The talk of breaking the big banks up has been floated for years, with no one really having the wherewithal or the gall to make a formal push to do so. However, Bank of America (NYSE:BAC) could be creeping up on activist investors' radars.
The big bank has felt the fallout from Brexit, now trading near three-year lows on a price-to-book basis. Its stock is down 22% this year. The big reason that the breakup talk is kicking up again is that BAC now has a board member with activist ties.
Michael White, who got put on the BAC board this month, is the retired CEO of DirecTV, but more importantly, he was named an advisor to Nelson Peltz's activist hedge fund Trian Fund earlier this year. White's role is to help Trian find potential investments and engage management teams. When White joined Trian, I noted that it was interesting from the angle that White was also the CEO of Pepsi (NYSE:PEP) at one point.
Now, recall that Trian Fund was an activist at Pepsi, where it pushed for a spin-off of the foods division. Trian has since sold off its Pepsi position. Nonetheless, White has led us to BAC where he now has a board seat, and Trian is no stranger to taking on banks, with a large stake in Bank of New York Mellon (NYSE:BK). But it's not just Trian that might be looking to take a bite out of BAC - or split it up.
The split thesis
The idea could be to split BAC into two companies, helping unlock the hidden value buried within the too-big-to-fail overhang. BAC has a unique catalyst that could be unlocked relatively quickly too, which includes spinning off Merrill Lynch. This would effectively break BAC's trading unit from its conventional banking unit.
A breakup would do more than just unlock value, it'd also help decrease the regulatory overhang. Recall that BAC failed the Federal Reserve stress test in two of the last three years. The 2017 Fed stress test is supposed to get increasingly tougher, which is bad news for the laggard BAC, but good news for an activist that would need to rally the rest of the shareholder base. Of which, there is already upheaval; CalSTRS and CalPERS both took BAC to task last year for combining the CEO and chair role.
Everyone's favorite bank analyst, Mike Mayo, the gadfly of sell-side banking analysts, has called for a Merrill spin off for years. He pegs the BAC fair value at $16 a share on a sum-of-the-parts basis, saying that the bank needs to "shrink" faster to catch up to competitors that are generating higher returns.
Activist at the gates
Activist investors, outside of Trian, that might be ready to pounce include FrontFour Capital and JANA Partners, where both took new stakes last quarter. Other notable activists that call themselves Bank of America shareholders include PL Capital and Basswood Capital - both of which are predominately bank activists.
Still, you're going to need an activist with some major pull, such as a Carl Icahn, to get involved to first shake up the board - that's where Trian comes into play. To take a 1% stake in BAC, Trian would need to pony up $1.4 billion, no small feat for the $10 billion fund.
However, not out of the question - as Trian has been increasingly taking on larger and larger companies, including DuPont (NYSE:DD) and Pepsi. As well, Trian owns 0.7% of the $280 billion market cap giant General Electric (NYSE:GE) - so in comparison BAC is not all that big.
Plus, Trian recently raised funds with the sale of its Pepsi stake. In any case, BAC is one of the few big banks that has an event-driven feel to it. The problem with actually getting close to a breakup is that we'd need to see BAC's shares languish in the low teens for a while, plus a likely fail of the 2017 stress test. So while it's a bit early to rush to add BAC to your catalyst portfolio, it's worth putting on the watchlist.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.