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There’s only one question vexing stock markets today: inflation. Is it, as the Bank of England wants us to believe, a blip which can be safely ignored as one-off price rises sweep through the economy? Or is it a sign that, like a sleeping dragon, if you poke it often and hard enough, it will wake up and bite you?

In truth, nobody knows, and there is plenty of (weak) evidence to support both theses. The arguments are being rehearsed endlessly. Will wage growth somehow turn into better use of the UK’s notably unproductive workforce? Are the supply shortages simply an example of the old adage that today’s shortage is tomorrow’s glut? Will the gains from global supply chains and digitising the economy continue to bear down on company costs as they have for the last decade?

The latest jump is dramatic enough to force the Bank governor to write to the chancellor to explain why he’s doing nothing about it. This will exercise his facility with the language, since central bankers are supposed to be prudent above all, so he and the Monetary Policy Committee are taking quite a gamble.

Asset prices are afloat on a sea of near-free money, which the Bank is continuing to manufacture. Not only are interest rates almost too small to measure, the programme of buying in government debt continues apace. This may turn out to be the right thing to do as the economy recovers, but it is self-delusion to deny that this is a high risk strategy, and measured by any conventional means, is asking for trouble. We can only hope the dragon isn’t paying attention.

No takeover: please stump up £1.2bn instead

As a defence against an unwanted bid approach, it at least had the advantage of novelty. Rather than invite the shareholders in easyJet to consider whether they might like to be taken over by Wizz Air, the management hit them with an offer they couldn’t refuse, to put up £1.2bn or see their holding diluted out of slight.

The price went down like a stricken jet, from 630p to 560p. By the end of this week, the shares had pulled out of their nosedive, but at around 600p the business is valued at £2bn less than it had been before the rights issue struck – so a loss of value of £2bn to raise £1.2bn in new equity. Such proportions are usually a clear indication of a corporate rescue. The prospectus, complete with its 27 pages of risk factors to make shareholders’ blood run cold, is a splendid example of the investment banker’s art. It details the offer to shareholders of 31 new shares for every 47 they own at 410p, a price which ensures that they must either put up or cut their losses.

Just to make sure the company gets the money, the issue is underwritten. The clutch of banks cannot have taken much persuading to sign up, since they receive most of the £39m in fees for the issue. With unconscious irony, the prospectus states that “Shareholders will not be charged expenses by the Company” (but they will pay them anyway). The banks’ risk is that the share price plunges again, but it needs another 30 per cent collapse before there are too few buyers at 410p apiece.

Well, banks are there to make money, and moments of crisis provide their best opportunities. EasyJet really is all over the place. The initial announcement of the issue was stuffed with corporate boilerplate about recovery from Covid, prospects for growth and expansion and uplifting rhetoric, but was noticeably short of actual numbers. It read more like a desperate attempt to fix the company’s unique problem.

That problem is called Stelios Ioannau, the airline’s founder and 25.34 per cent shareholder, who has been at war with the board for years. The rights issue will cost him £315m to maintain his stake. If he fails to find it, he becomes merely another shareholder, a nuisance value the board can ignore. It seems likely that John Lundgren, the airline’s CEO, saw the approach from Wizz Air as the chance to solve easyJet’s financial problems and to rid him of this turbulent priest. If so, he may be right, but his shareholders are paying a ruinous cost to preserve the independence of an airline that they might prefer to become part of a more successful group. He has forced them on board, but they are paying an eye-watering fare to indulge the captain.

A small step in the right direction

Good news, up to a point: house prices fell last month, making them slightly less unaffordable to the next generation of home-buyers. Well, up to a point indeed. The prices fell a bit because of the end of the wretched stamp duty holiday, a ruinously expensive government policy where essentially all the benefit went to the sellers, who raised their prices to compensate for the cut in transaction costs. Today’s buyers may see a lower sticker price, but their total cost will not change.

