Advice from the City’s finest is magnificently flexible. They can project a miracle boost to a company’s profit margins while simultaneously promising a fat payment to shareholders. They can line up politicians and trade unionists to defend a national champion from an “asset stripper” one day, and announce a deal to sell half the business to a foreign buyer the next. They can mutter darkly about an irrelevant threat to national security. They can press the pensions panic button.

They are, of course, the advisers to GKN, the subject of a takeover bid whose jury-rigged* crew of directors is trying to repel the boarders from Melrose. Advice this flexible does not come cheap. For “financial and corporate broking” Gleacher Shacklock, JP Morgan and UBS will share £60m, while the bill from lawyers Slaughter & May comes to £12m. Add in the rest of the crew and there is no change from £82m.

For just a few weeks’ hard work by not very many people, this is an impressive example of how the City shovels money around and keeps what sticks to the spade, or in this case, the mechanical digger. Of course the GKN board, like a man with raging toothache, was not in a strong position to haggle over the fees.

Not all the money is wasted. What initially looked like a hopeless case for the defence has scored some hits. The price agreed for the automotive drive train business is better than a fire sale, albeit with payment in shares in Dana, a US engineer with a patchy record.

Melrose has added £500m to its offer, handing more of the combined equity to GKN shareholders, while Airbus, its biggest single customer, has helpfully cranked up the pressure by signalling a rather predictable fear of the unknown. The advisers have also persuaded investors to view the businesses in a more positive light, rather than as a tired old engineering conglomerate.

Yet it hardly adds up to any sort of value for money. If Melrose wins the day, its shareholders will write the cheques, as well as paying another $40m bill, in the form of a break fee to Dana. That rises to $54m if the GKN board has a Damascene conversion and recommends acceptance. Since the directors would be out the day after a Melrose victory, that seems unlikely.

It is not hard to see why they are fighting so hard to keep their jobs, but the idea that the final offer “fundementally undervalues” this venerable business, as they claim, is mere takeover rhetoric from a board that can hardly know whether it does or not. Its emergency CEO has come out of semi-retirement, the new finance director is not an accountant, and the senior independent director has just stood down.

Backing GKN’s management is a leap of faith, and shareholders now have a fortnight to decide which way to jump. They might consider that £82m represents the trading profit on £1.3bn-worth of automotive drive trains, or getting on for 15 per cent of last year’s entire pre-tax profits. Can you spot the winners?

Words and figures did not agree

The results from Conviviality Retail two months ago were greeted with something close to rapture by analysts from Investec, N+1 Singer, WH Ireland and Shore Capital. For the purveyors of Bargain Booze and Bibendum, things looked set fair, and CEO Diana (the) Hunter had described the results as “strong.”

Yet as was noted here at the time, something smelled fishy. Despite all this enthusiasm, the shares slumped 11 per cent on the day, accelerating a fall that began before Christmas. The sellers just kept on coming, and the shocking discovery of a £30m tax demand due this month, after almost daily profit warnings, added farce to the tragedy.

Conviviality has now asked its banks for mercy. The business is in such a state that the dividend has been cancelled. The shares are suspended, and Shore fears they may be worthless. It’s hard to avoid the suspicion that somebody knew things were bad, even if they hadn’t actually hidden the brown envelope behind the sofa. It’s enough to drive you to…oh no, don’t say that.

This is my FT column from Saturday

*Jury-rigged: makeshift, improvised (OED)


In the wonderful world of fund management, it seems that looking after just $127bn is “sub-scale”. This was the logic used by Henderson in 2016 to explain why it was merging with an American outfit with a measly $195bn on its books. Janus Henderson is now listed in New York and managed from London, so how’s this trans-Atlantic pantomime horse performing?

It rather depends on your point of view. To have lost $10.2bn of funds last year is unfortunate, and follows a drain of $8.4bn in 2016. Morningstar reports a further $445m of redemptions in January. Despite a roaring bull market, the shares have gone nowhere since the merger, unlike some of the employees, released to contribute towards the expected $110m of cost savings.

