These are strange days in the lucrative world of M&A. The shareholders are revolting, and the share prices of companies involved with mergers and acquisitions are not behaving as the playbook dictates. Last week, for example, Deutsche Borse’s ill-starred attempt to take over the London Stock Exchange finally collapsed under the weight of its internal contradictions.

It fell to the European competition commissioner Margrethe Vestager to deliver the coup de grace (we shall miss her forensic independence when we’ve gone) but far from sliding back in disappointment, the LSE share price scaled new heights. Still cheap without a bid, says RBC.

Then there is Unilever; the share price without a bid is now above the proposal from Warren Buffett and Kraft. One of the world’s most analysed companies, Unilever is now valued at £20bn more than a few short weeks ago, even though a takeover looks more unlikely than ever.

At the other end of the scale is Tesco’s cosy deal with Booker. Richard Cousins, Tesco’s senior independent director, felt so strongly that CEO Dave Lewis has quite enough to do without buying more stuff that he quit. Two major shareholders now agree with him.

Finally, there is the match made in Scotland between Standard Life and Aberdeen Asset Management. Perhaps the enthusiasm for the deal from the local government should have alerted us, but the market’s (interim) verdict is that the two-headed merger will destroy value rather than creating it. The combined value of the pair is now almost £1bn below the total just before the deal was announced.

So far, there is no sign of a shareholder revolt here, perhaps because life insurance is harder to understand than food retailing. Still, strange days indeed.

They’re jolly productive, really

Britain’s low productivity is the fault of its bankers (among others) rather than those who actually make things, the Office for National Statistics revealed this week. How unfair. Look, for example, at the productivity of the crew from Bank of America Merrill Lynch with their tireless work for their faithful customer, the defence manufacturer Cobham.

Three years ago BoA advised on the $1.5bn takeover of Aeroflex, a US rival, taking a highly productive fee. Sadly, nobody noticed that Aeroflex had, ahem, flexed its balance sheet, not necessarily in a good way. In addition, the financial structure of the deal, surely the bank’s area of expertise, was not a success. Still never mind, BoA was there to help with a rescue rights issue, pitching the price so its underwriters bore virtually no risk, and taking a productive slice of the £20m fees.

Cobham’s woes continued, but BoA was there throughout. The latest rescue rights, finally launched this week, raises £512m. The new shares are underwritten at 75p, a socking 41 per cent discount to a price which had already adjusted in anticipation of the forthcoming issue, so the old shares barely moved from 128p on the news. There is a vanishingly small chance of the underwriters being called upon, and the £15m which sticks to the shovels of the banks is effectively another tax on the owners of the business. That’s productivity!

It’s financially radioactive

Just how much worse does it have to get before we see that nuclear power will never pay? This week Westinghouse filed for Chapter 11 bankruptcy protection in the US, as its once-mighty parent Toshiba tries to to avoid being brought down by its nuclear construction subsidiary.

Despite this industry’s relatively trouble-free half century in the UK, it is clear that it will never make a profit, as the combination of rising safety demands and decommissioning costs will always outrun the gains from experience and technological progress. Almost every nuclear construction project in the world is running late and over budget.

Yet the British government is persevering in the face of the evidence from all sides with the money sink that is Hinkley Point, and has not ruled out building more power stations like it. There are other ways of keeping the lights on at a price we can afford. It is surely time to admit defeat on nuclear.

How do you like your inflation? To be really up with the zeitgeist, you favour CPIH, the trendy new version of the Consumer Price Index, with added housing. Mind you, according to the Office for National Statistics, this is “not a national statistic”, although any minute it will become the officially recognised measure of inflation. Helpfully, both measures came in at 2.3 per cent for February.

Official recognition does not mean everything will be judged by this new yardstick. The even older one, the Retail Prices Index (also “not a national statistic”) will still dictate the changes for index-linked bonds, National Savings and much more. Economics purists dislike the RPI because it is not rigorous enough. The government dislikes it for the systematic upward bias it produces for its inflation-linked obligations.

