It’s not much of an endorsement when a major shareholder announces a sale of your shares with the price at a five-year low. It’s even worse when your company takes half the stock itself. The company here is BT, the vendor is Orange and the shares the leftovers from the purchase of EE, itself a shove-together of T-Mobile and Orange UK.

These are unhappy days for Gavin Patterson, the man who looks like Hollywood’s idea of a CEO. Indeed, short of the regulator forcing the company to divest Openreach, its wires business, almost everything else is going wrong.

Following an accounting scandal in Italy and troubles with BT’s public sector business, there is our growing reluctance to pay more to speed up superslow broadband. Even the footie is not what it was. The great British couch potato had seemed impervious to price rises, encouraging Mr Patterson into a bidding war with Sky for the rights. Now, it seems, our appetite is not insatiable after all, as Sky reported a 14 per cent drop in the average number of viewers per game.

Saeed Baradar, of brokers Louis Capital, concluded last year that BT had no chance of recouping its investment and urged shareholders to sell. This month’s departure of BT’s head of TV, Delia Bushell, three months after spending £1.2bn on football rights, suggests he was right.

BT still hopes to raise its dividend by 10 per cent a year, but even maintaining it is starting to look like a stretch. And looming over everything is the vast pension liability from BT’s days as a public sector business.

Mr Patterson has already forfeited his bonus. Jan du Plessis joined the board this month, slated to become chairman in November. The first line of his official biography issued by BT notes that Mr du Plessis “oversaw the appointment of a new CEO in 2013, as a consequence of Rio Tinto’s first-ever annual loss”. Mr Patterson may soon be calling a Hollywood agent.

Argentina to default (but not yet)

If investors want to lend you money for 100 years, it looks rude not to take it, even at a yield of 7.9 per cent. After all, everyone on both sides will be long gone well before the stock is due for repayment. Argentina desperately needs the money, while the lenders are gambling that  things there will keep improving enough over the next few years to keep the stock up to par, or even better.

And yet…if ever there was a triumph of financial hope over experience, this is surely it. Two centuries ago Argentina offered Britain the Falkland Islands in return for debt forgiveness (the offer was turned down on the grounds that Britain already owned them) and the last century has seen debt crises in 1930, 1955, 1976, 1989, 2001 and 2014.

Those in charge of the sovereign wealth, private portfolio, pension and bond funds who constitute the buyers of such bonds nowadays will hardly care about history. The banks will collect their commissions and move on, while the fund managers will point to a lucrative income stream and Argentina’s improving economic management.

Say, for the sake of argument, that this time it really is different, and the next default is 12 years away. By then, the holders will have received $95 in interest payments on each $100 invested. A buyer of 12-year US Treasury stock will have received $30. So the Argentinian debt would have to be worth less than 35 cents on the dollar for the buyer to have done worse, even ignoring the time value of the higher interest payments. Not such a bad bet, after all.

More forward guidance

If Mark Carney and the Monetary Policy Committee had not halved Bank Rate in his post-referendum panic, would they be contemplating a cut now? The answer is obvious,  but Mr Carney is stuck with the political reality that to raise it back to 0.5 per cent is dynamite in this month of disasters. His chief economist Andy Haldane can take a more objective view. Put it down to continuing the process of softening us up for the inevitable rise. But if, as his boss says, now is not the time, when is?


This is my FT column from Saturday


Ah, those were the days. Here’s the chief executive of Mitie two years ago. We are “well positioned for growth.” And last year: The “business model is flexible, resilient, low risk”. It turns out that none of this was true. Risks were higher and profits much lower, and now the numbers need restating “to correct material errors“.

The CEO has taken her growth and resilience elsewhere, and the man from British Gas has come in, scrapping the final dividend to fix the leak in the p&l. Mitie is one of these frightfully modern businesses which grew fat on the back of government outsourcing, “managing and maintaining some of the nation’s most recognised landmarks” (and detention centres).

