Liz Truss wants to see a cull of government white elephants. We would all like to see the herd thinned out, but she is financial secretary to the treasury, and so is in a position to load the elephant gun, even if she cannot fire it. There is no shortage of targets.

The biggest tusker stands out, despite its attempt at disguise. Hinkley Point C is the nuclear power station which is set to achieve the dismal double of almost bankrupting its builder while delivering power (if it ever does) at twice today’s price. Its cost will be hidden inside everyone’s electricity bill, as has already happened with renewables.

A study for the Global Warming Policy Foundation concludes that continuing the “dash for gas” policy of the 1990s would have cut CO2 emissions by the same amount as has the fashion for renewables which replaced it. The subsidies for green energy have simply pushed up prices, and since the cost is hidden, successive governments have blamed the power suppliers.

As the next tusker grows up, he is likely to outgrow even Jumbo Hinkley, into Britain’s vanity project for the 2020s. He is, of course, HS2, that gravy train for consultants, which has defied all attempts to justify its economics. While the rest of Britain’s network is in dire financial straits, this railway without a cause has led a charmed life, free of serious challenge by successive governments. If Ms Truss can bring this gleaming pachyderm into her sights, we would all be richer.

The others in the herd are mere calves by comparison. The satirically-named smart meters are so helpful to consumers that the companies are struggling to give them away. The subsidies on electric cars will have to be reversed if they ever catch on.

None of these money-eating behemoths is at serious risk from Ms Truss’s enthusiasm for slaughter, since they have seen off many chief secretaries in the past who made similar threats. Still, it does no harm to highlight a few of the state’s wealth-destroying projects. They help to explain why the UK’s economic growth is so pedestrian, even during the good times.

It’s grim in grocery

Of all the beggars’ sores on display in the high street last week, Sainsbury’s was the one that stood out. Look how badly we’re doing! Those beastly discounters are forcing us to merge with Asda! Think of how much happier we can make everyone,  with bigger profits for shareholders and happy, smiling customers rejoicing at lower prices!

Next month we shall see whether Andrew Tyrie and the Competition and Markets Authority are taken in by this guff, when they produce their first findings into a proposal to put 30 per cent of the UK’s grocery market into the hands of a single company.

Big mergers invariably disadvantage consumers. So whatever the grocers claim about passing on the benefits of scale, nobody seriously expects the deal to be waved through. However, there also seems equally little likelihood that it will be blocked completely, despite the compelling case to stop the UK’s second and third largest grocers from merging.

The Sainsbury argument is that Aldi and Lidl represent an existential threat. Both are much bigger than they look to UK shoppers, but so is Asda, owned by one of the world’s biggest grocers. Indeed, Clive Black at brokers Shore Capital argues that the merger is effectively a no-premium Walmart takeover.

Looked at this way, Sainsbury shareholders might be less keen to accept the terms, even if the CMA fails to force substantial sales of stores. As the company’s results showed this week, there is much for the management to do without the distraction of this anti-competitive deal.

Not a turkey after all

What a tip! While you were recovering from the turkey, this column picked the bones out of the Kier Group rights issue. The short sellers had driven the price down and stuffed the underwriters, who had to take up 62 per cent of the deeply-discounted shares at 409p, and then panicked out at 360p. At the end of the week the price was 380p, which looked too cheap, even for a construction company. They were. After a return to something nearer reality, they now cost 515p.

This is my FT column from Saturday

 

 

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…there’s bound to be far worse to come.
That just about sums up the sentiment as the year turns.  After all, it has not been much of a festive season for equity investors. Those who can still bear to look at their portfolios might prefer to eat more cold turkey than survey the damage the last quarter has inflicted on their savings. What looked, at the end of September, like another almost routine up year has turned into the worst for shares since 2008.

Suddenly, it seems, there are too many things to worry about. Rising interest rates in the US, tariff wars, faltering growth in China, too much debt everywhere, and the UK’s home-grown political crisis on top: it’s a decidedly unseasonal recipe. No wonder investors dashed for cash.