Switching to CPI saves it money. Given the relentless rise in house prices, you might think that switching to CPIH would produce a higher figure. You would be wrong. A retrospective analysis from Bond Vigilantes demonstrates that CPIH lags CPI by 0.15 per cent a year. So the change both sounds more comprehensive and saves the state money.

Inflation, usually defined as a change in the general level of prices, is hard to measure accurately, so the temptation for governments to fiddle the figures is never far away. The RPI may be flawed, but it was generally accepted as a reasonable proxy for a move in the cost of living, which is what matters.

The more the government changes the measure, the greater the opportunity for lobbyists to claim that a special (higher) rate should apply to media, pensioners or some other interest group. The public has been persuaded to say RIP RPI, which was hardly even reported this week, but each change risks damaging credibility. For the record, the RPI rose by 3.2 per cent in the year to February. Ouch.

Dear rem.com: keep it simple

David Richie was paid his contractual entitlements when he “stepped down” as boss of Bovis, the housebuilder that makes all the others look competent. There’s a £242,180 lump sum, £338,250 in lieu of notice, a £55,000 bonus (sic) which may be subject to clawback, and a contribution towards “outplacement counselling.” A long-term incentive plan could yield close to another half million pounds, depending on the share price.

During his nine-year tenure, housebuilders made out like bandits. Bovis, mired in problems from selling unfinished homes last year, is now the subject of at least one takeover bid, and it’s safe to say that Mr Richie’s reign was not a resounding success. However, he can’t be blamed for taking the money. A contract is a contract. The real blame lies, as so often, with the remuneration committee and its advisers.

This booming industry presumes that every CEO must be festooned with complex incentives to get the boss out of bed every day. There is little evidence that these incentives really work for the long-term benefit of the business or its shareholders. Of course, if the board said: “Here’s the salary, do you want the job?” there would be no reason for the consultants to charge all those fees.

Mixing business with pleasure

You may not be able to tell Stork from butter, or Fever-Tree’s fancy tonic water from Schweppes, but there is no arguing that it is the stand-out new issue of 2016. It is now valued at the same price as Britvic, and nearly three times that of AG Barr, of Irn-Bru fame, whose sales are 2 1/2 times Fever-Tree’s £100m.

Despite the world-conquering prospects, this valuation looks, well, feverish. However, Fever-Tree is quoted on London’s junior market, and a quirk of inheritance tax rules that shares quoted on AIM are not really quoted at all, and attract the same breaks as unlisted investments.

Those, ahem, elderly investors wealthy enough to have one eye on IHT avoidance are likely to have the other eye on the evening G&T, perhaps powered by Fever-Tree’s mixer. It’s a business they can understand, and if they suspect they may not be able to enjoy many more sundowners, the price paid for their shareholding is not that important, provided it holds up longer than they do. Chin chin!

This is my FT column from Saturday

Time to raise a Magnum Black to Warren Buffett and his Krafty krew. In a single month they have added £20bn to the wealth of Unilever shareholders, without our having to do anything, let alone agonise over whether Dove is a national treasure or a commercial enterprise.

The share price is now above the (presumably) sighting shot of $50, which shows how clever Mr Buffett was to spot an undervalued business. Whether by luck or judgement, Unilever CEO Paul Polman had his defences in place, allowing him to set off a fine display of defensive fireworks without breaking Takeover Panel rules.

We don’t need Kraft; we have our own version of zero budgetting; we’ve got plans to bring the future nearer, and we’ve got so much capital that we could borrow to give some away. This is called “making the balance sheet more efficient” and next to an actual takeover, it’s what investment bankers like to do best.

What’s more, it can be worth doing for the company too. Unfortunately for the bankers’ bonuses, it’s hard to see why in this case. Risk capital allows more risk, to reap higher long-term rewards. The chart of the Unilever share price looks less like one for a steady supplier of soaps and fats to the world than that of a dot-com rocket, only measured in decades rather than months. Over the years, investors who have taken their capital out of the business have lived to regret it.

Yet despite this record, Mr Polman still feels Unilever has had a lucky escape from the ravening beasts of Kraft. The takeover rules are strict about forward-looking statements, and he was fortunate to have sufficiently worked-through plans to respond immediately without breaking them.

