Contracting is a miserable business. Once the accountants, lawyers and bankers sitting in offices for their risk-free fees, someone has to go out and build the damn’ thing. As the post-mortem of Carillion reveals the extent of the financial gangrene in the company, we might spare a little sympathy for those taking the risk on thin margins and actually doing the work.

As every homeowner knows, a builder’s estimate is a sum roughly equal to half the final cost. For big projects, the arithmetic is more complicated and often worse. The contractor must keep his workforce employed, so in harder times the pressure to bid low enough to be sure of winning the work is greater.

Early payments allow trouble to be put off until the later stages of the contract, and auditing each unique work in progress is more art than science. A robust, genuinely independent audit of Carillion’s true cash position would doubtless have exposed the rot sooner, but it would not have stopped the company from taking on loss-making contracts in the first place.

The excoriating report from the MPs’ committees skewered the greed and willful blindness of the company’s board, but is mostly a howl of pain on behalf of suppliers and taxpayers. The pressure to split audit from other accounting services may now be irresistible, but looks uncomfortably like: something must be done, this is something, therefore it must be done.

The real problem lies in the nature of the contracting industry in Britain. The best brains become lawyers, bankers, architects or designers. Actually doing the work is a miserable business to be done by somebody else.

 

Avast there!

You probably failed to buy shares in this month’s hot new £2.4bn issue, the strangely-named Avast. Ignorance has already saved investors a few million, since the flotation has not been an unalloyed success. The parent company of AVG, guardian of a zillion computers, Avast was priced at 250p, the bottom end of the indicated range, yet has already drifted to a 20p discount.

Valuing this anti-virus, Czech-based, business is not easy, since internet threats are so amorphous. The 332-page prospectus cheerfully asserts that “smart home devices are ripe for hacking”, while investors are treated to such gems as “deferred revenue haircut reversal” along with 28 pages of risk warnings.

Other warning signs are less obvious, but the founders Pavel Baudis and Eduard Kucera along with their private equity backers from CVC Capital and Summit Partners are cashing out £380m of shares. Then there is a legal spat with Gary Kovacs, who sold AVG to Avast.

In the circumstances, to raise £600m for fees of a mere £22m shared between Morgan Stanley, UBS and their little helpers, seems quite reasonable by today’s City standards. Meanwhile, investors who missed out should remember the rule not to buy a share within a year after flotation.

Oh Beattie, where are you?

It’s been a long way down to £2, the price BT shares were 30 years ago, and Maureen Lipman was telling us to pick up the phone. The dire performance is a grim verdict on the succession of CEOs at what should be the core of the internet revolution. Now it seems that Gavin Patterson, the current incumbent, has had a brilliant idea. Why not put BT and EE together?

Furthermore, this astonishing insight is to be called BT Plus! Never mind the Italian fraud, the hubristic foray into footie on telly, the failure to grapple with the pension deficit, the customer service, the snail-paced rollout of fibre, Mr Patterson sees a glad, confident new day, although not for the 13,000 staff he now says he can do without.

As Nic Fildes pointed out last week, many think he should head the list. The star analyst here is Saeed Baradar of brokers Louis Capital, whose somewhat over-excited prose style contained a devastating demolition of BT’s prospects two years ago when the price was twice today’s 203p. Had Mr Patterson listened, he might have faced reality rather earlier. The new strategy makes sense, but he is not the man to implement it.

This is my FT column from Saturday

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The Office of Tax Simplification is the modern-day equivalent of the Commissioners for the Reduction of the National Debt (they still exist) and has a similarly thankless task. Simplification is no match for politicians’ complication, as the Scottish government has just demonstrated with its local income tax changes.

The Office is looking at an older cat’s-cradle of rules, those enmeshing inheritance tax, and this week a study for the Resolution Foundation recommended axing it. IHT is often described as a levy paid only by those who trust the taxman more than they trust their relatives, so the foundation’s proposal is that the recipients should pay it instead. As with pay-as-you-earn, the theory is that the grateful relatives would not miss being taxed on money they had never seen.

