Inclusive Capital’s Ubben named to Vistry board as homebuilder looks to leverage recent acquisition

Business: Vistry Group operates as a housebuilder in the United Kingdom and operates in both the open market and the affordable housing sector. They seek to develop sustainable new homes and communities across all sectors of the U.K. housing market. On Nov. 11, 2022, Vistry acquired Countryside Partnerships for £1.25 billion ($1.4 billion). Vistry operates through a partnership model, which is unique to the U.K., where they seek to reuse land wherever possible, focusing on mixed-tenure developments that deliver positive social impact. The partnerships business operates across 19 business units and works closely with governmental bodies, housing associations and local authorities, as well as selling homes directly to customers on the open market.

Stock market value: $3.09 billion

Percentage ownership: 5.9%

Average cost: n/a

Activist commentary: Inclusive Capital Partners is a San Francisco-based investment firm focused on increasing shareholder value and promoting sound environmental, social and governance practices. It was formed in 2020 by ValueAct founder Jeff Ubben to leverage capitalism and governance in pursuit of a healthy planet and the health of its inhabitants.

As a pioneering activist ESG investor (AESG), Inclusive seeks long-term shareholder value through active partnership with companies whose core businesses contribute solutions to this pursuit. Their primary focus is on environmental and social value creation, which leads to shareholder value creation.

On Wednesday, Vistry announced the appointment of Inclusive’s Ubben as a nonexecutive director to the board and the upcoming resignations of two incumbent directors, Katherine Innes Ker and Nigel Keen.

Vistry landed on Inclusive’s radar as a result of their engagement with another company – Countryside Partnerships. In May 2022, Inclusive had a 9.2% stake in Countryside and had made two bids to acquire the company, going as high as £1.5 billion. Both bids were rejected.

But Inclusive’s interest sparked significant shareholder pressure to sell Countryside and the following month, the company announced that it was seeking a buyer. On Sept. 5, 2022, Vistry agreed to acquire Countryside in a cash and stock deal, which closed on Nov. 11, 2022.

In the four months since the Countryside acquisition, the market has reacted favorably to the combination. Inclusive led the charge on the merger and now they are taking an active role at the combined company.

Vistry operates through a partnership model whereby the land is provided to them by governmental land authorities at no cost and they commit to build a certain amount of affordable housing. They build communities that are mixed tenure, placing affordable housing among open market homes, retail stores, etc. This model has the benefits of a secular shift to affordable housing and is capex light since they do not have to acquire the land. The company trades cheaply at 7 to 8 times earnings and has high growth prospects, complimented by their community benefits.

Inclusive said Vistry’s business model gives it the scale, operating synergies and resources to deliver societal benefits and great long-term returns.

On Wednesday, Ubben was named a director and two board members, Innes Ker and Keen, resigned. Inclusive is an amicable investor that is often invited onto boards. This situation is no exception. However, the exit of two incumbents alongside Ubben’s appointment indicates that there was a call by shareholders for a bigger board refreshment than just adding one shareholder representative. While this type of action is somewhat unusual for a European company, it is worth noting that the company’s five largest shareholders representing 40% of the stock are all North American investors who are more likely to engage with management than European investors.

This leaves a board that is undergoing a refreshment process and a CEO who is universally well liked and on the same page as shareholders opening the door for a methodology that has worked very well for Ubben going back 20+ years to ValueAct – let a good management team continue to generate cash flow and sit on the board and help advise the best way to use that cash flow.

One tactic he has used successfully in the past to grow shareholder value is to do a share repurchase at the bottom and keep cash when the company is fairly valued.

Finally, as with all Inclusive investments, this one has an impact element as well as a value element. The AESG thesis here is obvious as the core purpose of this company is to further social equality – developing affordable, sustainable housing. What is interesting about this from an ESG perspective is that it is a social ESG thesis, which is generally the most difficult type of ESG thesis to monetize. But, in this case the community benefits align so perfectly with the company growth prospects – topline company growth means more affordable housing.

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.