Now he wants those rules to be tilted towards the defence of “national champions”. Never mind that Unilever’s structure structure already makes it a dual-nationality champion, this is a thin argument. The Marmite manufacturer is not a national champion but a commercial business owned by its shareholders. If they collectively decide to sell it, they may be misguided, but should be free to do so.

There are always things that a big company can do better, and jolts like this provide the impetus to find them. Mr Polman should thank Mr Buffett and keep Unilever looking to the long term. It seems to work.

Our money down the drain

Macquarie is finally cashing in its Thames Water chips. The investment bank has made a stonking return from a low-risk investment, although exactly how stonking is hard to say. Infrastructure consultant Martin Blaiklock, a careful analyst of opaque utilities, puts it between 20 and 27 per cent annualised over the decade of ownership.

He can’t be more accurate, he says, because it’s unclear about a little matter of where a £500m dividend went when Macquarie bought the business from RWE. Then, the last vestiges of transparency disappeared via the Cayman Islands, leaving Thames Water Utilities, which actually runs the water, submerged under seven corporate layers.

The steady replacement of equity with debt contributed to Thames’ inability to pay for the super-sewer now starting to grind its way under the river. A separate company, also Macquaried,  was needed, offering the prospect of more specialist, opaque financial engineering now the Thames Water game is over. Not for nothing is Macquarie dubbed Australia’s version of Goldman Sachs.

He’s blue as well as purple

It’s hard to blame the executives at Purplebricks, the new model estate agent, for selling a slug of their holdings. The shares had more than doubled since Christmas when in February the company announced plans to conquer America, raising £50m at 220p a share, a small discount, to pay for the adventure. The price carried on, mysteriously, all the way to 360p ahead of last week’s shareholders’ meeting to approve selling the new shares to outsiders rather than to existing owners. They’ve since come back to 307p, and on Thursday the executives placed £24m-worth at 300p. Spare a thought, though, for lettings director Richard Jacques. On January 20, he sold 35,000 shares at 160p. Seven days later,  after the price hit 193p, the company issued a “no idea why” statement. How true.

This is my FT column from Saturday

Both literally and metaphorically, oil drives modern economies. It is so central to what we do that its price is the single biggest determinant of prosperity, yet despite the concerted efforts of economists everywhere, it has proved almost impossible to predict.

Last week the cost of a barrel of crude suddenly lurched down out by $5 out of its trading range. The move quite overwhelmed the cheerful comments from analysts responding to Royal Dutch Shell’s $7.25bn sale of its tar sands business in Canada. Partly thanks to the weak pound, Shell shares yield 7.2 per cent, a dividend that looks significantly safer after this deal.

Whether it is truly sustainable, or whether we holders should consider our investment as an annuity, with assets being sold to maintain the income, depends above all on the oil price. It’s fine, says the International Energy Agency, dismissing any talk of peak demand for oil. Indeed, the agency’s latest analysis forecasts that the cutbacks in exploration following the price crash from $100 point to a supply crunch in 2020.

Oh no, it’s not fine at all, says a detailed study from the Grantham Institute . The game is up for oil, with demand peaking that year, thanks to falling costs of solar and wind power. Even gas faces the prospect of little growth in demand.

Well, maybe.The oil price does look vulnerable, but more because of Trumpenomics’ policy aim of US self-sufficiency rather than through any lack of demand. We might conclude that Shell has seen the light in escaping the glue of Canada’s tar sands, a chronically marginal business, while mass adoption of electric cars is the future that never arrives. And as BP has shown with Macondo, there’s a deal of ruin in a big oil company.

All aboard the paper train

David Higgins has been updating us on his vision for HS2, that magnificent money-eating machine about to carve its way through the middle of England. He wants to see “everyday low prices” on the railway, along the lines of EasyJet or Ryanair. So, rather as you book that holiday trip to Alicante well in advance before the price goes up, you will book an exciting high-speed ride from London to Birmingham on a specific day months away.

