Share buybacks, that process of paying some shareholders to go away at the expense of those who remain, is getting a bad name. It’s deserved. Buybacks’ principal effect is to pretty up the earnings per share, a key measure for executive bonuses. They also help disguise the dilution caused by employee share awards, while producing a nice little earner for the company’s brokers.

The general rule is to announce the sum to be spent, and to keep buying almost regardless of the price, until it’s all gone. At the height of the last crisis, some boards took fright and suspended their programmes, only to resume at dearer prices when the market recovered.

Returning excess capital to shareholders makes obvious sense. It allows the owners to squander their money rather than have the directors do it for them. Mechanisms to do this, through special dividends or capital distributions, are uncontroversial, but the buyback fails to treat all shareholders alike.

As so often, Simon Wolfson at Next is showing how to do it. Last year the management’s projections indicated that the shares were too expensive to justify using the company’s money to buy them, so shareholders got a special dividend instead. As markets plunged last week, the price has come back into range, and Next spent £32m on its own shares.

This increases Lord Wolfson’s grip on the business, since he doesn’t sell shares in what he sees as his family company. However, as the perspicacious Nick Bubb points out in his Daily Retailer blog, the buying also indicates that Next is avoiding the weather woes of others in the high street and that the management views today’s price as fair value.What’s not to like?

Jam tomorrow

“Let’s put the cars of tomorrow on the roads of today” gushes the headline of Shell’s latest ad campaign, boasting with unfortunate timing about how far a single litre of fuel could take you.

Unfortunately, the roads of today have quite enough cars on them already, with congestion in London costing £5.3bn last year. According to Inrix, a “traffic information provider,” each car-commuter in the capital wasted £2,700-worth of time in jams, a sort of rough equality of misery with train-commuters. Across the country, the estimated figure is £13bn, and rising fast.

Still, next month the much-trumpeted investment in transport infrastructure is due to start. So, new roads, big improvements or new river crossings, then? Sadly not. Contracts worth £10bn are to be let for HS2, even though the gargantuan enabling Bill is not even law yet.

It’s hard to disagree with Edmund King (of the road) at the AA , that this new train set will make a minimal impact on the capital’s congestion. Unfortunately, new roads are even less popular than new railways, and those who are directly affected by the building works can cause serious damage at the ballot box. With politicians completely focused on next May, it seems Shell is right after all. However fuel-efficient, the cars of tomorrow will be stuck on the roads of today.

 Better to tax the dead

It’s often said that inheritance tax is only paid by those who trust their relatives less than they trust the taxman. To which could be added: it’s only paid by the middling-rich slice of the population. The poor escape, and the seriously-rich buy expensive and ingenious schemes to avoid it.

Paying tax when dead certainly sounds better than paying it while still alive, and if we want a meritocratic society, the logic is unassailable. There’s even less logic in allowing those swept up the property wave into taxable territory to pass the family home on to their undeserving offspring.

The prime minister says he wants to raise the current threshold. This is a handy benefit for elderly voters (the Office for Budget Responsibility expects 200,000 of them to die in the four years after the election) but a rational policy would cut the rate to 10 per cent and make everyone pay it on death, without exception. It would no longer be worth while for the rich to avoid it, and might even yield more than the £3.4bn, or a half of one per cent of all taxes, that IHT raised last year.

This is my FT column from Saturday





The conventional view of a city is of a commercial and industrial centre, surrounded by houses, schools and open spaces. The price of land is supposed to be the driver, and the essentially radial transport links reinforce it. But something odd is happening in London, as commercial activities in the inner city are being forced out by the rising price of housing.

Last year the planning rules were relaxed to allow conversion, to encourage residential use of unwanted offices and run-down premises. It hasn’t quite worked that way. Commercial landlords of occupied offices are seeing the chance to serve notice, convert and bank the gains from London’s hot residential property market.

This process is irreversible, as the City Corporation and some inner London boroughs successfully argued when they won exemption. An office block can be redeveloped, while a block of leasehold flats is, effectively, forever.