However, viewed from the co-chief executives’ c-suites, it’s not all bad. Dick Weil of Janus took home $9m, up from $7.9m in 2016, boosted by a $312,670 relocation package to get him from Denver to London. Henderson’s Andrew Formica saw his pay almost triple, to $7.6m.

This scaling-up business is obviously trickier than it looks. Or as a spokesman told FTfm: “Andrew’s change in remuneration reflects a combination of transitioning him to the new methodology and benchmark compensation level for the chief executive of a comparable global asset manager, as well as the positive financial results of Janus Henderson relative to the combined firms in 2016.”

This is humbug worthy of the Lucy Kellaway award, and provides a helpful template for executives needing to defend corporate greed, especially if they happen to find any of Janus Henderson’s dwindling funds on their share register. Perhaps we should not be surprised, since the hint is in the name: as every skoolboy kno, Janus is usually portrayed as the god with two faces.

Boxed in by the rules

The phrase “profit warning” strikes dread into the investor’s breast, so companies prefer euphemisms like “cost pressures and negative currency impacts are expected to result in an underlying performance for the year modestly below market expectations.”

This coy phrase was enough for the share price of paper and packaging group Mondi to tumble nearly 7 per cent on October 11 last year to £19.38. At the time, sterling had made one of its fleeting post-referendum recoveries, with the corresponding impact on the value of non-UK sales. However, Peter Oswald, Mondi’s CEO, clearly considered the reaction overdone, buying £100,000-worth of shares later that day.

The market continued to fret, and by December the price had fallen to £17. Now Mondi is reporting a rather different picture, with increased profits, a special dividend and a cheerful statement from Mr Oswald. Helped by a couple of brokers’ recommendations, the price has climbed to £19.80.

So when does a slightly soggy patch warrant a profit warning? In hindsight, Mondi’s patch was brief, as product price rises outran the anticipated cost increases. Companies are frequently criticised for saying too little, too late, but those shaken out of the shares in October will not thank Mr Oswald for his due diligence in keeping the market up to date.

It ain’t over until…

Anyone tempted to view the Italian election as mere opera buffa in an agreeable, but distant part of Europe might look more carefully at recent history. In 1992, with the European Exchange Rate mechanism groaning under the weight of its internal contradictions, and the British economy being strangled by the need to keep up to the deutschemark, the Italian lira finally fell through its floor, and out into the cold reality of market forces.

The official line from the Bank of England the next day was that this had “lanced the boil” on the face of the ERM, and that the crisis was over. Within another 24 hours, despite Britain’s panic rise in Bank Rate to 15 per cent, the pound had followed the lira out of the bottom of the ERM, and the whole misbegotten experiment was over.

The billions spent by the BoE propping up the currency remain one of the largest single transfers of wealth from the British state to the private sector, and the devaluation laid the foundations for 15 years of economic growth. Quite a comic opera, then.

This is my FT column from Saturday.


This is surely the weirdest rights issue of the decade. Shares in Provident Financial, a lender that has looked as distressed as some of its sub-prime borrowers, had been bobbling around a depressed 660p for weeks, as holders nervously awaited the mis-selling fine and restitution from the Financial Conduct Authority.

The weekend before last the Sunday Telegraph revealed it was “sounding out investors” about a £500m rights issue, and on the Monday the shares fell below 600p, braced for the worst. The worst, when it arrived on the Tuesday, wasn’t so bad – a mere £300m in new money – and neither was the £2m fine or the £169m compensation to overcharged customers.

The shares took off, bursting through £10, helped by those who had shorted the stock scrambling to cover their positions. While the size of the rise was a surprise, the direction surely was not. The shares had factored in a £500m fund-raise, while JP Morgan’s analysts had estimated that the penalties might total £300m.

Despite this unexpectedly good news the rights issue, a bizarre 17-for-24 offer at the knockdown price of 331p, did not escape the now-traditional tax on Provident’s battered shareholders. The underwriters, Barclays and JP Morgan (them again) and assorted hangers-on share £31m in fees, 9 per cent of the gross sum raised, mostly for the risk that the share price would nearly halve from its 10-year low in the next six weeks. As the underwriters would have known following their weekend “soundings” and knowledge of the FCA’s penalties, in reality there was no risk at all.