Almost in the same breath Sir David, the chairman of the project, dreams of “making Crewe within commuting distance of London, Birmingham and Manchester.” This is about as likely as Birmingham becoming a tourist destination, and is typical of the muddled thinking that gave us HS2 in the first place.

Unlike, say, Heathrow’s third runway, this project appears to be unstoppable, despite the evidence that it is not worth doing. Even if it can be built for its budgeted £22bn, the Public Accounts Committee doubts whether the line is value for money. Since £1.4bn has already been spent and building is yet to begin, that budget looks like a fantasy figure.

Sir David tells us that rail fares will be published this year, another paper exercise that is rather easier than actual construction. The prices might allow us to work out how much of the capital cost is wasted. They are unlikely to show that commuting from Birmingham, let alone Crewe, is a viable option.

A Gilbertian drama

It’s unkind to suggest that 1000 jobs will go from Standard Aberdeen in order to save one, but to make financial sense of this merger, the first figure may not be too far from the eventual outcome. Fortunately for Scotland, most of the redundancies will be abroad, some as far away as London. Others, like Standard Life’s departing head of equities David Cumming, will have more time to listen or even appear on early morning radio.

The merged company aspires to be viewed the way the market rates Schroders, where the family control allows it to take a long view. Perhaps Standard Life’s 1.5m small shareholders, who have held since flotation, might provide a similar sheet anchor. In the meantime, the new company has to demonstrate that two chief executives are better than one, and why it needs to have over £600bn under management in order to make a decent living.

Last week an interloper joined the FTSE100 index. Scottish Mortgage Investment Trust has little to do with Scotland and nothing to do with mortgages nor, indeed, the British economy. Its investments are almost exclusively overseas. Its largest UK-listed investment, Prudential, is not even in the top 20 holdings.

However, if you want to get something back from Amazon for putting your local shops out of business, Scottish Mortgage is one way to do so, since 10 per cent of the £5bn fund is in Amazon shares. James Anderson, who manages the trust for Baillie Gifford,  can invest wherever in the world he fancies he can see long-term growth. His third-largest holding is the perpetually money-guzzling machine that is Tesla Motors, so holders must have faith as well as patience.

Few fund managers actively brag that they prefer short-term speculation, but Scottish Mortgage, founded in 1909, makes a better case than most for sticking to a long-term view. The impressive performance shows that this approach seems to work. What most definitely does work is low fees, 0.3 per cent to the management, and total ongoing charges of 0.45 per cent of net assets.

Other investment companies use the excuse of the cost of globetrotting to justify charges of more than twice that. A wide-ranging survey for Morningstar showed that the best predictor of future performance of an investment fund is the cost to the investor, so while we’re constantly told that past performance is no guide to the future, the level of fees most certainly is.

Scottish Mortgage’s other long-term approach has been to resist the temptation to change its name, a great help to less sophisticated investors. It’s been rewarded with a share price that, highly unusually, is a premium to its net asset value and now, a place in London’s top index.

Help to Buy, or help yourself

Jeff Fairburn would very much like the government’s Help to Buy scheme to continue. This is hardly a surprise. Short of pouring the money straight into Persimmon’s bank account, it would be hard to find a more lucrative bung for the housebuilder he heads.

Nearly half the homes it built in 2016 attracted a slice of the £4.6bn scheme, where buyers need find only 5 per cent of the price of a new home. Persimmon sold its output at a 25 per cent margin, pushing up profits by almost as much last year. Since the immediate post-referendum panic, the shares have risen by a half. Mr Fairburn is full of the joys of spring.

It’s less clear whether the rest of us should share his sunny view. Help to Buy has artificially stimulated demand and served to spur prices, as some of us predicted at the time. Even today, £4.6bn is quite serious money for the taxpayer to find, and Persimmon is only an extreme example of the benefits flowing straight through to housebuilders’ profits. Besides, as a Hometrack analysis showed last week, the biggest numbers of these subsidised houses are going up where they are least needed.