The cost of commercial space is rising as the amount available falls, and concentrations of innovative or valuable businesses are at risk, threatening the future of the City, according to the property lobbyists. Their industry has become accustomed to commercial space being more valuable than residential.

Yet this is not obviously the terrible disaster they seem to think. The value of housing is high because people want to live where the jobs are, in London. A market force that replaces the daily tide of workers into the centre and out again with a multi-directional scramble will ensure a better use of London’s crowded streets and trains.

Increased local residential space has helped transform the City of London in the evenings and weekends, as well as making it a better place to work. Planners everywhere love drawing neat zones on their maps, but most of the zones they now want to protect have sprung up without their help. Reality is much more organic and more interesting. Rather like London itself.


Not Premier league

It’s seven months since the rescue of Premier Foods, the owners of brands old enough to make your eyes, if not your mouth, water. Ambrosia, Mr Kipling, Oxo, Angel Delight and 16 others still turn over £700m-worth a year between them. The rescue was described here as a fine example of the financial confectioner’s art, with a happy ending, of sorts, for the poor shareholders.

Alas, it’s not been that happy. In July CEO Gavin Darby was trying to stay positive despite a 6.1 per cent fall in first half sales. His fellow executives bought shares in the summer. Unfortunately, others have been only too happy to sell them, and at 30p, the price is now just half that paid for the king-size pile of shares issued in the reconstruction.

The analysts mostly disagree with the market, with Jefferies the latest broker to decide the shares really are worth 60p each. Just why Premier is unloved may become apparent later this month with the interim management statement. It’s unlikely to make cheerful reading. The food retailers will be passing the pricing pain to their suppliers, wiping out any gain from lower commodity prices. Shareholders look likely to need that branded comfort food.

Dead ‘ead Ed

Grasping reality has never been Ed Davey’s strong suit, but it’s sheer bad luck that he finds himself cheerleader for Britain’s latest nuclear adventure. Given the glacial progress of Hinkley Point C power station, it could have fallen to almost any of his long line of predecessors as Energy Secretary to force some enthusiasm for this radioactive white elephant.

However, if the European Commission’s rubber-stamp implies agreement “that this is a good deal for consumers”  then Concorde was a great commercial success. When it’s finally generating, Hinkley C is guaranteed twice today’s price for its output, index-linked.

Last year EDF, the French builders who were the only credible contractor, costed it at £16bn. The Commission’s figure is £24.5bn, Ah, yes, but that £16bn was in 2012 pounds, and excluded interest payments, guv. It’s another example of the old adage that a builder’s estimate is a sum equal to half the final cost.

Still, ‘Eadless Ed need not fuss with facts. He’s only in charge of the shambles that passes for Britain’s energy policy until next May.

You might have thought that investors would happily never look at a bank share ever again. Lloyds Banking shares once fetched more than £5 each (77p now) while Royal Bank of Scotland, 370p today, reached (an adjusted) £68 in 2007. You would, of course, be wrong.

So keen are the buyers that Lloyds last week knocked out another £160m-worth of the TSB shares it must sell by the end of next year. This is a mere amuse-bouche ahead of the sale of more of the state’s 25 per cent stake in Lloyds itself, which will come when the Bank of England decides it can afford to restart dividend payments.

Then there is the latest wave of “challenger banks”, starting with Virgin Money, with Aldermore, Shawbrook and Santander UK to follow. They’ve all hit on the brilliant idea of trying to be nice to the customers. Never mind that the last lot of challengers were called building societies, and we know how that ended. As John Quinton, then head of Barclays, remarked at the time: “We’ve got lots of customers that we’ll happily give them.”

Looming in the distant background is RBS itself, four-fifths owned by the taxpayer. Even at today’s depressed price, that stake is worth £33bn, a handy sum for the next government to pretend it can spend.

So there’s no prospect of a stock shortage.But why buy? Banking is not as simple as it looks, but is not as complicated as the big banks made it. Their punishment is a cat’s-cradle of regulations, and the prospect of escalating fines for past sins. As RBS showed recently, the crisis did not induce better behaviour.

