predictable, lower-risk revenue of a wealth manager to trade at a higher multiple than a banking business. Yet, UBS trades at 1.2 times tangible book value, whereas Morgan Stanley trades at two times tangible book value.

In general, banks are trading at very attractive valuations right now in Europe – at a 50% discount to the market. UBS is an extremely undervalued but high-quality business with significant improvement potential. First, since the merger with Credit Suisse, the bank is in the middle of a restructuring, which is not appealing to short-term investors, but an opportunity for long-term investors like Cevian. Second, UBS’s performance could be improved: The company is getting a 14% return on tangible equity, versus 20% for Morgan Stanley. Getting Credit Suisse integrated and optimizing performance creates a very compelling investment for long-term investors. Cevian thinks this could lead to UBS shares trading at $58 versus $30.89 today.

This is a large position for Cevian: $1.3 billion, almost 10% of the $14 billion it manages. Based on the firm’s philosophy and history, Cevian has likely been building this position for several months, constructively engaging with management during that time. The firm has not indicated that it’s looking for a board seat at the moment, which means that it’s not searching for one right now. However, Cevian is not the type of activist that asks for a board seat just for the sake of it. If Cevian is not asking for a board seat, it means that the firm is aligned with management right now and is having constructive talks with them on matters like profit potential. Cevian will continue to talk with management. If at some point in the future, the firm thinks that it can add value from a board level, it will discuss board composition with the company at that time. At ABB Group, the activist firm had an investment for about two years before Cevian founder Lars Forberg went on the board. More than six years later, he is still on the board. If Cevian takes a board seat at UBS in the future, the activist investor will bring with it the experience and successful track record it’s had in other banking companies, such as its 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 activist 13D investments.