This has a superficial attraction, but would quickly become just as complicated and avoidable. Meanwhile, the market is starting to find its own solution to the problem of wealth concentrated in geriatric hands. The yield from IHT has more than doubled in a decade, to £5.2bn, thanks to rising house prices and freezing the exemption limit.

If this stays unchanged the yield, forecast at £5.4bn this year, will rise swiftly thereafter, as homeowners die, making room for income tax cuts for moderate earners and offering them a better chance to afford their own homes. In contrast, Resolution’s bizarre suggestion that every youngster should be given £10,000 is an even worse idea than Help to Buy, George Osborne’s crowd-pleaser which has helped to buy yachts for housebuilders.

The  IHT debate is usually phrased in terms of passing on hard-earned wealth to your children. This is cant. The vast proportion of this wealth has come from merely standing on the escalator of rising property prices, so raising the tax-free threshhold would be another bribe to elderly voters. Besides, IHT remains the most optional of taxes. All it takes to cascade the wealth down the generations is a little planning – and to trust your relatives.

A shocking way to go

Simon Dingemans was a brilliant investment banker with Goldman Sachs before he left in 2011 to become finance director of one of the bank’s major clients, Glaxo Smith Kline. Now he is to leave next year. So are his fellow directors following tradition and showering him with shareholders’ money? Well, no. Because it’s his decision to go, there will be no leaving bung or any more of the incomprehensible incentives without which no modern company executive gets out of bed.

Mr Dingemans – who is also unusual in having no non-exec roles to distract him from his day job – is not going to be popular. After all, behaving like a normal employee is not what is expected from a departing executive director. Stepping off the gravy train without the comfort of a large cheque simply isn’t done.

Sadly, it remains impossible for an outsider to work out from the 28-page remuneration report (try it) how much he will get in his final year from the pile of basic salary, benefits, pension, annual bonus and long-term incentives. And however good he was at his job, it’s worth noting that we GSK shareholders have had a thoroughly miserable time whilst he has been on board. Still, full marks for leaving with dignity instead of dosh.

 

Argie bargy

It is only 11 months since Argentina persuaded the world’s banks to lend it money for 100 years, but the prospects for another 99 years of 7.9 per cent interest payments already look bleak. The central bank’s decision to hike its rate to 40 per cent this week is a cry of despair, rather like Norman Lamont’s raising British Bank Rate to 15 per cent to stay in the exchange rate mechanism.

Nobody believed him then, and no economy can operate for long with money costing 40 per cent. The choice is austerity or default, and since Argentina endured debt crises in 1930, 1955, 1976, 1989, 2001 and 2014 in the last 100 years alone, you can see the way to bet. A century before that, Argentina had offered Britain the Malvinas in return for writing off the debt to Barings. The offer was rejected on the grounds that Britain already owned the Falkland Islands. Accepting it would have saved a great deal of trouble.

 

This week’s annual meeting of Melrose Industries should be an upbeat affair. The only small cloud on a sunny horizon is a recommendation from one of the professional corporate governance geeks that shareholders vote against the tens of millions on their way to the quartet at the top of the company under an established incentive scheme.

Few shareholders are likely to take the advice. They have done far too well from their investments to cavil at another fortune for chairman Christopher Miller and his “buy, improve, sell” crew. Yet this is a sensitive subject, especially now they are in charge of one of the UK’s biggest engineering companies after winning the battle to take over GKN.

Melrose has been built by the quartet and the band of brothers who backed them financially. All have made magnificent returns from taking over companies that UK politicians have never heard of. With the £8bn tilt at GKN, all that changed. Once the story escaped the business pages of the papers, wild accusations of asset stripping, destruction of a fine old British company and the loss of jobs quickly followed.

Labour’s Jack Dromey and the Tories’ Rachel Maclean encouraged 14 colleagues to jump on the “Save GKN” bandwagon. Gavin Williamson, the Defence Secretary, voiced “serious concern” despite GKN not being among the top 50 suppliers to the MoD, while the COO of Airbus claimed that it would be “practically impossible” for the company to work with a Melrose-owned GKN.

So it went on. It hardly mattered that the asset stripping that Melrose was supposedly bent on would be better applied to GKN’s own makeshift board. After abandoning the absurd “Project Boost”, the directors rushed to sell the driveline business to a US company with a chequered record. They agreed to pay a $40m break fee and the buyer’s costs, on top of £82m paid to their own advisers.