This effect was predictable (and widely predicted) as was that from the other misguided policy, of Help to Buy. That too stimulated demand, allowing housebuilders to bump up their prices, in some case leading to a doubling of profit margins. This week’s proposal from the Centre for Policy Studies of “Homes for Heroes“, to encourage the building of 250,000 homes, many for rent for key workers, at least has the merit of acting on the supply side of the equation.

Finding the workforce to build these homes is something else. The cartel of big housebuilding companies effectively controls the supply of new properties, and the last thing they want to see is a sustained fall in prices (and thus profit margins) to allow wider home ownership. Recent surveys have shown there are plenty of sites with planning permission if the builders really wanted to raise their output to tackle the shortage. They don’t.

Perhaps you didn’t notice, but we had a Budget this week. In an exciting break with tradition, it was delivered by the prime minister rather than the chancellor, but a Budget it most certainly was. When the chancellor stands up to deliver his own version next month, he will be merely going through the motions, because there is so little new to say beyond filling in the ugly details. Whatever Rishi Sunak really thinks about his boss’s pre-emptive strike, to take the state’s share of spending to a 70-year high, this is the clearest triumph of politics over economics we are ever likely to see.

There is no logic in raising National Insurance contributions rather than income tax. The political calculation is that we will think that half of the 2.5 per cent increase will be paid by our employer, so it somehow doesn’t count as a tax on income. This is clearly nonsense. In addition, NI is still associated in the public mind with welfare in old age, so that those puzzling over why their take-home pay has been cut when taxes have not been raised may be bamboozled rather than resentful. Their confusion is understandable.

Rather than take an opportunity to make the tax system comprehensible to ordinary mortals, the introduction of a specific levy for a specific purpose makes it even more of a nerdy accountant’s delight. Besides, by the time we are asked to vote again, some of this week’s thumping tax rises will have been reduced, allowing our chameleon of a prime minister to claim, once again, to be at the head of a party committed to low taxation. The sad fact is that, collectively, we are likely to believe it.

No commentator defended the rise in NI over the more honest rise in income tax, and the surprise rise in taxes on dividends did little to disguise the blatant attack on younger, lower-paid workers to the benefit of the well-heeled retired. Once again, the government has failed to challenge the belief that the rise in the value of your house is somehow the result of your efforts, thus giving you the right to pass it on to your ungrateful offspring (who will sell it as soon as you die).

The biggest wedge is the divide between the older, Tory-voting home owners and the aspiring next generation. Already widened by government polices like help-to-buy builders’ yachts and a stamp duty holiday which merely accelerated rising property prices, these tax rises open it further.

Ordinary Budgets come with a proper debate and a Finance Bill which is picked over by both houses of parliament. This one was not seriously debated, being bounced through the day after we first saw an outline of the contents, just ahead of an expected reshuffle of government posts. No aspiring Conservative politician, however disgusted she may be at belonging to a party whose leader believes that more state spending is the answer to almost everything, dare risk being caught in the wrong lobby.

This was truly a dramatic re-writing of the fiscal rules. It conforms with the emerging Johnson doctrine of “policy is what I say it is today”. It is hard to imagine that a Corbyn administration would have dared to impose more punitive taxes, including the previous increases, than we have now. Boris Johnson may not be explicitly punishing the wicked capitalists who make the economy work, but the effect is the same.

I weep for you,’ the Walrus said:
      I deeply sympathize.’
With sobs and tears he sorted out
      Those of the largest size,
Holding his pocket-handkerchief
      Before his streaming eyes.

A bottomless pit

There is a popular belief that if only the National Health Service was given a big enough dollop of cash, the queues would melt away, staff would stop complaining about overwork, and that running it would be cheaper in future. This is a myth. The NHS is a bottomless pit, capable of absorbing more money than any administration can ever throw at it.

Covid has made things worse, but the figures from the Institute for Fiscal Studies are as scary as the disease. A decade of “Tory cuts” has seen health and social care cost rise from 32 per cent of day-to-day state spending to 44 per cent after the latest injection. For the last 40 years, no matter how much more was allocated to the NHS in the annual spending review, the actual growth was nearly always greater. Reforms come and go almost as fast as health secretaries, making no measurable impact on outcomes, while queues for treatment get longer.