The dashing has been fastest out of domestic UK businesses. The lament of the shopkeeper has been well documented, but shares in housebuilders, insurance and utilities have shared a miserable Christmas. From an outside investor’s viewpoint, the sliding pound has compounded the damage into a truly grim year.

These are just the conditions for bargains in the January sales. Housebuilders mostly have solid-looking balance sheets. While nobody can understand the balance sheets of the big insurance companies, faltering life expectancy will be a bonus next year.

Now BT’s dreams of glory seem to be over, it may find it can make money sticking to the knitting instead. Land Securities, the UK’s largest property company, is at a seven-year low. The water and electricity companies shares are discounting the worst in their regulatory reviews.

In all these sectors, yields of six or seven per cent abound. Elsewhere, some are much higher: Dixons Carphone’s historic yield is nearly 10 per cent. A cut from the new CEO is odds-on, but the price is discounting much worse. Physical shopping may have to reinvent itself, but is not going to disappear.

The rise of the global passive investor has made exchange traded funds the largest single force in markets, amplifying swings in sentiment. To these investors looking in from overseas, Britain today sometimes seems like a place where the lunatics cannot decide who should run the asylum.

Yet crises always pass, and perceptions change, sometimes with dramatic speed. When that happens, and international investors armed with their ETF billions combine with M&A bargain-hunters purchasing cheap sterling to buy UK businesses, the turn could be as dramatic as the fall.

Constructing a case for Kier

A postscript on the year’s most unsuccessful rights issue, from construction group Kier. The shares had traded around £8 before the launch of a 33 for 50 issue at the deep discount price of 409p. In this uncompetitive corner of the City, these issues are underwritten as well as discounted.

In this case, raising £264m left £250m after fees, but as Lex pointed out, it was not the usual risk-free money. When shareholders subscribed for only 38 per cent of the shares, the price crashed to 346p, helped down by some enthusiastic short selling.

The underwriters had to take the rest, but even this disastrous result would have been less painful had they kept their nerve. They had their fees for the whole issue, but had to subscribe for only 62 per cent, so their actual break-even was just over 360p.

The 62 per cent was placed at that price, including to some grateful short sellers, and the shares quickly rebounded, ending the week at 395p. Assuming the stock market’s war on construction companies ends in 2019, Kier looks cheap at today’s 380p. So no triumph, but no tragedy, either.

Adult employees on the block

Sad festive season news for employees at the website Spankchain, which plans to use blockchain technology to revolutionise the porn business. The team is being cut from 20 spankers to just eight, although that might give a misleading impression of what they actually do.

Far from active service, so to speak, they are developing a virtual currency to “allow us to eliminate third party intermediaries and unfair payment practices” in the ahem, adult entertainment community. This rather stretches the definition, since porn is not generally a communal activity, but on Spankchain’s flotation nearly a year ago, the price shot to 71 cents. It’s now 1.4 cents, where it is worth $4m. Quite a hard hit, then.
This is my (slightly modified) FT column from Saturday. Happy New Year to both my readers.

The biggest puzzle in the fiasco of accounting for student loans is not how it was done, but how successive governments got away with this conjuring trick for so long. The loans did not count as government spending, even though three-quarters of the advances will never be fully repaid.

The book losses on the advances were to be postponed until the debt was definitely bad, 30 years down the road. On the other hand, the (theoretical) accruing interest was treated as tax revenue even though no money was actually received. Any sales of loans at a discount were not considered to be losses until the 30 years were up.

This is the sort of accounting sleight-of-hand that helped bring down Carillion, only with more zeros. The loan book is over £100bn, and expected to reach £473bn by 2049. Now the Office for National Statistics has decided that the government must come clean on the true cost.

Well, cleanish, at least. The ONS assumes that 38 per cent of the accrued interest will actually be paid, so it allows that slice of the advances to be classed as loans. The rest counts as spending, adding £12bn to the deficit in 2020-21, and much more in future years.