Despite this self-serving behaviour, the result was uncomfortably close, with 52.4 per cent acceptances. This is a shameful reflection on the inertia or lack of analysis from those controlling big blocks of shares, because it has since emerged that the 2017 GKN balance sheet was prettied up by “stretch payments to suppliers”. This is a euphemism for late payment, the sort of behaviour that politicians are always railing against, where small suppliers are bullied by big customers.

Unwinding this, and behaving better, is now the Melrose directors’ responsibility. They are playing in the premier league now, and will have to adjust their game accordingly when it comes to executive rewards.

Last week Euan Stirling of Standard Aberdeen told the directors of housebuilder Persimmon that their fabulous remuneration suggested they had lost sight of their “responsibility to act in the best long-term interests of the company”. Were the GKN directors still in office, he might have given them the same lecture.

Instead, CEO GKN Anne Stevens has returned home to the US, while chairman Mike Turner is spoken of as a possible next head of Barclays. Before deciding, the bank’s search consultants might look at succession planning, corporate responsibility and use of shareholders’ money at GKN. It’s not a pretty sight.

This Asda be stopped

When Wm Morrison agreed to buy an ailing Safeway in 2003 to compete against the big three supermarkets, a dominant Tesco immediately signalled a counter offer. Sir Terry Leahy, then Britain’s all-powerful grocer, knew that any proposal from Tesco, Sainsbury or Asda would be blocked by the Competition Commission, but he successfully snared Morrison in the investigation.

By the time the commission produced the screamingly obvious answer, Safeway was almost dead in the water. Morrison’s takeover, on something close to the original terms, caused years of chaos to Tesco’s benefit, and cost the family control.

It’s unlikely that today’s Tesco boss, Dave Lewis, will try to disrupt Asda’s proposed merger with Sainsbury, especially since he has just got away with buying Booker, Britain’s dominant food wholesaler, but the lesson of history is that he should not need to.

For all the bluster about new competitors, the lack of geographical overlap and lower prices for customers, this proposal is clearly anti-competitive. If the 25 per cent limit on market share from mergers is to have any meaning, the Competition and Markets Authority must block the deal. Its new chairman Andrew Tyrie has much to do.

This is my FT column from Saturday

What is the point of Hammerson? It’s Where More Happens, according to the accounts, full of happy smiley people gazing into windows in its shopping centres. They are obviously not shareholders or they would be asking how a whole generation of property gains has somehow passed them by.

Thirty years ago, Hammerson shares cost about 400p. Last month, weighed down at the prospect of an ill-conceived merger, they cost 440p. Fifteen years ago, the dividend was 16.83p. The payout for last year is 15.5p. Next month the directors face the unenviable task of asking their shareholders to vote against a deal to which they have pledged “irrevocable” support four months ago.

Their gushing enthusiasm in December to buy Intu has this week turned into a cringe-making “withdrawal of recommendation” written by the company’s general counsel. In between, as the statement does not add, Hammerson’s share price crashed from 530p to 440p, while the board threw out a cash-and-shares proposal worth 615p from Klepierre of France, a bigger operator of shopping centres.

The Hammerson board saw no need to inform shareholders of the approach, and when it leaked, dusted down some boilerplate about “very significantly” undervaluing the business. When Klepierre raised the price to 635p, Hammerson said it again.

The board now believes the net asset value is a magnificent 790p, far ahead of the price at which it was happy to issue new shares to buy Intu. With the shares at 519p now, the best thing the Hammerson directors can do is pledge to realise that 790p as speedily as possible and return the proceeds to the shareholders. The second best thing would be for chairman David Tyler and CEO David Atkins to resign at the meeting. Their credibility is destroyed.

 

Going green about the gills

There are few things that government ministers like doing better than announcing crowd-pleasing policies with a target date far into the future. Labour got a warm glow in 2008 when the Climate Change Act imposed a legal obligation to cut Britain’s carbon dioxide emissions by 80 per cent by 2050, a date by when those passing the legislation will be (mostly) dead.