Underwriting was once a useful way for companies to buy certainty when raising new capital, with the underwriters prepared to hold the stock if not all shareholders subscribed. It has turned into a grotesque parody, a cartel for a few investment banks, providing ammunition to those who believe the City is just a cosy, greedy club.

That’s another £11bn wasted after all

“It is nonsense for Neil Collins to write that the investment in the national smart meter rollout will be a waste” wrote Sasha Deshmukh to the FT, nearly three years ago. “Every consumer will feel the benefits” of this £11bn project, added the man in charge of selling them to us.

Today, it’s plain that his smart meter is only marginally less stupid than the old one, and that the investment is indeed a waste of money. The programme is failing, the gains are trivial, and the official estimate of annual savings of £300m by 2020  is pure wishful thinking. Far from “putting consumers in control of their energy use” as the government claims, the meters may even stop being smart if you switch supplier, as we are constantly urged to do.

The industry must move towards managing electricity demand, since supply from renewables is so unreliable, but these meters hardly help. They cannot switch on the dishwasher when the price of electricity falls, unlike under the dumb old Economy 7 tariff. No wonder the Consumers Association reckons that two out of every five recipients are unhappy.

If the householder had to pay cash for installation, nobody would bother, but as so often with government energy policy, the true cost is hidden in the bills, allowing the blame to be shifted onto the energy suppliers. We must all pay, but until there’s a properly smart meter available, just say no.

Flatlining, or just slow to recover?

Is yours a zombie company? Surveying the wreckage of Toys R Us and Maplin among others, you might fear the worst. Yet oddly, Deutsche Bank can find fewer zombies than a year ago. Defined as a company which has failed to earn its interest cost for two consecutive years and is valued at less than three times sales, the comprehensive analysis of the world’s 3000 biggest businesses implies that more of them have found a strategy for survival, rather than clinging on awaiting a mercy killing from rising interest rates.

The bank’s uncomfortable conclusion, for those still in the twilight zone, is that central banks should cease to worry about the corporate undead and have the confidence to raise interest rates to head off the inflation which is so clearly looming.

This is my FT column from Saturday

Richard Parry-Jones stepped down last week as senior independent director of GKN. He has not stepped far, since he remains on the board as a non-exec, swapping places with Angus Cockburn. In corporate governance land, the SID occupies a key role, allowing shareholders to voice concerns without a direct confrontation with the chairman or CEO, so with the company on the wrong end of a £7bn takeover bid, the timing looks uncomfortable, at least.

The move is just the latest in the game of musical chairs on the engineer’s board. In September Kevin Cummings was appointed chief executive designate on the impending retirement of Nigel Stein, at which point Adam Walker quit as finance director, replaced by a non-accountant, Jos Sclater.

Two months later Mr Cummings was unappointed and left with immediate effect. Rather than having Mr Stein stay on (he was not slated to retire until the end of next month) the board appointed Anne Stevens, a semi-retired non-executive GKN director.

Even in normal conditions, this sequence of events might be described as unfortunate, but the hostile bid from Melrose which followed last month should concentrate minds on the need for stability in the boardroom. The latest shuffle of seats follows what looks like part of a desperate attempt to hang onto them.

GKN’s record is too poor for a credible defence, so it has played both the pensions and national security cards. Defence secretary Gavin Williamson and Jeremy Corbyn, from their different perspectives, have decided that grandstanding about asset stripping of Britain’s industrial heartland plays well with the voters, even if has only a distant relationship with the facts.

GKN hardly qualifies as a key supplier to the Ministry of Defence, while it was the company’s own board that suddenly decided to strip some of the assets and return the sales proceeds to the shareholders, as part of “over 500 initiatives” (count ’em!) in Project Boost, the company’s response to the bid. This scrap is essentially about which team is likely to be better at running this engineering flagship. Rearranging the deckchairs hardly helps the shareholders decide.