In the longer-term, this scheme may have other unpleasant side-effects. Those buying now may be grateful, but could discover that when they come to sell, the potential (non-subsidised) buyers are rather harder to find. They could see their 5 per cent deposit wiped out.  Thus do we reap the baleful results of another crowd-pleasing scheme from our former chancellor. Let us hope his successor can avoid them this week.

 

Where there’s blame, there’s…

Have your investments suffered an accident? Are your shares in the 99 per cent club? Then the Aussie lawyers at Slater & Gordon may not want to hear from you. They specialise in chasing for compensation, and their shares have suffered a nasty fall over a broken acquisition,  tumbling from A$8 two years ago to 7 cents today. The loose financial paving stone that tripped them up was the purchase of bits of the up-like-a-rocket-and-down-like-the-stick  Quindell, a similar UK practice. Well, accidents will happen, but the £673m Slater paid looked careless, almost negligent, at the time. FTAlphaville had been all over Quindell with awkward questions for months beforehand, as the share price slithered. Legal action is inevitable. Of course.

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Thus the late Andy Grove, who built Intel into the world’s dominant microchip maker. Last week one of the UK’s most successful companies received a billion-volt jolt when FTAlphaville forced Kraft-Heinz to admit to hitting on Unilever.

The company’s response was brisk. Get your thieving hands off us! We don’t fancy you at any price! Don’t you know we’re a national treasure? The reaction was enough to force Kraft’s backers into an ignominious retreat.

Under Paul Polman, its Dutch CEO,  Unilever has successfully blended a long-term policy with its enthusiasm to become a good corporate citizen. Now, as if to disprove that he is not complacent after eight years in the job, he has launched a “comprehensive review” of the empire, promising a shorter long-term policy.

This sent the City’s dealmakers into a frenzy: share buybacks, hiving off foods ‘n’ fats, a takeover of Colgate, spin out home care and refreshment…there is no end to the exciting things they would like Unilever to do. Just don’t mention those life-changing fees.

It’s true that Mr Polman did look a trifle smug when he compared Unilever to a non-governmental organisation for doing good. Less pontificating on global warming and more on the joys of Magnum Espresso Black would be welcome. His sensitivity to criticism was once exposed during a tetchy press conference when asked whether he had considered buying a Unilever product for his thin skin. And yet…the bigger danger now is that Mr Polman decides that only a dramatic gesture will demonstrate that success is not turning into complacency.

This is not a company in crisis. There is no convincing case for radical reform merely to follow City fashion. Us Unilever shareholders are a loyal lot, with 70 per cent of the shares being held for more than seven years, but Kraft’s assault has exposed the share structure with its Dutch Siamese twin as a possible poison pill (Berenberg’s analysts say not) which is ripe for reform. Dealing with that, and bringing the long term a little nearer, is surely enough for now.

A merging market, or not

It is now a year since the bosses of the London Stock Exchange and Deutsche Bourse agreed that their businesses would be better together. Conveniently, the London CEO Xavier Rolet announced that he was buzzing off, leaving his Deutsche opposite number, former Goldman Sachs banker Carsten Kengeter, in charge.

The little matter of the British referendum was, we were told, irrelevant. Traders could save €450m a year from posting one set of collateral rather than the two they need today, and since the shareholders in the exchanges reckoned that much of that gain would not be wasted on the customers, they voted to merge.

How long ago it seems. Brexit turns out not to be quite so irrelevant after all, as was pointed out here (more than once). This week the British MPs debated the issue, and did not much like what they saw, while Margrethe Vestager is about to rule on whether the EU will allow the deal. The exchanges have been offering desperate further concessions to help her see things their way.

This deal was initially described in Inside London as horse and rabbit pie, and concluded: “The Deutsche CEO is clearly a hungry man, but on these terms he should not be allowed to eat the rabbit.”

Cheltenham’s for racing, apparently

After Lloyd’s of London, Cheltenham racecourse. Next month’s festival may find more punters actually watching the races, rather than fighting each other to reach the bar(s). In order to discourage fighting, customers will be limited to buying four alcoholic drinks at a time. Expect a brisk secondary market (many of the visitors from the City do this sort of thing every day) in nil-paid drinks rights for the thirstier punters to bid for. As for Lloyd’s, its ban on daytime drinking only applies to its staff. Those with particularly awkward underwriting propositions should still seek their man in a select bar nearby – unless he’s gone to Cheltenham, of course.