The fines will be a drain on profits, but are insignificant compared to the costs of pruning the branches and upgrading the technology. Vince Cable remarked to Alphaville last month that parts of their operating systems are not just years, but decades behind current demands. Unpicking TSB from Lloyds while maintaining 24-hour services was so complex that it may have cost shareholders more than the proceeds from the sale.

All this must be paid for by the interest rate margin, the gap between the derisory rate paid on deposits and the usurious rate charged for advances. Into this gap are stepping the web-based  providers of alternative finance. Peer-to-peer lending is running at £150m a month, The £200m P2P Global is an investment trust standing at a premium to net asset value. These, and many other similar businesses, are currently merely nibbling the edge of the big banks’ smorgasbord. One day, though, they’ll eat their lunch.

On the Blinkx

Life’s never dull at Blinkx, whose “technology leverages speech recognition, text and image analysis to deeply understand the meaning and context of video content to generate improved search relevancy for consumers and a brand safe environment for advertisers.”

This week’s excitement was another profit warning, as the business reached an “inflection point” with “adjusted EBITDA” forecast at zero for the first half-year. Added to the challenge of working out what Blinkx does is that of keeping track of the interests of Subhransu Mukherjee and Suranga Chandratillake, its two principal executives.

A cascade of stock vestings, awards, purchases and sales have helped swell the issued share capital by 10 per cent in a year. The pair’s share sales at over £2 in January look inspired, unlike their purchases at less than half that in February.

Still, those shares cost just 30p today. There’s 17p a share of cash left for inflection, which shows the value of paying executives with scrip instead of (more) money.

They think it’s all over...

but it’s only begun. Referendum relief is fading for many Scottish-registered companies as they realise that the issue is far from settled. The boardroom question is: aside from the (significant) one-off costs of moving south, are there any advantages to staying here?

For the big banks, the answer is obviously No. RBS is run from London and could reincorporate here as National Westminster. Other businesses, faced with a left-leaning administration with tax-raising powers, might consider it prudent to leave quietly.

Ironically, an exodus could help cement the Union, if Quebec’s history is any guide. A wafer-thin majority in 1995 to remain Canadian saw businesses decamping, exposing the costs of independence. Last April, the Parti Quebecois was heavily defeated in Quebec’s general election.

This is my FT column from Saturday

The capital markets hate the thought of new taxation. They much prefer to impose taxes of their own, and last week it was the turn of the shareholders in Mothercare to pay their dues to the great financial machine.

Moth is a mess, as Mark Newton-Jones, its new chief executive, readily admits. He was appointed immediately after the board had rejected a somewhat dubious  300p-a-share takeover proposal from the US, and has now decided the business needs a capital transfusion.

Only too happy to help, say Numis, JP Morgan Cazenove and HSBC. We like Mr Newton-Jones’s plan to bring Mothercare, squalling like an infant, to the digital age, where it can exploit what is still a pretty powerful brand for an easily-identified target audience. So do they want to get aboard for the ride? Goodness me, where have you been?

That was in the old days of rights issues, where new shares were issued at a small discount, offering little dilution to the existing shareholders, with a realistic chance that the underwriters would end up on the share register. This forced them to consider whether the new shares were worth holding, before accepting the risk.

It’s all different now. The last thing today’s backers want is the actual stock, so this issue is nine-for-10 at 125p, half the market price of the existing shares, or a 34 per cent discount to the adjusted ex-rights price.

In other words, Mothercare shares must tank by a third in the next five weeks for the underwriters to be liable for a penny. Since the rights issue was not exactly unexpected, it’s hardly surprising that the shares quickly rallied after the news.

For their risk, the helpful broker and banks are charging £5m, or 5 per cent of the £100m proceeds of the issue. There is no attempt to justify this fee. It’s just the tariff for the job. A private sector tax on the Mothercare shareholders by any other name.

Goldilocks v Gaddafi

At first sight, the courtroom clash between Goldman Sachs and the Libyan Investment Authority brings to mind Henry Kissinger’s comment on the Iran-Iraq war – “If only they could both lose”. The Libyans have portrayed a Gaddafi-era deal that went terribly wrong as the vampire squid sucking the blood from innocent desert Arabs.