Lies, damned lies…

Did you spend last month at the gym, or at least buying kit with intent? The Office for National Statistics reckons we did, spending 10.9 per cent more than a year ago. This estimate, and the others in the shower of official figures the ONS release each month, should be a good guide to shopping reality, but not everyone believes them.

Nick Bubb, a veteran analyst of our spending habits, routinely calls the official stats “Planet ONS” for the distance between them and surveys from Nielsen, the British Retail Consortium and others like Retail Economics. January’s official fitness leap is invisible to them, and is not an isolated example. The ONS reckons that sales at small non-food businesses jumped 10.5 per cent last month. Small household goods shops apparently sold a booming 18.6 per cent more, while their larger cousins saw a 5.2 per cent slump. No other survey spotted these (and other) dramatic changes. Richard Lyn of Retail Economics describes the figures for small retailers as “not credible.”

Tracking clothing sales is tricky since the on-line explosion of new brands, and the ONS is alone in having access to numbers from Amazon, but the official figures are treated as the definitive ones for policy decisions like interest rates. If the ONS is the only one in step, no wonder the Bank of England so frequently trips up.

Heathrow regrets to announce…

When it comes to Britain’s grands projets, none matches Heathrow’s third runway. Half a century in the planning, the paper project has forced ever more imaginative and intensive use of the existing pair. The airlines have told the MPs’ transport committee that they view Heathrow’s cost estimate of £14.3bn as fantasy, and fear they are being asked to underwrite it.

They are surely worrying unnecessarily. The Cameron administration’s final decision to favour Heathrow over Gatwick overlooked the rule that nothing is final in this game. Actual construction is always just over the horizon, or the M25, starting on the 12th of Never.

This is my FT column from Saturday

The leaked report from the Financial Services Authority into Royal Bank of Scotland’s treatment of small businesses is a truly shocking document. Perhaps because it was not designed to be published, there are few of the weasel words that so often blunt the impact of such enquiries, with the result that there is a clear path of responsibility extending right to the top of the bank.

We do not expect our bankers to behave like saints, or even like the vast majority of charity executives, but neither do we expect their maxim, imposed from above, to be “screw the customer”. A big clearing bank is more than merely an enterprise for its shareholders, which is why the taxpayer was forced to rescue the industry. Few argued that there was a realistic alternative at the time, but having taken the money, the executives at RBS appear to have thought that they had no wider obligations in return.

Those put in charge after the rescue have now departed, but only to senior posts elsewhere: chairman Philip Hampton to GlaxoSmithKline, CEO Stephen Hester to insurer RSA, and Nathan Bostock, the man in charge of the ironically-named small business recovery group, to run Santander UK.  Small wonder that Callum McCarthy, formerly of the UK’s financial watchdog and now chairman of the report’s producer, can scarcely contain his fury.

Unlike other enquiries into what went wrong, this report deals with behaviour after the crash. Today, the banks are still blinding their customers with complexity or letting them down. The bankers are still being paid grotesque sums. When the McCarthy report is finally officially published, there must be consequences. The old adage goes: the wheels of justice turn slow, but grind exceeding small. Let us hope so.


Rail’s so exciting, he’s exiting

These are exciting times for Britain’s railways, says Mark Carne, the chief executive of Network Rail, introducing the latest strategic plan to spend £47bn over five years. Too exciting for him, clearly, since he’s leaving. Perhaps to distract attention from the failure of the last plan, he’s terribly excited about prospects for employing more women. Golly, his successor might even be one, he says, which says something about succession planning at Notwork Rail.

Rail expert Roger Ford, writing to the FT last month, spells out the bleak arithmetic of failure. He calculates that each mile of the creeping electrification of the Great Western railway costs six times that of the East Coast line in the 1980s. Even allowing for more health and safety constraints and adjusted for inflation, 30 years of advances in technology have been swamped by deteriorating efficiency compared to old British Rail. The £50m just spent building a modest station at Cambridge North rather makes the point.