The chancellor must have known that this ONS ruling was coming before he embarked on his income tax giveaways last month, which he justified by the Office for Budget Responsibility magically finding a similar sum to slice off the forecast Budget deficit. It all reinforces the suspicion that Philip Hammond’s real plan was to give the money away before Jeremy Corbyn could.

Hammering the point

Nearly every trading day for the last five months, there has been a buyer of Hammerson shares, often in penny packets but adding up to 27m, or 3.4 per cent of the company. Unfortunately, this is not some stalker who can see hidden value in Hammerson’s emptying shopping malls, but the company itself.

And a fat lot of good the buying has done. When it started, the price was 531p. It’s now 337p, an impressive plunge even by the standards of a struggling sector. The buyback is the aftereffect of a nasty dose of McKinseyitis, which recommended exciting new things for the Hammers to do, after the board’s view of the bid for Intu went from “irrevocable” to “withdrawal of recommendation” in the blink of an eye.

The last accounts now read like something from another age, with nothing but blue skies ahead. The 25 pages of impenetrable guff from rem. com. chairman Gwyn Burr includes a bonus to CEO David Atkins for “outstanding leadership skills to deliver the Intu acquisition”.

We must wait until February to find out if there’s a clawback, although by then there may be more pressing concerns about the balance sheet. The way Paul May of Barclays does the sums, Hammerson’s gearing had already passed its self-imposed limit of 40 per cent in June, and the commercial property market has got much worse since then.

After such an annus horribilis, change at the top looks well overdue, but chairman David Tyler (£325,000 to augment his day job at Sainsbury’s) and CEO Atkins (£2m, less than he got in 2012, poor love) show no sign of departing. In July, this column asked: What, exactly, is Hammerson for? Silly question, really.

For Brexit, read Next

British businesses, 140,000 of them, should brace themselves for a letter from the government telling them what to do in the event of a no-deal Brexit. If it is anything like the previous official missives on the subject, the businessmen would be well advised to get on with something more productive, like reading the 11-page analysis published by Next, the UK’s most successful store group with sales over £4bn, last September.

CEO Simon Wolfson is a Brexiteer, but the paper insists that a hard exit is not the company’s preferred option. It concludes that port delays are the biggest risk to the business, but that it is manageable, and presents an opportunity to reform customs procedures. Assuming the government does rather more than send out 140,000 letters, the overall impact would be about sixpence on the cost of a pair of socks.

This is my FT column from Saturday

There were many aspects to George Osborne’s crowd-pleasing Budgets to dislike, but few promise to do as much long-term damage as his Help to Buy, that impressive example of economic illiteracy. In the face of a shortage of housing supply, the subsidy to buyers stimulated demand, pushing prices further up and creating an artificial two-tier market.

An analysis this week from brokers Peel Hunt showed the baleful result, and quantified just how successful Help to Buy Builders Yachts has been. In the years before the 2008 crisis, the sector made steady profits of around £2bn. The profits then disappeared, and did not regain that level until 2015. At that point, Mr Osborne’s big idea clicked in, and the profits took off. Houses financed by Help to Buy typically fetched a 5 per cent premium over the market price, which came straight through to the bottom line.

In the last four years the sector has more than doubled profits, to over £5bn a year, while building much the same number of houses as before the crisis. Help to Buy has transformed the trade’s margins, allowing dividends, which previously totalled around £500m in a good year, to soar to almost £3bn. Executives who happened to be in the right place at the right time have made fortunes, even at companies whose remuneration committees were more awake than those responsible for Jeff Fairburn at Persimmon.

This would matter less if some of the benefit had gone where it was intended, to the buyers of the overpriced homes. They are effectively being forced to gamble on a resumption of house price inflation, something the latest RICS survey cannot see.

After five years, the cost of the government help starts to rise sharply, to encourage owners to remortgage commercially or sell. If the homeowners cannot borrow enough or find a buyer at a profit, they will be looking for someone to blame for mis-selling them the loan. No prizes for guessing where.