This malaise is a common feature for monopoly suppliers. The customer is reduced to the role of supplicant, grateful for what he can get when he finally arrives at the front of the queue. Think BT in the days when you had to wait to get a telephone, or to pay a bribe for a weekend engineer. The water companies are demonstrations that private sector monopolies are just as bad, enriching their owners at the expense of the environment.

Introducing competition in health is very difficult, because as individuals we need healthcare most just when we are least able to afford it, but the current monolithic structure guarantees an insatiable demand for more, regardless of how much we throw at the NHS. No other developed country has followed the UK’s example. Looking at where we are, that’s no surprise.

Name that trust

There are few things quite as irritating to the long-term holder of a share than a change of name. Two changes in a decade means that the holder is unsure whether the share certificate is worthless or is actually in some soaraway stock he’s never heard of.

Tracing is a lot easier than it used to be, but it’s still a pain. It’s made worse when the name change produces something faintly ridiculous. So it’s goodbye Standard Life UK Smaller Companies Trust, and hello abrdn UK Smaller Companies Growth Trust, which not only incorporates the risible new name for Standard Life Aberdeen, but slips an extra aspiration into the title.

A name change was needed following the sale of the Standard Life name to Phoenix, as the old life assurance company is sent to the abattoir, but nobody seriously expects the abrdn name to survive its relentless teasing for long.

Companies generally change names to draw a veil over past misdemeanors; this week we saw some sparkling results from Vistry. Who they? Please don’t remember them as Bovis Homes, builder of the shoddiest houses in the industry. All behind us now, says the new management, but stuffing the customers appears to have done little damage to the share price, which has returned 14 per cent compound over the last decade, according to Morningstar. Perhaps that’s a useful feature of housebuilding: you don’t expect any repeat business, so why care?

Anyone with the right qualifications can call themselves a firm of accountants. There are millions of them across the world, but there are only four that count. In no other field of business, even including the vast US banks, is there such a concentration of market power as in the not-so-fab four, Deloitte, KPMG, EY and PwC. The first two have been hit with $80m fines, EY failed to see the looming disaster at Wirecard, and PwC is resisting accusations of failing to spot fraud at a racing car company.

This is market failure on a grand scale; worse still, if one of them makes a monumental mistake, the only practical response is to bring in one of the other three to do the post-mortem. When construction group Carillion failed in 2018, both KPMG and Deloitte were conflicted, further reducing the choice. To rub salt into the wound, fees for dealing with the failure amounted to £72m (with £17m going to PwC) and KPMG has this week been accused of providing “false and misleading information” to its regulator, the Financial Reporting Council.

How on earth did we get here? There used to be a big five, until Arthur Andersen was brought down in the wake of the Enron scandal. Even five looked too few, but the last merger, to create PwC in 1998, somehow failed to attract the regulators’ attention despite heavy criticism in the financial press. Today they have over a million employees between them, and it is practically impossible for one of the four to be allowed to fail. EY is the leading candidate: it faces a £1bn legal claim after the collapse of NMC Health and Finablr in the UK as well as Wirecard in Germany.

The competition authorities are, belatedly, trying to do something about what is effectively a cartel. The FRC has introduced guidelines to beef up audit and discourage its use as a gateway to lucrative consultancy contracts. The result may be better audits (we’ll see) but the immediate impact is a dramatic rise in audit costs, plus a reluctance among the big four to take on difficult clients. Actually forcing a real break-up seems as far away as ever.

Besides, a whole new industry is opening up for the big four. Mere numbers are no longer enough today. Public companies must show they are good corporate citizens, so here comes Environmental, Social and Governance reporting. and who better to ask than the accountants? Companies can wave their ESG certificates alongside their clean (if incomprehensible) audit reports, to counter protests from “stakeholders” who may have no financial interest in the business.

