For an entertaining read it’s hard to beat the Davis Review for the Financial Conduct Authority. Its exposure of shocking incompetence and amateur public relations, wrapped in the sort of pompous prose that only an experienced lawyer can pull off successfully, turn it into a classic.
Simon Davis investigates the events at the end of March when a story in the Daily Telegraph caused panic in the market for life assurance shares. It indicated that the FCA was going to attack “exit fees”, the charges that life offices impose on policyholders who have the temerity to try and move their money to escape rotten value policies.
The report tells, in gripping detail, how the FCA’s attempts to manipulate the press coverage of its document on fair treatment of customers backfired spectacularly. Contrary to the leak to the Telegraph, the FCA is proposing only to look into exit fees to see if there’s a problem.
Well, they know the answer now. The slump in share prices gave the game away. Milking old policies, while penalising attempts to escape, is hugely profitable. Shares in the specialists at Phoenix and Friends Life plunged by a fifth.
The FCA’s final report is due next year, giving the life offices time to explain how these 30m old policies are so terribly expensive to service, and that they must make their money somewhere. Should the bonusless Martin Wheatley, the FCA’s chief executive, survive that long, he might explain that that’s just tough, and demand that exit fees be scrapped.
Meanwhile, at £17,000 a page, the 226-page report is cracking value – not least for Mr Davis.
PPP is the new PPI
And the prize for 2014’s cheekiest takeover bid goes to… John Laing Infrastructure Fund. Actually, it was more of a “Take it off yer ‘ands guv” offer. After five profit warnings and a slumping share price, Balfour Beatty looked a soft enough touch to accept £1bn for its portfolio of roads, schools and hospitals.
The offer, more than JLIF’s market capitalisation, is at a recent valuation, but Balfour’s jury-rigged board swiftly rejected it, highlighting just how valuable these public private partnership portfolios really are. The price at which PPP hospitals and schools change hands is seldom exposed to the public gaze, since they tend to be shuffled between private equity groups, but some of the financing is so expensive that it threatens to bankrupt the users.
In October, Balfour sold its half interest in a Yorkshire hospital for £61.5m, a gain of £42.2m and a 28 per cent premium to the recent book value. Meanwhile, the hospital’s trust has had to fire employees and cut salaries to balance its books. The last government’s dash for PPP financing promises to do to the taxpayer what PPI did for the banks.
The Balfour board is promising to publish the latest value of the portfolio next month, in a move likely to expose the true cost still more starkly. Not such a cheeky offer from JLIF, then.
Is POG a dog?
Fancy a few shares in Petropavlovsk? Don’t worry if you can’t pronounce it, nobody else can either, so it’s universally known as POG, its stock market moniker. There will be plenty of shares to go round, not far short of four billion including conversions, assuming this week’s rescue goes according to plan. The veteran chairman, Peter Hambro, promised to honour shareholders’ pre-emption rights, and by a prodigious feat of financial engineering, he’s done so.
The existing shares are almost worthless, but each carries the right to buy 15 new ones at 5p apiece. He’s not only taking up his, but with his CEO is personally underwriting $30m of the $235m issue, part of the cash needed to pay off an ill-judged convertible issue due in February.
POG shares were once £12.50, a price, it’s safe to say, they’ll never see again.Today’s cum-rights price is 9.5p, ex-rights under 6p. But in the wastes of Siberia there’s a gold mine that is forecast to produce 700,000 ounces at $900 each (worth $1230 today), which is why Mr Hambro is so keen to save the company. That, and the family pride of a City banking dynasty, of course.
This is my FT column from last Saturday (with apologies for late publication. On Monday my iPad said it had been published. It lied.)