The chargesheet against Goldman includes  training programmes, gifts, overseas trips and the offer of a highly prized internship at the bank. Typical bad behaviour, just what you’d expect from a top investment bank; run rings round unsophisticated hicks, lay off the risk and collect the fees.

Except that it doesn’t seem that way any more. The gifts, according to Goldman, were chocolate and aftershave (were they trying to say something?), the training programmes were an attempt to help the client understand the not-terribly-complicated derivative transactions, the overseas trips were to attend the programmes, and the internship came after the deal had closed.

This defence is a great disappointment for those who want to see nothing but greed and evil inside the big investment banks. The Libyans may have further evidence of bad behaviour to present, but chocs away and a splash of aftershave really won’t move the dial on the bribery meter.

Wham bang thank you NRAM

Patience and inactivity are the two hardest disciplines in investment, and for us long-standing investors in NRAM 12 5/8 per cent perpetual subordinated units, the disciplines may be about to pay off. This curious stock is one of the few shoots left from the forest of fixed-interest stocks issued by Northern Rock before it was felled in 2007, and after they were all dumped into NRAM, the bad bank in the government’s reconstruction, the price plunged to £16.

The bad bank has turned out to be not so bad after all, and this week the European Commission removed the restrictions on interest payments for Northern Rock and Bradford & Bingley debt, accepting the argument that keeping the restrictions will cost more than removing them.

The dated stocks can be redeemed, but the 12 5/8 is a former PIB and undated. The price jumped to £149 on the news (though there’s hardly any market) which still doesn’t look enough to give up a yield of 8 1/2 per cent a year for ever…

This is my FT column from Saturday

Buying bonds can damage your wealth. Buying junk bonds…well, what does it say on the label? The buyers of the bonds issued last September by Phones4u have learned just how damaging these things can be, as the price went from £100 to £12 in a matter of days. As Joseph Cotterill noted, this was a Wile E Coyote moment, since the signs had been there for months that not all was hunky-dory at P4u.

Perhaps for the first time, the bondholders are reading the prospectus for the senior bonds and the accompanying pay-in-kind notes. These are peculiarly dangerous instruments: instead of a cash coupon, you get more and more notes, until the wonderful day when all the rolled-up paper is redeemed. Or, as in this case, not. Trading at £85 in August, they are now standing at, er, £3.

Like many P4u employees, the holders can’t see the funny side of the decision of the company’s owners, BC Partners, to pull the plug. BC is laughing all the way to the bank, since the proceeds of the bond offers went to finance a dividend which repaid the whole of its investment. In the private equity trade, this is called a “dividend recap”, replacing the owners’ capital with new debt. In this case, it took P4u’s debt from 2.2 times ebitda to 4 times, a level that leaves no room for error (and little cash for investment).

The network companies sensed financial weakness. They saw the chance to grab a fatter slice of the mobile pie, and (almost) all’s fair in love and business. O2 abruptly cancelled its contract in January. BC wrote off the value of the post-recap equity in May, when the long engagement of Carphone Warehouse and Dixons (a P4u retailer) was finally consummated. When Vodafone announced that it could live without P4u, the game was up and the company collapsed.

The bondholders are, understandably, trying to salvage something from the wreckage, mulling turning their useless debt back into new equity. They are also reaching for their lawyers. Should the management have hung up earlier to preserve cash? Did BC know, or at least suspect, more than the long list of risk factors disclosed in the prospectus?

There’s many a billable hour here, but the real moral of the tale is that too many bonds in today’s climate offer miserable yields for potentially catastrophic risks. And does anyone read the small print?

How to keep the lights on

The boffins at National Grid must hope that Britain ‘s Indian summer lasts all the way to March. Those of us who believe that weather tends to balance out over time (remember the soaking spring?) suspect that there’s a price to pay this winter.