Meanwhile, the ESG bandwagon has sprung a nasty puncture. It is a “dangerous placebo that harms the public interest”, thinks Tariq Fancy. He could be safely ignored but for the inconvenient truth that he was in charge of sustainable investment at Blackrock, the world’s largest investor, whose boss is frightfully keen on green. He describes ESG investing as “a fairytale.”

Even before it gets going, ESG is riddled with problems over definition. Your ESG fund may eschew tobacco and armaments, but does that prohibition extend to the companies making aircraft landing gear for planes, or tyres for the wheels? Chipmaker Nvidia scores highly on the ESG scale, but its customers include bitcoin miners, who between them consume as much electricity as Denmark in their search for the next coin, an essentially valueless waste of energy.

Still, never fear. The answers to all these knotty problems will be found in the new departments of the big four accountants, who will package it up with a ribbon at £800 an hour.

Boys from the black stuff unite

The North Sea oil producers could have picked a better moment to launch their fightback against the forces of extinction than just ahead of next month’s greenfeast at the COP26 conference on their doorstep. Still, they have to get their message across at some point or we’ll be once again dependent on those cuddly people from Russia and Saudi Arabia.

The political problem facing the UK government here is acute. So far, it has resisted pressure to stop a coal mine in Cumbria or to rescind development permission for the Cambo oilfield offshore Scotland, or to try and lean on Britain’s dwindling oil exploration sector to dwindle faster. All three provide ammunition for those who believe that salvation lies with stopping the UK’s output of fossil fuels. It’s a worthy aim, since we’d all prefer to save the planet, but even if the protesters force a government climbdown, it will make no difference to the outcome except to make Britain poorer.

The Cumbrian coal will be used to make steel, not to be burnt in a power station; the Cambo field is only going to slow the fall in North Sea output; and stopping it altogether would not affect what we burn. This is surely the point. Instead of keeping jobs in the domestic exploration and production industry, the value of the output would go elsewhere, effectively providing a boost to the regimes in Russia and Saudi Arabia either in higher prices or in the opportunity to raise their output.

This should not need to be spelled out, but the protesters can point to the UK’s climate change legislation, which demands carbon neutrality by 2050. No realistic projection has ever shown how this can be done, while the Committee on Climate Change, the unelected body which is calling the shots here, has resisted attempts to publish its workings behind its bland assertion that it is all possible at a cost we’d hardly notice.

Still, our dear prime minister will want something to grab the headlines and get him round the COP corner, so here’s an idea: propose the devolution of Scottish oil to the Scottish government. That should put the environmental cat among the coalition pigeons of the SNP and its new chums the greens.

“We can’t think of anything constructive to do with the company’s money, so we’re giving it back to you, dear shareholders.” Few boards would put it quite like that, but it is the logic that propels companies to buy back their own shares. Buy-backs decrease the number of shares out there, which ought to push up their price and make the remaining shareholders better off.

Well, maybe. You could also say that the company is paying some shareholders to go away, at the expense of those who remain. A pair of American academics musing about the answer to life, the universe and everything in stock markets, wondered why prices are forever jumping about. Their answer is not 42, as you might expect, but depends on the balance between companies buying back their own shares and selling more of them. Almost everything else is, according to Xavier Gabaix (Harvard) and Ralph Koijen (Chicago) in their near-incomprehensible prose, just noise.

Their “inelastic markets hypothesis” finds that “investing $1 in the stock market increases the market’s aggregate value by about $5”. They don’t mean that if you put in $1 you’ll get back $5, but that new money, as opposed to selling one share and buying another, has a ratchet effect. It turns out that most of that new money comes from the companies themselves, dwarfing the fund flows from outside investors. In the peak year of 2018, buybacks among the S&P 500 exceeded $800bn, as companies borrowed money and geared up. Conversely, when companies sell new shares, money leaves the markets.