Winning the contract is one thing: trying to work out when, or whether, it is really profitable is something else. The accountants are having another stab at setting the rules here (IFRS15, if you want to show off) to discourage undue optimism from CEOs. With contracts that last several years, the temptation to take a rosy view so as not to disappoint investors can be irresistible.

No big outsourcer has resisted. Their published figures are deeply suspect, and the analysts are struggling to interpret them. Shares in rival Capita jumped 17 per cent last week (but are still half their peak) on relief that things are no worse than expected. Besides, as Morgan Stanley points out: “IFRS15 enables the writing off of accrued income (i.e. revenue recognised but not billed) from the balance sheet through reserves (so no prior year adjustment to the p&l). This revenue can then be recognised effectively under IFRS15 again.”

Neat, huh? Take the hit to reserves, and book future profits (assuming there are some) through the p&l. This should help Capita in its long search for a CEO, although he or she may still be unable to kick the outsourcers’ habit of booking profits before they are earned.

No Green legacy

Owen Green, who has died aged 92, was one of the two takeover kings who dominated the stock market in the 1980s. Less flamboyant than James Hanson, he was just as deadly, as he built BTR into an industrial giant, at its height the fourth most valuable company in the FTSE100. Victories included Thomas Tilling (then the biggest-ever UK takeover) and an ailing Dunlop, although glass-maker Pilkington managed to escape.

Running it with a small staff from a dreary 1960s block in Westminster, Sir Owen eschewed non-executive directors and corporate codes. His appetite for buying diverse businesses made it hard for outsiders to describe exactly what BTR did, and the sprawl of hundreds of individual companies reporting back compounded the pressure on his executive colleagues.

His fans saw him as a badly-needed champion of British manufacturing industry, while his detractors suspected BTR was an accounting confection, sustained by under-investment and rules which allowed takeover provisions to be recycled into profits. The group did not long survive his retirement, after 37 years, in 1993. More recently, he savaged the culture of corporate greed that had infected big companies while wages were being squeezed. There’s no sign of that changing.

Forward guidance: raise interest rates

At last, the folly of the Bank of England’s panicky halving of Bank Rate to 0.25 per cent following the referendum may be starting to sink in. The governor, Mark “forward guidance” Carney, may still be complacent, but three of the eight members of his Monetary Policy Committee voted for a rise last week. Perhaps they spotted that the Retail Prices Index, that measure the authorities would like us to forget, signals that inflation was up to 3.7 per cent in May.

Meanwhile the housing market is buoyed up on the toxic combination of the help-to-buy subsidy and the unsustainably low mortgage rates that flowed from last year’s cut. The longer this goes on, the greater the risk of a crisis for borrowers who lack the resilience to deal with an increase in mortgage costs. A return to “normal” conditions may still be a long way off, but one small step in the right direction by the MPC would be a good start.

This is my my FT column from Saturday


Sometimes, when a company comes to the market asking for money, you wonder how on earth it manages to find willing investors. The enterprise seems absurdly overpriced, or requires suspension of disbelief that defies rational analysis, so when AO World went public three years ago, the FT was not alone in musing how a distributor of washing machines could justify a glamour rating.

Such was the fight to get aboard that most investors were turned away, helping to create a scramble for stock, and a 40 per cent premium on the first day of trading, valuing the business at six times sales. It all looked very odd, from the £20m in fees (£12m to Rothschilds) it cost to raise £60m, the hefty share sales by the founder, and the highly unusual share register unearthed by FT Alphaville.

Reality, with a profit warning less than a year after the float, big sales of shares by directors, management changes and a £50m fund raising, is arriving. The bulls say that with the shares down by two-thirds, it has arrived. The bears still cannot see a case for just another durables retailer even now, and suspect that the sale of extended warranties on appliances which hardly need them is propping up the business.