Even before the unplanned closure of four geriatric nuclear stations, Grid’s own forecast is for the margin of capacity over demand to fall below 7 per cent, and to little more than 2 per cent in 2015/16. Its novel solution is to call for volunteers; companies will be paid not to take juice at peak periods, either shutting down or making do with their own stand-by diesel power.

This power costs both the companies and the environment dear, but it reflects the desperate measures needed to keep the lights on. We’re here as a result of the cat’s-cradle of EU directives, successive government green initiatives, and the resulting reluctance of anyone to commit to new build.

A paper from the Global Warming Policy Forum, a climate-sceptic pressure group, spells this out in grim, if not exactly novel, detail. It recommends speeding up shale gas development, delaying compliance with the EU’s emissions directive and scrapping the carbon price floor, a levy that has the peverse effect of making it cheaper to burn coal than gas.

This is typical of the unintended consequences of an energy policy run by two political parties with opposing views on how to do it. Coming soon: so-called smart meters. Not so smart, since they don’t tell the washing machine to switch on only when the price of power drops to a level you’ve set. One day. maybe, but until then we must just hope that the weather bill for our everlasting summer doesn’t come in next winter.

This is my FT column from last Saturday

There’s an awful lot of iron ore in Australia. South America, too. The problem has been getting it out and shipping it to China, and such was the scale of its building boom that the price went from $25 a tonne in 2004 to $170 in 2010.

BHP, Rio Tinto and Vale grew fat on the profits. The money that was not wasted on empire-building acquisitions went into more production and now the first law of commodities – today’s shortage is tomorrow’s glut – has kicked in. The price is tumbling, and at $82 a tonne, is the lowest in five years.

Goldman Sachs’ Christian Lelong calls it the end of the iron age. The extra production out of Austalia is still cranking up, while the Chinese seem to have enough empty buildings for now, thanks. The miners have destroyed their profitability by overinvesting, as they always do.

It could get a lot worse. Capital Economics is forecasting $70 next year, uncomfortably close to its cost estimates of $50-$60 a tonne for Aussie ore delivered to China. The miners believe that the expensive Chinese mines will close, but this process may be too slow to stop the slide. Ivan Glasenberg, the boss of Glencore, is whistling cheerfully that the commodities supercycle is not dead, if only his competitors would stop ramping up production.

He’s the expert, and he can take comfort from Goldman’s distinctly mixed forecasting record, particularly with shares. In this case, though, Mr Lelong’s analysis looks pretty deadly.

You do what, exactly?

Johnathan Turrall is not a happy bunny. He’s a small entrepreneur frustrated at the behaviour of banks, and he has written to the FT to complain. In his case, Bank A turned him down as a customer because of fears about money laundering. There’s a happy ending, of sorts, in that he admits that Bank B has agreed to run the account for MetaLair, his nascent company.

MetaLair, in case you were wondering, is developing a “double spending proof fully centralised exchange mechanism enabling trustless exchanges between blockchains” [their italics]. Mr Turrall and Sussex University hope it could be the first decentralised cryptocurrency exchange.

Suddenly, you can see why Bank A might be apprehensive. Its money laundering people have probably heard of bitcoins but, like the rest of us, have only the vaguest idea of what they are. They might have read about how convenient bitcoins’ anonymity is for those who dislike audit trails or other forms of inspection of their activities. In short, it’s easy to see why they might not rubber-stamp MetaLair’s application.

This is surely symptomatic of a wider problem for banks dealing with small businesses. Start up a home-made jam business, and describing it to the bank is a piece of cake, so to speak. Explain that you’re developing a decentralised cryptocurrency exchange, and the small business department is already struggling.

Since the significant companies of the future will look more like web-based information businesses than purveyors of specialist foods, this is something of a roadblock to British prosperity and employment.

Bankers working in M&A, watching tech mega-deals being done without them, are learning the hard way that they need to understand this stuff. If the commercial banks really do want to develop the giants of tomorrow, their small business people will too.