It would be comforting to think that these insider traders were buying because their shares looked too cheap, but experience suggests that boards are hopeless at judging this, and buy-backs are a poor forward indicator. Exhibit A has to be the serial offenders at Royal Dutch Shell. We nearly all hold the shares, directly or indirectly, so the company’s inept board deserves particular scrutiny.

During 2019, Shell paid over £23 a share for buy-backs, borrowing to do so. By early 2020, as the oil price softened, it could buy back at the comparatively attractive price of around £14. Then Covid crashed the oil price. Suddenly, everything was to be sacrificed for “reinforcing business resilience and financial strength.” Buy-backs were suspended, despite the share price falling below £10. Then the board had a collective panic attack and on 30 April slashed the dividend.

Not much has improved since. The dividend policy, formerly solid for half a century, seems to change with the weather, while buy-backs are back. The shares drift along at around £14 once more. The credibility of the dividend has been sacrificed for sporadic buy-backs. A change at the top is coming, and well overdue.

Perhaps Shell’s new man could take a lesson in how to do buy-backs from Simon Wolfson, the brutally honest shopkeeper who runs Next. He believes in buy-backs, but he sets out the rules (and prices) at which he reckons the company’s money is better invested in its shares than stores (or on-line).

This rational use of the company’s capital has been almost universally ignored by others, where the standard approach is to set aside a sum and keep buying until it’s all gone. Unfortunately, it’s not so hard to see why. Dividends are of little interest to most executives, whose prize is to cash in their share options at a high price and become rich. If some banker can convince them that buy-backs raise share prices, who can blame them?

Time to takeaway this index

It seems that Just Eat Takeaway is not a British company after all. The boffins at FTSE Russell have been labouring away, fortified only by the occasional late-night tikka masala, and now conclude that last year’s merger of Just Eat of the UK and Takeaway of The Netherlands turns the whole thing Dutch, so it must leave the FTSE100 index. The departure follows that of BHP, as the Aussie miner scrapped the pretence that it was as British as it is Australian, and ought to prompt an examination of what this index actually does.

As a measure of the state of London’s equity market, it’s pretty hopeless. The constituents are selected mechanically by market value, which means domination by banks, tobacco, oils and miners, all of which have been mediocre, poor or very poor performers for years. The FTSE250 index, which applies the same rigid criteria for the next 250 largest stocks but is a better indicator of the health of UK plc, has far outperformed its big brother.

No index can capture everything without becoming meaningless, and the 100 was an improvement on London’s first shot, which picked 30 “leading industrial”stocks. It was calculated by multipying all the prices together and dividing by 30, thus producing the risk of going to zero if one stock went bust. Today’s FTSE100 is a convenient shorthand for one day’s market movement. As a long-term indicator, its time is surely up.

Such a relief for Lloyds

Banks usually only go into the property business when the borrower fails, so it is imaginative of Lloyds to announce plans to plunge into residential buy-to-let, even while the fiscal sun is shining. Like all its competitors, Lloyds has more capital than it knows what to do with, and it is not allowed to give the excess to the long-suffering shareholders.

So rather than crank up the mortgage war still further, it is going up the food chain, to buy completed homes from the builders before anyone else, and renting them out. At present, the builders have no trouble finding buyers (often with Lloyds’ money), and it is not obvious to outsiders how banking expertise translates into fixing the plumbing or mending a broken window, but still. It was a banker, Nick Sibley, who once mused that a bank with too much capital would find a way to squander it, and it was just a question of which wall it would choose. Different this time, of course.

Has there ever been a better time to buy oil and gas resources? Under the cosh from pressure groups, often with trivial or no shareholdings, Big Oil boards are running before the green wind, and dumping their reserves as fast as they can. In a busy week for BHP, the deal to sell its oil and gas extraction businesses to Woodside was rather overshadowed by the decision to abandon its double-headed listing and become a purely Aussie company. The thought of losing the second-largest component of the FTSE 100 index produced much moaning and rending of garments, but the Woodside deal is surely more significant.