Compared with last week’s other new issue disaster, AO looks like a success. The 2011 document describing the “value opportunity”  that became Genel Energy now reads like a parody of the South Sea Company prospectus. Perhaps it was not designed to confuse, although calling the company Vallares, and explaining that it was “modelled on Vallar, the cash shell” hardly helped, considering the labyrinthine structure of Nat Rothschild’s other vehicle.

This triumph of the dealmaker’s art extracted £1.33bn from supposedly sophisticated investors like Schroders, Blackrock and Scottish Widows. The founders, Mr Rothschild and BP’s former boss Tony Hayward, were awarded £164m in shares.

Genel has certainly been unlucky. The collapse in the oil price, war’s impact on its Iraqi concessions, and the failure of its major asset to live up to expectations have not helped. The woes have been compounded by internecine strife on the board, and from the £10 issue price the shares have collapsed to 89p today. Both men have now gone, and a third of the shareholders voted against the remuneration report.

The moral of these two sad stories of new issues is clear. If something looks absurdly overpriced, it probably is. And avoid any business with a structure that cannot be explained in a (shortish) sentence.

…and still on new issues

There’s quite a head of steam building up to stop Saudi Aramco floating in London. The company might struggle to comply with the Slavery or Bribery Acts, it might baulk at boardroom diversity, its governance might be suspect, its connection to London is tenuous, but the real problem is its sheer size.

Even if it is worth only (only!) £900bn, a float of the 25 per cent minimum needed for a “premium listing” and inclusion in the FTSE 100 index would make it the biggest constituent by a country mile. Even the mooted sale of just 5 per cent would test the depth of London’s markets.

The UK Investment Association argues that this too small a slice for inclusion, but this is a canard. The rule was designed to discourage companies of dubious parentage and poor liquidity, while Aramco is a well-established, properly-run business. There would be no practical difference between 5 per cent and 25 per cent from a governance viewpoint.

Nobody has to buy this share – except, of course, the tracker funds, if it’s in the index. To which the obvious response is: tough. Tracker funds are supposed to follow the market, not to lead it down the cul-de-sac of passive investment. Nobody has to buy a tracker, either, while Lex calculates Aramco’s weighting at a 5 per cent float as about the same as National Grid.

Besides, there is much more at stake here. Aramco could be the first major premium listing since the Brexit letter. The decision will be interpreted either as a symbol that Britain is open for business, or that one of the world’s most important stock markets is inflexible and turning inwards, just as the remainers always feared.

This is my FT column from Saturday.


British Airways strands 75,000 passengers, produces an explanation as solid as a paper aeroplane, and sees its reputation trashed. This triple whammy was surely enough to poleaxe the share price of IAG, BA’s parent. Except it did nothing of the sort.

The morning markdown last Tuesday quickly produced buyers, and by Wednesday lunchtime the price was back to the previous Friday’s close. Even with the company wading in for its buy-back programme, this looks a curious response by the market. After all, compensation claims could top £100m, while the damage to a reputation already dented by irritating cost-cutting measures will take years to restore.

Yet the market’s response is not irrational. The conclusion traders drew was that the misery inflicted and the incompetence shown doesn’t really matter. The world’s major airlines have a powerful position in a growing industry. If it is not quite an oligopoly on long-haul, there is at least an argument that they are not competing so hard as to damage the bottom line.

Bloomberg’s Matt Levine has a theory that since the major US airlines are largely owned by the biggest fund management groups, it’s in their interest to see all carriers’ earnings improve. “An airline that cuts fares or spends money on better service to win market share isn’t necessarily doing its shareholders any favours.” He quotes airline analyst Jamie Baker at JP Morgan Chase that competition nowadays has more to do with winning an investment grade rating, or entry into the S&P 500, than with serving customers.

This would help explain why flying on American airlines is so ghastly. It does not take into account the growing, subsidised Middle Eastern carriers on long haul, or the thorough drubbing inflicted on BA by the low-cost carriers in Europe. As Alitalia has proved, the so-called flag carriers are still struggling to find a convincing response to this problem. However, the stock market’s response to BA’s little local difficulty suggests that inflicting misery on the passengers is not something that bothers investors unduly.