However, there’s a welcome note of realism in the new plan. Most of the grandiose projects which have caused so much embarrassment are shelved, in favour of vital but politically dull spending on upgrading signals and maintenance. George Osborne’s fantasy “northern powerhouse railway” is replaced by local improvements, and with luck God’s Wonderful Railway will finally be electrified. Network Rail’s chairman, Peter Hendy, can bring some real rail expertise to the task.

Meanwhile, the Great White Elephant that is HS2 continues to lead a charmed life, eating billions and promising years of misery and disruption for a project which nobody believes is worth its vast cost. Still, never mind this economic illiteracy. Network Rail is going full steam ahead for gender equality, and who could complain about that?

Another unmissable investment

So how is your investment in XIV, the VelocityShares Daily Inverse VIX Short-Term Exchange Traded Note going? Not too well, since it is inversely correlated to the prices of some futures on the CBOE Volatility Index. Oh, do keep up, that’s the VIX, itself a pretty strange measure. After months snoozing, VIX suddenly had a spasm and wiped out its reverse. The XIV (geddit?) fell by around 96 per cent and Credit Suisse, the bank that invented it, is now uninventing it. This story either shows what valuable services banks provide, or that the devil makes work for idle hands.

This is my FT column from Saturday.

Oh Lord, give me chastity, but do not give it yet. For many months now the Monetary Policy Committee has been guided by Saint Augustine’s prayer: we know we need to raise Bank Rate significantly, but we want an excuse to put if off. Now the markets have provided another one, in the shape of roller-coaster share prices, and so the era of financial repression continues a little longer.

That the era is coming to an end is surely not in doubt. At some stage, the relentless need of governments to borrow money will start to weigh on the prices of their bonds. A look at ancient history, those days before 2008, suggests that central banks that are too slow to raise interest rates eventually have to raise them further to choke off inflation.

So far, the MPC has merely corrected the error it made with the panic cut following the referendum result. The belated rise in Bank Rate to 0.5 per cent last November still leaves it at a crisis level. It is clearly too low when growth has again confounded the Bank of England’s forecasts, and when inflation measured by that other reminder of ancient history, the Retail Prices Index, is bowling along at 4.1 per cent. No wonder governor Mark Carney would like to see it scrapped. It shows up the cost of his committee’s procrastination.

Shiny new motor? No thanks!

The trade body for the British motor industry has struggled to find something positive to say about another disappointing set of sales figures. The best gloss is that they are less disappointing than in recent months and, look, sales of electric cars are booming. As the Society of Motor Manufacturers and Traders points out, the whole market has been damaged by the government’s capitulation to the green lobby on diesel cars, whose buyers are being made to feel like enemies of the people.

New car sales are notoriously cyclical, and after five successive Januaries when sales rose, the cycle is due to turn, especially as the People’s Quantitative Easing, in the shape of payment protection insurance mis-selling payouts, is finally starting to run out. The stimulation from vendor finance packages, that modern version of hire purchase, is also fading.

Yet there are some more disturbing longer-term trends to worry the forecourt salesmen. The SMMT points to low consumer confidence, although many other consumer businesses are faring well enough. Today’s cars are reliable and do not rust, so changing them is seldom really necessary. Indeed, the really worrying possibility is that people may not buy them at all. A rising proportion of twenty-somethings have not even taken a driving test, let alone aspired to a shiny motor. To them, cars are conveyances rather than possessions.

Electric vehicles may galvanise the car industry, but the omens are not good, despite their 24 per cent rise (to just 5.5 per cent of the total UK market) last month. Today’s buyers get a bung from the taxpayer, parking and congestion concessions, and duty-free fuel. None of these bonuses is sustainable, even before considering how to replace the £38bn a year currently reaped from fuel taxes. When subsidies were cut back in Denmark and Hong Kong, sales of EVs collapsed.

In addition, the technology is evolving fast, posing a whole new set of problems for the carmakers. The danger is that tomorrow’s potential buyers may start to wonder whether that state-of-the-art machine will last any longer than their new mobile phone.