Railing at the wrong target

London’s new railway is turning into very cross rail, as the traditional game of passing the blame gets under way. The scheme, commonly dubbed Europe’s biggest construction project, is late and over budget, and thus must be considered yet another example of Britain’s inability to build infrastructure.

This is silly. According to McKinsey, only two out of every 100 projects worth over $1bn comes in on time and budget. The average cost overrun is 80 per cent, and the average delay is two years. Crossrail was supposed to start last week, but 2020 now looks a realistic target. In 2012 the estimate was £15.9bn, and the latest budget increase only takes it to £17bn.

Unlike that other railway, the £100bn (just wait) HS2, that is hardly a runaway financial train. The London Olympics had to come in on time, and came in on budget by the simple expedient of raising it to four times the original estimate. By these standards, Crossrail is a model of how to do it.

How to raise productivity

We are constantly being told how hopelessly unproductive we are. The average worker in France or Germany produces much more per hour than the average Brit. Now it seems that while we do indeed lag those clever continentals, it’s by much less than we had been told.

The Organisation for Economic Co-operation and Development has looked at the way the figures are compiled and found that differences account for half the gap, which is thus not 16 per cent, but only eight. This is still quite a lot, and increasing prosperity requires increasing productivity, but measuring it in real life is close to impossible.

Information which previously took hours or days to gather is now available in a few clicks. How productive is that? Airline productivity may have risen dramatically, but mostly by forcing the passenger to do nearly all the work herself. Banks no longer employ armies of tellers, passing over routine stuff to the customer.

We should be grateful to the OECD for sparing some of our blushes, and producing this helpful research. But the organisation itself is something of an anachronism, and its highly paid, well qualified employees might find themselves more productive employment by closing it down.

Is there another big UK company that has been half as disappointing as GlaxoSmithKline? A business that once led the world in finding and developing pharmaceuticals is today reduced to expensive purchases of other companies’ research.

Its shares have gone nowhere for six years, and the question of whether the dividend can be maintained has taken the place of discussion of exciting new compounds. For a business highly placed in one of the world’s great growth industries, that is a sorry spectacle. Now Emma Walmsley, the newish CEO, has administered two doses of corporate action, but far from providing hope for a cure, they merely served to knock another 10 per cent off the share price.

If selling Horlicks looked sensible, the use of the proceeds (and more) to buy Tesaro, a developer of cancer drugs, looks like severe value destruction to Barclays’ analysts, among others. The deal is dilutive to earnings and painfully highlights GSK’s own shortcomings in research.

It is telling that the company felt it necessary to provide reassurance on maintaining the dividend (unearned, on some accounting measures), for a 5.6 per cent yield at £14.40. The balance sheet is not in the best of health, and GSK’s ability to sustain the payment in the long term must be in serious doubt. Moody’s downgraded the credit outlook after the Tesaro deal.

Successful drug companies do not yield 5.6 per cent. Unsuccessful ones do not yield 5.6 per cent for very long. On this week’s evidence, the prognosis is further financial pain for us chronic GSK shareholders.

Grayling’s chance to shine

Chris Grayling was most insistent. There was to be no more public money for HS2, Britain’s paper railway, going from London to Birmingham and thence who knows where or when. We never suspected that the current Transport Secretary had a sense of humour, but this is one of his better jokes.

Less funny was the drawn-out defenestration of the HS2 chairman, Terry Morgan, whose sacking threatened to take longer than he had been in the job, and is a fine example of shooting the messenger. Sir Terry is an engineer, and it is hardly his fault that the horrible financial truth of this benighted project is finally getting onto the political radar.

Infrastructure projects are worth doing only if they create more wealth than they destroy. Upgrading the rail network by straightening curves, removing bottlenecks and modernising signals produces measurable increases in wealth. Much of the money would be spent in the north of England, where it is badly needed.

Every published analysis has shown that HS2 returns less than the cost of its capital. Yet while the rest of the network is starved, it appears to have a charmed life.