Don’t cry for me, Venezuela

When it comes to beating up Goldman Sachs, any stick will do. Last week’s, wielded by Ricardo Hausmann, a former Venezuelan government minister, accuses the bank of buying “hunger bonds” a melodramatic description of the purchase of some distressed debt, described by the country’s opposition lawmaker as “making a quick buck off the backs of the Venezuelan people.”

This is a bit rich. Goldman’s asset management arm reportedly paid 31 cents on the dollar for 6 per cent bonds issued in 2014 by the Venezuelan state oil company and which, bizarrely, had been held by its central bank. Given the parlous state of the country’s economy, a quick buck is not the most likely outcome. Crudely, the purchase price says default is twice as likely as repayment.

Venezuela is a shocking example of how bad and corrupt government can ruin a country regardless of its natural wealth, but other attempts to force change in repressive regimes by cutting off access to international markets have not ended well. If and when Venezuela’s nightmare ends, agreement with the bondholders will be part of the solution. Goldman, like Tom Lehrer’s old dope pedlar, will then have the chance to be doing well by doing good.

Not just one way, after all

Warning: the value of your investment can go down as well as up, and past performance is not a guide to the future. This familiar rubric is not usually associated with house purchase, but after three straight months of decline, it should be. The ingredients for a bear market, starting in the buy-to-let flats sector, are all there: a worsening tax position, waning interest from overseas and a dramatic increase in supply.

Nowhere is this more apparent than along the south bank of the Thames near Battersea Power Station. Its four chimneys have been brilliantly rebuilt, Apple is moving in and the American embassy adds cachet to the area, but the sheer volume of 20,000 new flats is putting downward pressure on rents. Buyers who paid a deposit to buy off plan, looking to flip the purchase before the bill arrives for the balance, face a painful back flip instead.

Last week was clean energy week at the FT. Well, a three-day week actually, but a conference covered the whole energy industry. Look carefully, and you will have spotted a session on nuclear generation, which was at least more than in the paper’s double-page spread ahead of the event. That managed but a single mention of the n-word.

Nobody outside the industry now thinks the future of electricity generation is nuclear fission. The cost of building the plants to comply with safety and anti-terrorism standards is rising all the time, fears of a runaway price for oil and gas now look silly, while advances in wind and solar technology are destroying those projections of ever-dearer energy.

On the same day as the Big Read on energy, the FT reported the appointment of nuclear critic Nicolas Hulot as France’s new energy minister, sending the shares in EDF down by 7 per cent. EDF, of course, is the contractor for that white elephant in the nuclear room, Hinkley Point. If this unproven design ever gets built and produces electricity, the UK consumer will be obliged to pay over twice the current market price for the output.

Hinkley Point was conceived when “peak oil” meant peak supply, and conventional wisdom said that we would start to run out. The term now means the opposite; hydrocarbons are more abundant than we ever dreamed, and peak demand for oil may be less than a decade away.

At the same time, the electricity supply market is changing. The assumption that the grid must be capable of supplying whatever is wanted looks increasingly wasteful. Rather than manage supply, technology allows management of demand. A smart meter would run the dishwasher or charge your electric car when it detected that the cost of juice was low. Unfortunately today’s so-called smart meters, now being rolled out at a hidden cost to consumers of £11bn, are too stupid to do this, and may be vulnerable to hacking.

The UK’s energy market is in an unholy mess, with attention distracted by the vacuous debate about switching electricity suppliers. The real costs lie with the “green initiatives” at the other end of the wires. Scrapping Hinkley Point would not solve all of them, but it would be a start. Perhaps best to wait until after June 8 for another U-turn from Mrs May, though.