A decade on, and the costs of that feelgood factor are starting to appear. Governments of both colours have pinned the blame for rising electricity prices on the supplying companies, obscuring the hidden subsidies for windmills, solar farms, wood pellets and assorted “green” schemes that have kept costs to consumers high in an era of abundant energy.

Rather than admit that the Act was a mistake, the UK government is doubling down, with Energy Minister Claire Perry suggesting that there may be a case for even tougher limits by 2050. This is still a politically comfortable 32 years away, by which time this administration will be as far into history as the Thatcher years are today.

This virtue signalling of green credentials is producing more immediate results elsewhere. The decision by the May administration to demonise diesel and ban the production of non-electric cars by 2040 sent shock waves through the industry. Having been encouraged to save energy by shunning petrol, motorists are now punished for buying diesel cars. Sales have (predictably) collapsed, and 1000 contract jobs are going at Jaguar Land Rover.

The motor industry has systemic problems of its own. The end of PPI compensation payments, that £30bn of quantitative easing for the masses, removes a powerful stimulus to demand, which has also been sustained by the modern-day version of hire purchase. Demand for electric cars is sluggish, despite substantial subsidies which one day will have to be replaced by tax. Of course, Ms Perry and today’s administration will be long gone by then.

No more on this account

Today’s company reports are completely accurate and totally incomprehensible, the accounts as bloated as the choice of auditor is skinny. For big companies there are only four firms after the fifth, Grant Thornton, threw in the towel on FTSE100 pitches. Audit reports are frequently so qualified as to be meaningless and offer no guide to the true state of the business. Now John Kingman has added to his portfolio by chairing the review of the Financial Reporting Council, accountancy’s hopeless regulator. Whatever he recommends, let it not be disclosure of more incomprehensible detail.

Once upon a time, following the great inflation, the Bank of England started issuing bonds with a return linked to the Retail Prices Index. Since inflation rots bonds, these linkers would provide an asset which would rise when other bonds were falling.

This iron logic has proved false. Quiescent inflation encouraged investors to accept lower rates, both nominal and real.  According to the 2018 Barclays equity gilt study, published last week, the real return on conventional gilts has been 4 per cent, exactly the same as from linkers over the last decade. Over 20 years, conventionals have returned 3.6 per cent, against 3.9 per cent for linkers.

This annual orgy of statistics, now going back 118 years, shows what fine long-term investments shares are (5.1 per cent real, compound since 1899). However, for those whose horizon is rather nearer, the picture is more muddled. Over both 10 and 20 years, UK government bonds have returned more than equities with 3.2 per cent each time (both have easily beaten cash, but you would expect that) and had shares not done so well last year, the picture would have looked even worse.

However, there has to be an upper limit to the value of a bond. Already buyers of linkers are locking in guaranteed real-terms losses of around 1.5 per cent, while the UK government is paying 1.7 per cent for conventional 40 year debt. Now this financial suppression that followed quantitative easing is being unwound. Governments face relentless demands for more spending without more taxation, and there will be no shortage of new issues of gilt-edged stock in the next few years.

On the other hand, a buyer of Diageo, say, starts with a yield of 2.5 per cent, and the world shows no sign of becoming teetotal. Any long-run chart of share prices shows a steady upward climb, regardless of the colour of the governing administration, and what seemed at the time like dramatic corrections are barely perceptible dips. Bonds are just debt, while shares are stakes in rising prosperity, which is why they are ultimately more rewarding than lending to the government.

Bridge over troubled water

The threat from the internet to traditional clothing retailers is not as bad as you thought. It’s much worse. Not only is it eating market share, but the on-line sales are inherently much less profitable, especially in a market where growth is hard to find.

A summary of this “channel shift” was included in last month’s results from Next, a business whose publications contain more useful information than many boardroom papers. The analysts at UBS now conclude that “the downside from lost in-store sales was much higher than the gain from additional online sales.” They add that since the “profit bridge” across the digital divide is costing Next 13p off every pound of sales, the outlook for less well-managed businesses is dire indeed.