For perspective, this week’s face-saving deal for Go-Ahead to spend £15m on “passenger improvements” to ease the misery on the home counties commuter trains amounts to 0.027 per cent of HS2’s £56bn budget, and nobody believes it can be built for anywhere near that price.

Mr Grayling knows that the figure is a fantasy, probably about half the final cost if it ever gets built. He also knows that he will be gone from the post long before the fiction is exposed. If he really wanted to do this job rather than his next one, he should scrap HS2 and divert a little of the money to solve the worst of the network’s problems. Then we would all be laughing.

He didn’t listen

Unilever’s CEO Paul Polman thinks that business leaders are too taken up with a “win-lose” mentality, and that the way ahead is to bring humanity into the executive mind. He explained to the FT’s Andrew Hill that company leaders of the future must “reach out and listen” to outside voices.

How very true. A little listening would have saved him the embarrassment of his climbdown over moving Unilever to The Netherlands. Had he reached out to investors in Unilever plc, rather than leaving finance director Graeme Pitkethly to tell us critics that we just did not understand, and that a minority was holding the majority to a form of ransom, Mr Polman would not have been forced into retirement rather earlier than he had planned.

This is my FT column from Saturday

 

 

The old adage about forecasting being difficult, especially for the future, might have been coined for the oil industry. A few short weeks ago, the price of a barrel of Brent had passed $80, and the speculators dreamed of $100. Now it is failing to hold on to $60, they are selling, and the end of the oil world is nigh.

It is not just the short-term expectations that have proved so wildly wrong. The 2008 World Energy Outlook from the International Energy Agency calculated that hydrocarbons provided 81 per cent of the world’s energy. A decade on, despite the trillions of dollars poured into alternative fuels, that percentage is unchanged.

As Nick Butler points out, the 2008 Outlook did not even mention the phenomenon that has transformed America from the world’s gas-guzzler to a net exporter of oil. The shale revolution was entirely unexpected. At the time, the expression “peak oil” meant the year when the world’s reserves would start to fall. Since then, the use has been turned on its head, to mean the date when oil demand starts to fall.

Wood Mackenzie’s analysts currently put that date at the late 2030s. For what it’s worth, the IEA forecasts that even by around that time, hydrocarbons will still be supplying three-quarters of a (much greater) world demand. We may be dazzled by the thought of electric cars (whether we really want them once the subsidies turn inevitably into taxation remains to be seen) but demand for oil for plastics, chemicals, construction and airlines will not be quickly replaced.

A thoughtful analysis from fund managers Ashburton concludes: “We believe the pullback in the oil price is transitional. This…confluence of normalised inventories, tight spare capacity and the lack of new oil from conventional projects – due to the collapse of capex from 2014 – will likely lead to tighter markets in 2019.”

It’s only another forecast, but it looks rather more plausible than the “end of the road for oil companies”. They are going to power the plant for a good few decades yet, and the price will continue to surprise us all.

Carnage at the Bank

Since this is the week for forecasts, Mark Carney deserves centre stage. The governor of the Bank of England should have known that the press would seize on his most pessimistic projection, rather as we always do with climate change, with apocalyptic warnings of impending doom.

The message that we shall all be poorer, not actually poorer, just poorer than we otherwise might have been had we done something else, is a tricky one to get across. The puzzle is why Mr Carney persists in “forward guidance” when his record is worse than that of a monkey with a pin.

The original Project Fear might charitably be seen as an honest mistake, which is a good deal less cynical than as a payback to the then Chancellor for giving him the job, but for an institution like the BoE, there is much to be said for saying less. It is not obliged to make forecasts other than those which are relevant to its remit on inflation.

This week’s Project Fear II merely hands more hostages to fortune. Whatever the UK’s position on April 1 next year, even if the shops run short of fresh veg from Spain and the M2 lorry park backs up to the M25, the sky is unlikely to fall.

It would be unkind to suggest that Mr Carney is thinking about dun’ governin’, now that a vacancy running Canada seems unlikely. Perhaps the IMF or the OECD might beckon. They both know quite a lot about the challenges of forecasting the British economy.