We’ll pay you to go away

Aviva shares are close to a nine-year high, so obviously it’s just the right moment to embark on a share buyback programme. With the sort of timing that might contribute to the miserable returns in its internal investment funds, the company is to spend £300m buying in its own stock. This will more than offset the dilution from the last lot of executive awards which vested in March, and which produced such modest gains for the incentivised executives.

They must hope that a new lot of incentives do rather better. These are altogether beefier, with nearly 3.5m shares available at 530p. One day, maybe, CEO Mark Wilson and his team will restore Aviva to its former glory. With him at the helm, Aviva shares have more than doubled, but at 533p are still only half the price they were at the turn of the century.

Vultures can be Co-operative too

The vultures are nibbling at the crumbling carcase of the Co-operative Bank 11 per cent subordinated notes, due 2023. It’s not four years since these bonds were issued at £100 as part of the “liability management exercise”, or rescue, and so high were the hopes then that they went to a useful premium.

Now the bank needs rescuing again, and the bonds have collapsed. With the bank’s equity essentially worthless, the bondholders are next in line for pain, and the price fell to £27, at which point the vultures read the 700-page prospectus, got interested and pushed it back up to £37. These bonds are not so much an investment as a high-risk gamble that the next liability management exercise will be the last, and that the bondholders will end up with shares in a profitable bank. Vultures have their place, after all.


A stock market is for the exchange of stock between willing buyers and willing sellers. Obviously. Beyond encouraging the buyer to pay up and the seller to deliver, an exchange’s managers, like those in a dating agency, might feel it’s hardly their fault if things don’t work out. Yet as with a sustainable relationship, businesses contemplating a listing on the London Stock Exchange need stamina and determination as well as a refusal to be shocked at the cost of getting into the club.

There are more rules and disclosures than the customers of the original coffee house could ever have dreamed of, many of them designed after bitter experience. The embarrassment of the last mining boom, especially the governance disaster that was ENRC, is still fresh enough to make the LSE risk-averse for new issues. That’s on top of company law and government-inspired targets or aspirations. If you can’t meet them well, tough, we don’t want your business.

Then there is Aramco. This is the world’s biggest Initial Public Offering by a country mile. Only London and New York have capital markets deep enough to find the hundreds of billions of dollars that the sale of even a minority of Saudi Arabia’s monopoly oil company will raise.

We have yet to see the details of this extraordinary IPO, or indeed, much in the way of any meaningful financial figures, since even the size of the oil reserves has been considered a state secret. Disclosure may fall some way short of that required from a UK company seeking the premium listing a business of this stature would warrant.

Pledges on compliance with the Modern Slavery Act 2015, the Bribery Act 2010, or conflicts of interest rules under the Companies Act 2006 may be difficult to extract. Then there are the more awkward “comply or explain” areas like gender diversity, the renewed Tory manifesto proposals on worker directors and the UK corporate governance code. None is likely to appeal to the Saudi rulers.

Yet the thought of Aramco not listing in London is too horrible for the LSE to contemplate. Fresh from the latest failed merger with Deutsche Borse, it is in no position to dictate terms. Fortunately, the sheer size of the business may save the day. Aramco’s market capitalisation would swamp the FTSE100, making this index even less relevant to UK plc than it already is. Only a small fraction of the company’s share capital will be sold, so it will be caught by the “free float” rule. If that’s not enough to square the circle, another way will surely be found. A stock market is for the exchange of stock, after all.

Bye-bye buyback?

The average share buyback is, in effect, a reward for some shareholders to go away at the expense of those who remain. The motive for the executives is the kicker this process produces in earnings per share, routinely a key metric for at least one of their panoply of rewards.

For the bank advisers, there are commissions, plus the handy bonus of a guaranteed buyer for their marketmakers to trade against. Standard practice dictates that the company earmarks a total to be spent, and then keeps buying until the money’s all gone, almost regardless of price. When share prices plunge, it’s quite common for boards to panic and suspend the buyback programme, thus missing the moment when long-term shareholders would actually benefit.