Exam question

Here is a Bank of Scotland note. Sir Walter Scott is on the front and the Brig o’Doon on the back. It promises to pay the bearer five pounds, signed by order of the board by Dennis Stevenson as Governor. Candidates are invited to assess this note as a store of value and a medium of exchange, choosing one of the following answers:
a) at parity with Bank of England £5 note
b) at small discount (not acceptable to taxi drivers)
c) at small discount to Reserve Bank of Zimbabwe $1 trillion note
d) none of the above – hold and hope to operate a bear squeeze
Prize for the first correct answer: the Stevenson fiver.
Candidates are reminded that Lord Stevenson of Coddenham was Governor from 2006 to 2009, when he retired following, ahem, a reconstruction.
This is my FT column from Saturday

The last time the FTSE100 Index was at today’s level, St Tony was in Number 10, boring old stocks like Unilever and Diageo were being dumped in favour of exciting new businesses like Freeserve and Dimension Data as the dotcom boom reached its apogee, and War Loan cost £70.

Government stocks were hardly more popular than “old economy” shares, but those who ditched the dotcommers and put their money into long-dated gilts (war loan is about the longest) have had a wonderful time.

They have avoided the heart-stopping plunges of two bear markets, enjoyed a guaranteed income of around 5 per cent and seen their capital gain. Lending to the British government has never been so agreeable.

Forecasting is always hard (especially for the future) but one thing is sure: it won’t be as agreeable over the next 14 years. Treasury 4.25 per cent 2027 yields 2.5 per cent. War loan at £90 yields 4 per cent, to reflect its shrunken relative size and the possibility of repayment at £100 if that suited the UK government.

Far more likely is the prospect of the state issuing much, much more paper, and since it must have the money, it will do so whether the market wants the paper or not. The Labour government was obliged to pay more than 15 per cent for 20-year money in 1976. This cycle turns slowly, but a bear market in gilts is surely the next big move.

The yield on the FTSE100 is 3.4 per cent, and even during the worst financial crisis in much more than 14 years, the total dividend payout of its constituents did not fall. When share prices go down, rising dividends provide a cushion of sorts. When bond prices go down, there’s nothing to ease the pain.

Heathrows go on and on

When the British Airports Authority was privatised in 1987, it was plain to all but those involved that the move turned a public sector monopoly into a private sector one. The then chairman argued with a straight face that there was plenty of competition – from Schipol and Charles de Gaulle airports. It took almost 20 years for the Office of Fair Trading to notice, panicked into referring BAA to the Competition Commission by a takeover bid for the company.

Another eight years on, and few would argue that splitting Gatwick (and Stansted) from Heathrow was a mistake. But for the sheer press of humanity, Heathrow is a much less miserable experience, and maintaining the competitive pressure is surely Gatwick’s best argument for hosting London’s next runway.

It is also Howard Davies’s best argument for ditching Boris’s fantasy island: if built, it would destroy Gatwick and Stansted (Heathrow would close to help pay the £1,000-plus per head of the UK population needed to build it). The old BAA monopoly would be restored, more powerful than ever.

There is something about grands projets which causes common sense to fly from the politicians’ minds. While everyone can agree that investment in infrastructure is a fine thing, finding prospects of sufficient size to make a difference and which are worth doing is hard. Neither HS2 nor the Thames supersewer adds up convincingly.

Crossrail seems like a rare successful example on track to complete inside a (generous) £15bn budget. Its success has raised the pressure to find something else, anything else, to exploit the project management expertise that it has created.  Boris island wasn’t the answer.

Their Cup runneth over

When sorrows come, they come not single spies, but in battalions, as the beleaguered top brass at Tesco have found out. Not only another profit warning and a slashed dividend, but the Carbuncle Cup for its new supermarket at Woolwich.

Still, there’s consolation, of sorts. Tesco cannot possibly win it next year, when the excrescence of Land Securities’ Walkie-Talkie will be finished, and thus eligible for the prize. A fire hazard to those below it on sunny days, its footprint is too small for its ambitions, so it gets fatter as it goes up (and up). If beauty is in the eye of the beholder, this is the ugliest new building I’ve seen since the now-demolished post-war horrors along London Wall.

This is my FT column from Saturday


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