The point here is that the damage to margins could be permanent, even for retailers who do not fall off the bridge. On the UBS projections, Next’s experience translates into 12 per cent off M&S’s pre-tax profit, and a gruesome 78 per cent off Debenhams’. There are going to be many more drownings in this industry.

Tyrie: storm warning

As is traditional for any MP member of the awkward squad, Andrew Tyrie stepped down at the last election with no gong despite his masterful chairmanship of the UK Treasury committee. He now has a chance to shine as chairman of the Competition and Markets Authority. As a strong believer in both, he might start by looking at the City’s unofficial underwriting cartel.

Last week was the turn of Provident Financial to pay what is effectively a tax on listed companies for raising risk capital. To raise £300m, Provident’s shareholders had to pay £31m in fees and commissions. In theory, there was a risk that the underwriters of the issue would be left with any stock the shareholders did not buy.

In practice, there was no risk. The shares would have had to halve in six weeks from an already depressed price which had been softened up in anticipation. In fact, the price jumped, and has hardly moved between the day after the announcement and this week’s subscription deadline. Plenty for Mr Tyrie to do, then.

This is my FT column from Saturday. If you know anyone who might like to see it, ask them to put neilcollinsxxx into their favourite search engine, and hope the firewall doesn’t block it. Follow the links to get it sent every Monday (well, nearly every Monday).

 

 

 

 

The board of Unilever regrets any inconvenience caused, but the directors believe that it is in their best interests to disenfranchise UK shareholders. This is not a description of their latest proposal they will much care for, yet in anything but the short term, that would be the inevitable result.

The plan, heavily trailed and finally revealed last month, is to unify the two classes of share, Unilever plc and Unilever NV. Newnilever, as the company certainly will not be called, is to be incorporated in Rotterdam with a primary listing in Amsterdam.

The justification, that there is a greater daily trade in NV than in plc shares, is a canard; the principal market for both is in London. Amsterdam is a financial backwater. The deepest market in Europe, and thus the cheapest cost of capital, is in London. More than twice as many Unilever employees work in Britain as in Holland.

Unilever’s CEO, Paul Polman, was keen to emphasise that the three new principal operating businesses would all be based in the UK, but this is no more than an attempt to throw up a smokescreen over the significance of the decision, and to distract attention from the plan’s central weakness.

Without a principal listing in London, Unilever will no longer be eligible for inclusion in the FTSE100 index, of which it is the third largest constituent. It would no more be British than are the UK subsidiaries of IBM or Nestle, and many funds would become forced sellers or risk breaching their mandates by holding a Dutch share.

Many thousands of individual investors would feel further removed from a business which has long been a core holding in any portfolio. There is no upside in this proposal for us, while new investors, with their inevitable focus on domestic stocks, would no longer consider it for their portfolios.

The company’s response has been to encourage shareholders to lobby the London Stock Exchange to keep Unilever in the FTSE 100 index, a move which would make a mockery of the rules, and is hardly the role of the shareholders.

Fortunately, it is not too late for a rethink. The proposal needs a 75 per cent majority from plc shareholders, and already two of the top 10 shareholders have expressed serious misgivings. Between them, the 10 control 19 per cent of the votes, enough to defeat the proposal on any likely turnout.

Mr Polman has enhanced Unilever’s reputation both as a long-term investment and as a responsible corporate citizen, but this proposal is a serious misjudgment. To some, it looks like a way to protect his board from the possibility of another takeover bid. Others suspect that the UK incorporation of subsidiaries makes a break-up of the group easier.

Unilever denies any such thoughts, but there is more than a touch of hubris, or even  petulance, in the way the company is behaving towards its plc shareholders. Mr Polman is coming to the end of his term, and will thus escape the long-term consequences of this historic decision.

He need not look far for a solution. Royal Dutch Shell has its headquarters in The Hague, but is incorporated in Britain, with a primary listing in London. Unless Mr Polman wants to risk a showdown at the meeting in September, this is the model he should follow.

Time to sink this barrage

Here’s how decisions on big projects get made in Britain. The latest pitch from Tidal Lagoon Power, which wants to build a £1.3bn barrage in Swansea Bay, is: Look, this semi-aquatic white elephant is now even cheaper than Hinkley Point!

