Michael Harrison: Small shareholders get hurt when big guns want a deal

When Neil Woodford buys shares in a company, he invariably invests big. There is a very good reason for this. With a large shareholding comes power. And with power comes control.

So it is with the ill-tempered bid for the doorstep lender Provident Financial from its much smaller rival NSF, where Woodford Investment Management and two other big investors have emerged as kingmakers.

Between them, Woodford, Invesco (where Woodford first made his name as a top stockpicker) and Marathon own 50% of Provident and 65% of NSF. Wearing their hats as Provident shareholders, these three investors have already accepted the all-share offer from NSF, even though the bidder is not offering any premium for control. This matters less for Woodford and co because some of what they lose on the swings as Provident shareholders they gain on the roundabouts as NSF shareholders.

For Woodford, there is another agenda at play. By his own admission, his equity income fund has had a grisly couple of years. The value of the fund has halved because of poor stock performance and investor withdrawals. This has put Woodford under pressure to sell more of his shareholdings to meet those redemptions or stem the level of redemptions.

He recently told the FT that unless he succeeds he could be out of business in two-and-a-half years.

If the Provident-NSF deal goes through, it will help stave off that day because part of the rationale is to asset-strip the combined group by selling off Provident’s car loans business and returning the proceeds to shareholders. That would constitute good news for Woodford. But it would be small consolation for the remaining minority investors in Provident.

They are being denied the kicker they would have enjoyed had this hostile offer been made in cash and at the usual premium to the target’s current share price.

Instead, they are being asked to take NSF paper and put their trust in NSF’s ability to make a better fist of running Provident. Some of these minority investors, such as Standard Life, Legal & General and the Abu Dhabi Investment Authority, are big and ugly enough to look after themselves.

But spare a thought for the 2700 or so small retail investors who have stuck with Provident through thick and (mostly) thin as its shares have sunk to a 22-year low. Being offered a decent cash exit would have been some compensation for all the years of pain.

Of course, these shareholders could have sold out long ago and moved on. Many do, which is why investors such as Woodford and Invesco often find themselves in the pivotal position they occupy less by design and more by default, possessing large holdings in companies that have become uninvestable.

Nor can conviction investors such as Woodford be accused of only ever acting in their own interest. They are often a force for good, taking large strategic stakes in companies and galvanising them into action. Investors are forever being urged to act less like short-term opportunists interested only in making a quick buck and more like supportive proprietors of companies committed to their long-term success. Woodford and Invesco fit this bill.

The electricity generator Drax would never have embarked on its transformation from biggest carbon emitter in Europe to one of the world’s largest renewable power companies had Woodford not used his large shareholding to support its conversion to biomass and then help bankroll the huge investment required.

But the tussle between Provident and NSF is a timely reminder that markets do not operate on altruism alone, which is why minority shareholders can easily find themselves short-changed and squeezed out. They enjoy very little protection in company law and have very limited room for manoeuvre when one or two large shareholders embark on a particular course of action.