This is my FT column from Saturday. Since then the penny seems to have dropped with the London Stock Exchange that Ms Vestager is a woman with a mind of her own who can see a potential monopoly a kilometre away.

Remember “Nuclear power? No thanks”? That sunny, smiling sticker which was almost standard on the back of every Citroen Deux Cheveaux? How we smiled at such naivety. Nuclear power was the future. The fume-belching little 2CV may have gone the way of the Trabant, but after another grim week for the nuclear industry,  it seems those stickers may have been right after all.

A financially viable nuclear power station looks increasingly like a mirage. Even the eye-watering guarantee from the UK taxpayer for Hinkley Point C is insufficient to cover the risk that building it will bankrupt EDF. Toshiba’s woes have claimed the scalp of its president. Hitachi is signalling that its project in Anglesey needs government backing to proceed.

It’s telling that after 60 years of mostly successful operation, commercial viability still eludes the nuclear power industry. Perhaps we have been lucky to have avoided serious accidents, and the decommissioning costs were hugely underestimated, but the combination of ever-rising safety demands and cheap hydrocarbons has destroyed its economics. Appealing for fresh state aid looks like a desperate last throw of the nuclear dice. If an industry cannot finance its own projects after half a century of development, it may be time to try another industry.

Fortunately, other industries are available. The cheapest and quickest fix is to build gas-fired power stations, to tap into worldwide abundance and increasingly diverse supply, even before domestic fracking gets going in the UK. Unfortunately the artificial barriers imposed by today’s energy policy are preventing this subsidy-free solution. For the longer term, the price of solar energy continues to fall and smart meters that really are smart will start managing the demand side of the equation. Even offshore wind looks a better bet than nuclear, as battery technology evolves.

Instead, we have a cat’s-cradle of subsidies to generate electricity and, through grants for electric cars, subsidies to use more of it. This was self-evidently stupid, even before the impact of the seismic changes across the Atlantic, where cheap energy is a cornerstone of Trumpenomics. Subsidising “green” power generation in the UK will not prevent our competitiveness decreasing as America pumps up its output of oil and gas.

Abandoning nuclear means facing reality on the likely path of future carbon dioxide emissions. It means repealing the Climate Change Act, with its arbitrary targets for dramatic cuts, passed near-unanimously by parliament in 2007 in an orgy of self-indulgence. Legislate in haste, repent at leisure.

Cazenove’s star buy

Mining analysts tend to tell their clients to buy at the top (when everything looks wonderful) and sell at the bottom (when prices are depressed enough to threaten bankruptcy). Cazenove’s 51-page tome on the joys of digging fertiliser out of Yorkshire at least avoids this trap, since the price of Sirius Minerals has more than halved in six months. The brokers think the shares could now more than double.

There’s plenty there to mine, but it’s underneath a National Park, so must be spirited out without disturbing the landscape. The proposed solution is a 23-mile underground conveyor, which would be a world first by about 22 miles. The mechanics scarcely bear thinking about.

The financing is almost as heroic as the engineering, with over 4bn shares, a convertible bond, and a royalty deal on top of the debt. Those who paid 20p a share in the last finance round are 2p a share down already, and can only hope that Caz is right, and this is Sirius’ darkest hour.

 

Quite right, quite meaningless

So, Rolls-Royce. A £4.6bn loss and an unchanged dividend. Something wrong here, surely? Aren’t dividends supposed to reflect what the company earns, rather than some sort of semi-obligation? Ah well, you see, £4.4bn of the loss is a write-down of currency hedging, not cash at all, merely a book-keeping exercise to trim the hedges to their market height after the fall in sterling. It’s as if you had to set a fall in the value of your house against your income. The accounting rules oblige Rolls to do this and thus, as the profit and loss account becomes more and more accurate, it means less and less.
This is my FT column from Saturday