The barrage, 9km long, threatens Hinkley’s crown as the country’s most expensive electricity generator. The backers have squeezed a subsidy from the Welsh assembly, and so they can now argue that the cost to central government is less than the ruinously expensive nuke which no outside analysis says is worth doing.

Armed with its first taxpayer bung, the company is now putting the bite on business secretary Greg Clark, with moving stories of redundancy among the 50 staff should he fail to throw taxpayers’ money at the barrage. In a recent letter to Carwen Jones, the Welsh first minister, Clark described tidal lagoons as “an untried technology with high capital costs and significant uncertainties”. Quite right. This scheme makes no economic sense. Don’t weaken, Greg.

 

 

It was a close run thing, but the foreign marauders have been seen off. The long-term value creators have triumphed over the short-term deal-makers, despite a shocking, and shockingly-expensive, campaign to discredit the bidders. That this victory was made possible with the backing of new holders trying to profit from the gap in value between their cost and the market merely adds to the irony.

The triumph is, of course, Melrose’s £8bn takeover of GKN, achieved despite an extraordinary defence which sneered at the opposition, conjured up a deal to sell two-thirds of the business to a foreign company with a dodgy record, and which changed tack more often than a boat in an America’s Cup race.

The result was close thanks to the power of spin over substance, with all sorts of people who should know better weighing in: it was against Britain’s industrial policy: we should disenfranchise short-term holders: we cannot accept one of our suppliers being taken over: the Melrose share price offered a “fake premium.”

None of these slurs survives examination. The deal to sell the automotive driveline business to Dana was, we were told during the bid, well under way before Melrose arrived. We will learn just how well once the new team examines the documents. Suffice to say that GKN was such a tough negotiator that Dana threw in a secondary London listing and an extra $140m after the deal was agreed.

Britain’s industrial policy is a chimera. There were no credible grounds for the state to interfere, while any logic disappeared when GKN agreed to deliver driveline to an American company. Disenfranching short-term holders is not only impractical but self-defeating, since it would be simple to leave the nominal voting rights with the seller, to be exercised by the buyer. That is quite apart from asking why such “long-term” holders were selling in the first place.

Then there was the response from Airbus. Tom Williams, its chief operating officer and friend of Mike Turner, GKN’s chairman, said it would be “practically impossible” to award new work were GKN to be taken over. So does each Airbus supplier require approval from Mr Williams before any change of ownership?

As for the suggestion from GKN’s stopgap CEO, Anne Stevens, that Melrose offers a “fake premium”, the Melrose share price has hardly changed since GKN revealed the approach and suddenly decided to give her the job. Her appointment is unlikely to be the reason for the jump in the GKN price from 330p to 440p that day.

The increasingly desperate missives to GKN shareholders from Mr Turner rather gave the game away, as did Ms Stevens’ petulant response to the confusion over whether she is 70 or merely 69. As a farewell present to the new owners, the GKN board agreed to pay advisory fees of £82m, plus a further $40m break fee to Dana.

Together, these two payments total 17 per cent of last year’s pre-tax profits. The 2016 accounts, the latest available, state the “single figure” pay for the top four executives at £5,447,000, but since three of them have departed, the numbers are a poor guide to the bill for clearing out the current board. Let us hope the compensation figures are less outrageous than the fees Melrose’s bigger band of shareholders will have to meet.

Bohemian Rhapsody

Galileo is a fine example of how the European Union works. This absurd fandango will cost €10bn to duplicate something we already have, free to consumers, in the form of America’s global positioning system. When it finally arrives after 15 years’ gestation, Galileo is supposed to be more accurate, secure and doubtless has a better tune. In reality it is a euro-vanity project in case the beastly Americans turn GPS off (they’ve promised not to) and we all get lost.

The initial pretence, 15 years ago, that the system could pay for itself without forcing euro-contractors to use it, is long gone. Now the EU is threatening to exclude Britain from competing for contracts to develop the system on the grounds that “security” means it must be a members-only project. This has not gone down well in Downing St, but the whole scaramouche is a fine example of how a vainglorious Brussels loads deadweight costs onto producers, and why we voted to leave.

This is my FT column from Saturday