Comply or explain (or else)

Now pay attention. The chief executive is going to move up to become chairman next spring, at which point the property director will become CEO. The old CEO replaces the current chairman who has been there for 12 years. The new chairman promises to stay for only two more years, after which an outside candidate will be sought.

This is corporate governance at Derwent London, a successful commercial property developer, measured by the rather undemanding standards of the sector. As St Augustine did not quite say: Lord make me chaste and compliant, but not yet.

This is my FT column from Saturday

Takeovers are the vodka in the capital markets cocktail. They provide the kick to a worthy but dull mixture. They keep the pressure on complacent or incompetent managements and remind them whose capital they are using. They allow companies to evolve to meet changing markets.

They are also politically intoxicating. The merest hint of job cuts brings MPs of all parties out in spots and the lobbyists out in force. This is why the Competition and Markets Authority was set up with strictly limited powers to block deals. It can prevent too much concentration of market power, and cite national security, but not much else.

All this may be about to change. New proposals promise a much wider definition of of national security, ostensibly to meet the threats from foreign acquisition of sensitive technology. However sensible this may sound, the government’s irresistible urge to interfere would quickly extend the definition. As John Vickers, former director-general of the CMA’s predecessor, pointed out recently, the projection that 200 deals a year might face review, against the handful that do today, rather gives the game away.

The evolution of markets is already making contested takeovers (as opposed to agreed deals where top managements look after each other) extremely difficult, as Melrose discovered in its assault on GKN. Despite the egregious behaviour of the GKN board in trying to frustrate the bid, the margin of success was shockingly small. The ambiguous position of tracker funds and the prevalence of nominee holdings make getting out the vote so difficult that this may have been London’s last contested bid for a large company.

GKN had argued for “protection” as a defence contractor despite not being on the Ministry of Defence’s top 50 suppliers. New rules would make an appeal to national security much harder for the government to resist, and, like the vodka-free cocktail, remove a vital ingredient for efficient markets. 

White elephant news

And the news is that they are all fattening up nicely, ready for the chop. If only. First came the inspired idea for trimming a little fat off the world’s most expensive railway, the high speed link from London to Birmingham (and beyond!). Money can be saved, we’re told, by not running the trains as fast as previously promised.

Quite why nobody thought of this before is a mystery, but a speed of 225mph requires 8.8m diameter tunnels for noise and pressure reasons. Cut it to 143mph and you need only 7.5m diameter. One-quarter of the line to Birmingham will be in tunnels, so a lower speed will make a significant difference to journey times.

The speed may be falling, but the costs are rattling along. The latest guess of £65bn is just over twice the first sensible estimate in 2010, but even if the trains were to be walked through the tunnels by a man with a red flag, nobody expects that sum to be the final figure.

It is also a mystery that the project has got this far. Neither political party has ever objected, even as the justification slipped from “it’s faster” to “the existing line’s too crowded”. No outside study has ever found a convincing case for building it, and urgent projects on the rail network has been shunted into the sometime/never sidings.

Meanwhile, the nuclear financial meltdown that is Hinkley Point continues. The only positive aspect of the original deal was that the UK consumer would not pay for its ruinously expensive electricity until some was actually generated.

Even that is not enough, it seems. EDF, the French government controlled contractor, would now like us to start paying for it before we get it. Essentially all the cost of a nuclear station is incurred before any juice is generated, so financing the construction can be two-thirds of the final bill.

With a straight face, the EDFfers claim that this financing could make Hinkley’s electricity competitive with renewables. It wouldn’t, of course. It would produce the illusion of being cheaper, and would get EDF off a financial hook that may yet prove fatal.

Elsewhere, the National Audit Office has confirmed what everyone knew, that smart meters are merely a cruel nominative joke. This week the NAO’s report concluded that the programme is late, the costs are escalating and that the gains may be illusory. Just as well it’s only a baby white elephant.

This is my FT column from Saturday