| The Children’s Investment Fund’s Christopher Hohn |
Christopher Hohn seems irritated. The founder of the $6.5 billion London-based activist hedge fund firm the Children’s Investment Fund Management has launched a campaign against EADS (European Aeronautic Defence and Space Co.), urging the European aircraft maker best known for its Airbus division to sell a key military airplane unit.
However, he doesn’t understand why this public pugilism is not getting much attention in the U.S. even though the target has a $46 billion market capitalization. “It is a major story,” he lamented to me in a brief phone conversation as he was preparing to head to India. “It was on the front page of the Financial Times.”
Ben Walker, a partner of the hedge fund firm, recently sent a letter to EADS’s chief executive calling on the company to sell or take public its 46 percent stake, worth $5.3 billion, in French military aircraft maker Dassault Aviation, calling it “a poor use of EADS capital.” Walker, who says his firm owns “materially in excess of 1 percent” of the shares, then wants the company to use the proceeds to issue a special dividend or do a stock buyback.
Hohn, who usually disdains the press but spoke last month at the Delivering Alpha hedge fund conference in Manhattan, said in the telephone interview that the stock has doubled since he made his investment last year. He believes it is still cheap and could double again even without the asset sale. “It doesn’t need it,” he asserts. “Earnings are doubling.” If EADS does do the asset sale and diverts the proceeds to shareholders in some manner, Hohn says the stock “goes up more.”
EADS, Boeing’s main rival, was formed in 2000 from the merger of the French company Aérospatiale-Matra, the Spanish company Construcciones Aeronáuticas (CASA) and the German company DaimlerChrysler Aerospace. Last fall, EADS failed in its attempt to merge with BAE Systems to create the world’s largest aerospace and defense company when the Germans opposed the deal. Since then it has undergone a major restructuring and privatization.
Most significantly, Daimler and French conglomerate Lagardère Group, which had been major shareholders, have completely sold their stakes. In addition, the German and French governments agreed to adjust their stakes through a series of transactions that would result in the two countries each owning 12 percent of EADS. However, the two governments agreed to relinquish their veto rights over major corporate decisions, which is critical.
More recently, EADS agreed to reorganize into three divisions and change its name to Airbus in 2014. Its Airbus division accounts for a large majority of revenues and profits, so Hohn thinks the company would be better off without some of its investments in defense companies.
Hohn founded the hedge fund firm in 2004 with the intention of donating a portion of the fees and profits to the Children’s Investment Fund Foundation, or CIFF, which is managed by Hohn’s wife, Jamie Cooper-Hohn. The Children’s Investment Fund, also known as TCI, has generated a roughly 15.5 percent annualized return since its inception. Hohn set up his firm after spending seven years working for Richard Perry’s Perry Capital.
TCI is up 25.8 percent through July after gaining 30 percent in 2012. Last year we reported that the firm was creating three new share classes that would offer lower fees, according to a letter the firm sent to clients and obtained by Institutional Investor’s Alpha. The firm told investors the new share classes would create “better alignment between the investment manager and investors.”
The fund lowered the management fees, lowered the incentive fees and required the fund to hit a specific hurdle, or performance target, before the incentive fee was paid, asserting that “it is appropriate to charge incentive fees only for value added performance.”
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