So the bankers to defence group Cobham have duly helped themselves to their pound of flesh. Last week’s fund-raising continues the fine tradition of price-gouging your customers, as taught to the City of London by the Americans after Big Bang in 1986.

Two years ago Cobham, advised by Bank of America Merrill Lynch, spent $1.5bn on Aeroflex, an American maker of electronic test equipment. To say the purchase was not all the buyer and its adviser had hoped is something of an understatement. The debt taken on has helped push Cobham to the brink, and the result is a rescue rights issue to raise £507m.

BofA is on hand again, but the terms, one new share for every two at a 45 per cent discount to a market price which had already priced in the cash call, are a fine example of the banker’s art. Together with the underwriters and advisers, the bank is charging £20m to cover the possibility that Cobham shares will collapse again in the next fortnight. This travesty of underwriting risk may be the norm, but it is little more than a tax on shareholders for the benefit of the banks.

There’s more. Bizarrely, Cobham is to pay the same dividend, spread over the increased share capital, at a cost of £126m, or a quarter of the net proceeds. This sum translates to 7.4p a share against a rights price of 89p, although to call it a yield is nonsense, since the payment is clearly unsustainable.

Finally, there is the curious case of the departing finance director. Simon Nicholls, Cobham’s FD since 2013, had been head-hunted by Wolseley in January but last week the buyer turned shy and said he would no longer be joining the company. He cannot escape some blame for Cobham’s troubles, but it appears that BofA can. He is out of a job, and the bankers, as usual, are counting their money for old rope.

A very odd Alliance

There are far too many investment trusts. The industry has a long tail of companies which do little more than provide sinecures for the directors, because contested takeovers are almost impossible. An approach to a poorly-performing trust will trigger liquidation unless the price is close to net asset value, while a bidding board must ask whether it is in their shareholders’ interests to take on an unattractive portfolio without a substantial discount.

The approach from RIT Capital Partners to Alliance Trust looks like this problem writ large. Jacob Rothschild’s RIT boasts much better performance, a clearer idea of what its managers are trying to do, and better PR. For years Alliance’s management ignored shareholders’ concerns, spending freely to fend off the activists from Elliott Advisers before capitulating.

A new board has shaken down the management, launched a strategic review, and seen some improvement in the performance of the portfolio. The review covers outsourcing the investment management (perhaps to a group like RIT) and the future of Alliance Trust Savings. The flat-fee charging structure of ATS is as attractive to us as customers as the trust’s long-term performance has disappointed us as shareholders.

It is not clear what, if anything, a takeover by RIT would bring to the party, and from the Rothschild camp’s signals this week, it does not seem clear to them either. RIT shares trade on a small premium to net asset value, against a discount for Alliance, but after the news broke, the difference narrowed to the point where the costs would eat any gain.

A share offer from RIT without a cash alternative at close to NAV could be easily defended by the Alliance board. With such a cash alternative, RIT would be obliged to sell the most liquid holdings in the Alliance portfolio to pay for it. The inevitable disruption costs could outweigh any gain to RIT’s existing shareholders.

The Alliance board could fairly point pout that the strategic review might produce a more attractive alternative. It could point to Alliance’s lower expense ratio, and to the Morningstar research showing that the best indicator of future outperformance is a low level of fees. It is unlikely that RIT’s managers would welcome a move from St James’s Place to the joys of Marketgait in Dundee.

This is my FT column from last Saturday

 

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