Even so, it’s something of a surprise to find a proposal in the Tory manifesto to do something about this dubious practice. So far, it’s only “commissioning an examination” to see whether the shareholders benefit. Best of luck with that, but at least it’s a start.

Think of it as a bridging loan

When it comes to pre-election bungs, the policy to scrap the tolls on the Severn bridge must have looked irresistible. Faced with the novel prospect of winning seats in Wales, the Tories can suddenly beiieve that removing this barrier to Anglo-Welsh trade is worth £100m a year. Apparently this economic magic does not apply to crossings of the Mersey, Humber, Tyne, Tamar or Thames at Dartford. No language barrier, perhaps.


Should Jeremy Corbyn want an example of the spoils going to the few not the many, he might look at the document which rams together Standard Life and Aberdeen Asset Management. As a result of this lovey-dovey £11bn merger, 800 people will lose their jobs.

Whether or not the departing hordes added much value, the jobs were not the zero-hours, unstable or badly-paid ones that Mr Corbyn so dislikes. The departees include only a modest cull of the directors, since eight from the dozen on each side will step up to the board of the new Standard Life Aberdeen. Presumably the first resolution will be for a new boardroom table.

The beneficiaries are rather fewer in number. The managers share a £35m bung to stay, and once the inevitable infighting has cut the board down to a manageable size, the directors will get more, because it’s customary to pay mega-rewards at the top of mega-corporations. The big winners are the usual suspects among the advisers, who have cranked up the fees to a magnificent £74m. This handy sum is split between Goldman Sachs, JP Morgan and Credit Suisse, plus assorted lawyers and PR advisers.

Well, it was jolly hard work. The bankers had to agree with both company boards who had decided that putting two of Scotland’s finest together was a good idea, and that the shares were already priced at almost exactly the right terms. Then followed the trickier business of persuading the shareholders not to make a fuss at the lack of any premium. Pointing out the £200m saved by firing all those superfluous employees doubtless helped.

The shareholders seem strangely resigned to their fate. They certainly can’t see some glad, confident morning; after an initial twitch, Standard Life shares are lower now than they were on March 6 when the deal was announced. With Aberdeen shares trailing along, the proposed merger has, so far, destroyed shareholder value as well as those jobs, and in a continuing bull market. There is still time for the whole thing to fall apart, although apathy is the way to bet. Mr Corbyn might pay attention.

Forecasting is hard, especially for the future

It’s a paradox of economics that the worse economists’ predictions turn out to be, the greater is the demand for more of them. The forecasts from the UK Treasury are treated with almost holy reverence on Budget day, even though the previous predictions are often shown to be comically inaccurate (worse, on the whole, than those from Capital Economics, for example, who are currently forecasting an early interest rate rise). The projections for later years are little more than wishful thinking, but still carry weight because they are “official.”

ING bank asked YouGov to find out what we think of the dismal science. Over half with a view said they didn’t trust economists’ opinions, although an encouraging 40 per cent said they understood media discussions of the subject. Three-quarters of respondents believed economics should be taught in school. They were not asked which subjects should be dropped to make room in a crowded curriculum.

We claim to have a good understanding of the consequence of a fall in sterling or government spending cuts, while understanding the consequences of Brexit produces the now-familiar 50-50 split, this one between those who think they know and those who know they don’t. Economists will argue that there is more to their trade than forecasting. With George Osborne’s Treasury-backed predictions of disaster to follow a vote to leave now looking like a bad joke, perhaps that’s just as well.

No whining, please

I am member number 59363 of the Wine Society, and should I die today, my estate could cash in £74.79 of accumulated profits. Unfortunately, the 2016/17 accounts reveal that there were no profits last year, thanks to a blunder in 2010 when the pension scheme benefits were capped. Despite the legal advice at the time, it now seems that the cap didn’t fit after all, and the result is a nasty hangover in the p&l. Sadly, there is no suggestion in the accounts that the (unnamed)  advisers should stand their round.