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TORONTO (Reuters) - Shareholder activism is likely to gather momentum in the Canadian energy industry in the coming months, sparked by some poor stock performance, the success of past campaigns and growing support from large institutional investors.
Money managers, as well as the proxy firms that help activists and targeted companies navigate these battles, say that a stronger economy has also given activists the financial firepower they need to buy the large corporate stakes required to push for control.
"You'll see more activism in oil and gas as it's easy to value the assets," said Stephen Griggs, chief executive of Smoothwater Capital, a Toronto-base activist fund.
"You have significant capital costs that need to be incurred in order to drill wells, you have companies leveraging themselves up, which creates risk," he added. "It's also a very entrepreneurial world where it's not always the best-run companies."
The Toronto Stock Exchange's oil and gas index is down by more than a third since its peak in 2008, while its benchmark TSX index has repeatedly hit record highs in recent months. That performance has put the energy sector on the radar of activists.
U.S. investors are showing rising interest in the sector. Last year, billionaire Carl Icahn acquired nearly 6 percent of Talisman Energy Inc. And Warren Buffett, who has traditionally been more of a value player than an activist investor, bought a slice of Suncor Energy Inc, Canada's biggest energy company.
Activist investors look for stocks that have lagged those of peer companies, seeking businesses that can be revitalized through asset sales, restructuring or the removal of inefficient boards and management.
The investment strategy is well known in the United States, where players such as Icahn have made billions buying stakes in big companies and shaking up management.
In Canada, shareholder activism was given a major boost by the overhaul of Canadian Pacific Railway Ltd orchestrated by the William Ackman-led hedge fund Pershing Square Capital Management. CP's shares have more than tripled since Pershing revealed it owned a stake in the company late in 2011.
“CP was a home run for everybody,” said Wes Hall, chief executive of proxy solicitation firm Kingsdale Shareholder Services, who advised Ackman during the CP battle. “If you can articulate a similar thesis to an investor on one of their portfolio companies, of course they're going to listen.”
The number of proxy fights in Canada has increased in nine of the past 10 years, according to data from Kingsdale. Resource deals have also been on the rise, the numbers indicate.
Last year, Canadian targets represented about 6 percent of activism worldwide, figures from Activist Insight show. And Canada was the country with the third-highest level of activism based on data for the first half of 2014, according to the industry research firm.
Industry veterans say the trend is gaining momentum with the quiet support of big institutional investors such as pension funds, insurers and mutual fund managers, which have historically preferred to operate behind the scenes.
"A lot of Canadian funds just don't prefer to be the front man in an activist campaign. Does that mean that they will still support an activist? Absolutely," said Kingsdale's Hall.
It is also easier for a shareholder to discreetly build up a stake in Canada than in the United States, industry players say.
Given these factors, the Canadian market should be bracing for more U.S. activists, said Glenn Keeling, executive vice president of CST Phoenix Advisors.
Keeling advised Agrium Inc last year as it thwarted an attempt by U.S. activist investor Jana Partners to get the Canadian fertilizer producer to restructure operations and overhaul the board.
“Canada is arguably the most shareholder-friendly country in the industrialized world,” he said. “There isn't an activist that doesn't know that Canada is the friendliest place to be one.”
Toronto-based West Face Capital, as well as U.S. hedge funds Orange Capital and Front Four Capital, are some of the other activists in the Canadian market.
Orange Capital said last month that it owned a stake in oil and gas company Bellatrix Exploration Ltd. It is calling for the company to consider selling assets, hire an independent financial adviser and make changes to its board.
Smoothwater, which targets, small and mid cap stocks, has bought Calgary-based real estate developer Genesis Land Development Corp and Toronto-based Equity Financial Holdings Inc.
To be sure, the activist trend in Canada could stumble, should the regulatory environment tighten or focus shift to other developed markets. But for now, activists are seen pushing ahead.
“We're in the early innings of an activist renaissance in Canada,” said Jeffrey Dean, managing director at investment bank Trimaven Capital Advisors.
Editing by Jeffrey Hodgson; and Peter Galloway