Corvex Management: An Activist Investor Analysis

Corvex Management manages approximately $2.1 billion as of June 30, 2018. Over the past two years, the portfolio has been doing well but underperforming the S&P 500. Since September 2016 Corvex has a return of 16.73% versus the S&P 500’s 34.67%. Over the past few years, the Madison Avenue-based hedge fund has been in a number of headlines with investments and activist efforts involving KFC-owning Yum! Brands, Inc. (NYSE: YUM), American Realty Capital Properties, Inc., Allergan plc and most recently Energen in 2017.

Even in the hedge fund community, few investors received the kind of training and financial backing that Corvex founder Keith Meister received. Prior to the fund's launch in 2011, Meister was widely known as Carl Icahn's right-hand man. Meister took Icahn's philosophy of being aggressive, contrarian and confrontational, and bolstered it with $250 million in seed capital from George Soros.

The fund’s performance has been strong, though assets have been leaving the firm. In the second quarter of 2018, the firm reported a gain of 9.77%. Since 2011, assets have wavered from a peak of $9.1 billion in 2015 down to its current level at $2.1 billion.

Meister's style of investing at Corvex is controversial. Many fund managers are reserved, quiet and straight-faced; by contrast, Meister is outspoken and ornery, even more so than his famous former boss. In October 2014, the The Wall Street Journal published an article that opened with the line, "Keith Meister takes things personally." It went on to describe the activist as "competitive" and "very emotional."

Meister has been sued multiple times for his professional and interpersonal actions, including a relatively high-profile showdown with the ADT Corporation's board of directors, on which Meister once served. In its lawsuit, ADT alleged that Corvex's leader "aggressively pressured and intimidated his co-board members" to participate in a repurchase of Corvex shares.

Though his style has earned him a legion of detractors and critics in the financial media and across corporate boards, Meister is respected by power players in the fund community because he drives results. "He's intense in the best sense of the word," said Aurora Investment Management executive Justin Sheperd, one of Meister's investor clients.

Yum! Brands has been one of Corvex’s most noteworthy activist endeavors. In Q1 2015, Corvex Management acquired an activist stake in Yum! Brands at about the same time Third Point Management, Daniel Loeb's hedge fund, took a much smaller position. Meister's group bought more than 15 million shares to become the largest shareholder; Loeb only grabbed 3.5 million shares for a distant second place. As a consequence, Corvex became the lead activist, although it is likely the two hedge funds worked with each other to promote shareholder value.

Corvex entered the Yum! Brands arena looking for a seat at the board of directors and a number of operational changes, including the sale of KFC Eleven and Super Chix and a spinoff of Yum!'s Chinese division. Meister and Loeb's activist activities were strategically timed around a switch at Yum! Brands for CEO, when Greg Creed replaced longtime executive David Novak. Creed, who had been chief executive at Taco Bell from 2011 to 2014, unwittingly walked into a firestorm.

Yum! and Creed initially balked at Corvex's requests, particularly the spinoff idea for the Chinese division. Creed received support from Novak, who became executive chairman of the board after leaving the CEO slot, although public dialogue between Corvex and Yum! was amicable. Yet, one by one, the demands from Meister and Loeb fell into place.

By April 2015, KFC Eleven was closed. By August, Super Chix was sold to an investment group headed by founder Nick Ouimet. About that same time, China was hit with its worst stock market collapse in years, leading to global concerns about a recession in 2016 and the bursting of an obvious asset bubble in the Far East. Chinese prospects were much bleaker, and the Yum! China brand was, thus, less valuable.

On Oct 15, 2015, the fast-food operator announced it would add Keith Meister to its board of directors. Meister bragged about the company's "multiple avenues for unlocking significant long-term value" and said he would work expeditiously to "deliver that value to shareholders." It was a much-needed win for Meister, whose firm had suffered through a 24% drop in the Yum! stock price since making its position. The company remained openly committed to keeping its China division intact, though that did not last.

By Oct. 20, 2015, Yum! announced a plan to split Yum! China and Yum! Brands, arguing the move would increase shareholder value and allow more room for KFC and Pizza Hut to grow. Meister's fingerprints were all over the rushed decision; the Chinese division could now grow debt-free, something Meister argued was imperative. Creed said the speed of the decision was based on "a lot of common ground" between the two individual proposals.

In 2017, Corvex took an activist position in Energen along with Elliott Management Corporation. The two firms urged for a sale of the business. Corvex held a 5.5% stake and lobbied that the firm was heavily undervalued and that significant profits would result from a sale of the business. As an energy company, Corvex also argued that the firm’s land deals involving research, development, and exploration were available at a high value to others looking to potentially acquire and consolidate. The firm’s actions were met with opposition and did not go far. Energen hired advisers JPMorgan and Tudor Pickering Holt & Co. to review the business and found that they would remain on track with their current framework and strategic plans.

Heading into 2018, Corvex is no longer heavily invested in YUM! but still owns an activist stake in Energen with 7.91% of the outstanding shares. Energen is also the firm’s top holding at 32% of the portfolio. Other leading names in the portfolio include Facebook, Bank of America and Microsoft which round out the top four portfolio holdings. The only other large activist stake above 5% is in Landcadia where Corvex owns 19% of the outstanding shares.