The art of the deal

It’s rare indeed to find a transaction where the bankers really earned their fees. So step forward Jonathan Bewes, Eamon Brabazon, Geoff Iles and Luke McMullen. This Merrill Lynch quartet acted for Home Retail in the sale of Homebase to Wesfarmers two years ago. In what must rank alongside Slater & Gordon’s purchase of most of Quindell when it comes to purblind Aussie optimism, the buyers have not only written off the entire £340m purchase price, but another £114m on top. The deal looked ropey at the time, as Lex warned, but somehow those silver-tongued bankers prised the chequebook open. Well done, boys.

This is the uncut version of my FT column from Saturday.

It’s a month since the Mifid triffid landed in the City of London, and some of the consequences of this alien invasion from the European Commission are starting to become apparent. The Markets in Financial Instruments Directive, MkII, was born out of the admirable desire to force the notoriously opaque pooled fund industry into greater transparency of costs and charges.

From this simple goal has come a 16,000 paragraph monster, so complex that it is beyond the capacity of a single mind to comprehend. It has also produced gems like “negative transaction costs”, as FTfm highlighted this week. If the price of a share falls after a fund manager has decided to buy it but before trading, then he can book the difference as a negative transaction cost, and set the “gain” against his published ongoing costs figure.

If, on the other hand, the price rises, then the transaction cost is deemed to have risen too, which is added to the other costs to the investor, making the charges look higher. Say you wanted to buy a share at 100p, but actually had to pay 102p. Your purchase price is higher, but you would not count the 2p as part of the transaction cost.

This methodology could hardly have been better designed to confuse and mislead investors, and this impression is reinforced by Mifid’s little KID brother. The Key Information Document, which all pooled funds are now obliged to produce, sets out what an investor might see back from various formulaic projections.

Thus, funds which are obliged to slap warnings all over the place that past performance is no guide to the future must now publish fantasy projections based on that past performance.

All these new rules reflect the European Union’s willful failure to understand how markets work, coupled with resentment towards the prosperity created by the City of London. Only this week have the EU’s Brexit negotiators finally admitted that they believe a smaller City would benefit the other members. It is another acknowledgement of their innate suspicion of free markets and their desire for more control. It is also why so many in the City believe that the sooner we leave, the better.

Cheers, then a nasty hangover

Perhaps it was the Bargain Booze, or the agreeable Bibendum wines, but the analysts covering the company that owns them could hardly curb their enthusiasm following the half-time results last week. Here is Investec: “We view Conviviality as a multi-year growth story.” N+1 Singer concurred: “[There was] good momentum across all three divisions as the new MDs begin to have a positive impact”.

WH Ireland gushed: “Trading since the end of the period has also been positive with sales in the first 9 weeks ahead by 8.4 per cent.” Fellow brokers Shore Capital joined in the booze-up: “The focus in the interim results for us is profitability and bridging it to full year expectations.” So plenty of coverage for a mid-cap company. Conviviality’s CEO, Diana (the) Hunter, had earlier described the results from “the UK’s leading drinks wholesaler,” as “strong”.

Yet far from being cheered, Conviviality shares plunged 11 per cent on the results, and at 314p are down by a quarter in two months. Shore’s long analysis had struck just one slightly cautious note, calling for “more detail around the reshaping of the leadership team that has resulted in the departures of some seemingly key personnel.”

Perhaps the shares really are worth 470p, as WH Ireland claims. Or perhaps the market senses trouble ahead that the experts can’t see. We’re surely not giving up drinking, are we?

Sorry, I don’t recognise you

Revenue recognition: we’re going to make so much money from this contract that we might as well book some of it now. Reality turns out to be more complicated, as Capita finally admitted last week. Little Utilitywise runs energy management contracts, and is having terrible trouble making the numbers add up. After two postponements of its final results and a rapidly-falling share price, it has pulled the plug and suspended its AIM listing. Its bankers are being more sympathetic than the new accounting standard. The shareholders should brace themselves.