Since nobody could be found to pay real money, the much smaller Woodside is issuing vast numbers of shares to BHP instead. In turn, BHP plans to pass the buck by giving them to its shareholders. It’s such a good deal that both stocks fell on the news. Despite the following day’s bumper results and surprise capital reorganisation, BHP shares had a torrid week.

The usual suspects are welcoming the dash to exit the oil business, but it is hard to see why. Beyond the sugar rush of seeing Australia’s largest company struggle to get with the zeitgeist, the sale will make little difference to the world’s output of oil and gas. Indeed, it may even add to CO2 emissions, because the new owner may be tempted to cut corners in a way that an oil major would not dare. There is much fashionable talk of “stranded assets”, and some projects which were started on the basis of an ever-rising oil price will indeed never pay for themselves. This is nothing new, and is the story of the oil business. Right now, we have the unedifying spectacle of the US President urging Saudi Arabia to raise production to prevent the price of gasoline rising.

The BHP deal is only the latest in the series of sales by listed oil companies. Many of the buyers are unlisted private equity, or feel less vulnerable to the green pressure groups. With little or no retail exposure, they present a much more difficult target for the activists to hit. There are signs that their smarter members are waking up to this. Market Forces, a self-styled green investor, is arguing that it would rather BHP managed its oil business down rather than selling it. If Big Oil undertook to do that, in exchange for a stop to the constant sniping from those with no commercial interest in the businesses, and an acknowledgment that we are going to need a lot of oil and gas for many decades yet, there may even be scope for an outbreak of peace.

Don’t inhale this stuff

For a fine display of manufactured indignation, this week’s open letter from 35 (count ’em) health charities, public health bodies and doctors is a gem. The authors are appealing to the shareholders in Vectura, a maker of asthma inhalers, to turn down the £980m takeover bid from Philip Morris International, arguing that for a tobacco company to own a business which is trying to combat some of the side-effects of smoking is a bad idea.

Well, they have no skin in this game, so they can be as rude as they like to the Marlboro Man. The signatories, most of whom view tobacco companies as inventions of the devil, argue that government research grants might disappear, expertise might be lost, and the takeover might “legitimise tobacco industry participation in health debates within the UK”. Any suggestion that Philip Morris might choose to pay for research that is beyond the means of Vectura today, or to try and grow a business after paying a billion pounds for it is merely a smokescreen to cover their dastardly plans.

The shareholders in Vectura might think that there can hardly be an adult on the planet who does not understand the risks from smoking, and wonder what the fuss is about. They might argue that they own the business, and can thus decide (collectively) whether to follow their board’s advice and take the money, or to get a warm, but expensive, glow from turning the offer down.

For the institutional holders, the conflict is more nuanced. They can worry about reputational risk to their brand from accepting, and so opt for the warm glow. Of course, it is not their money at stake, but that of the owners of the capital they manage, their policyholders and pensioners, who (with luck) would stay blissfully unaware of the sacrifice they are making. So far, it looks as though the funds are simply dumping Vectura shares, allowing Philip Morris to pick them up in the market.

There are going to be more instances like this, where financial interest conflicts with the latest iteration of “stakeholder capitalism”, as listed companies are forced to take on ever more obligations to outsiders. This trend is helping to drive businesses away from the public markets towards private equity, where pressure groups can’t reach and the rewards are much greater. It is no surprise to find that the underbidder for Vectura is Carlyle, a private equity group. The surprise is to find them cast as the good guys in this soap opera.

Bank job

He’s fiddling with his bike; he’s doing a piece to camera in his shirtsleeves holding a mug of tea. Yep, it’s the new, informal face of Lloyds Bank. We are spared only the sight of CEO Charlie Nunn on a black horse galloping, Poldark-style, across the landscape. Lloyds shares cost almost £4 before the last financial crisis, but despite being handed a market share that would never have been allowed in normal times, there followed a miserable decade, ending with the price at 27p a year ago (when they were tipped here).

Since then, they have clawed back up to 44p and a market value of £32bn. Yet compared with the ratings (actual and expected) on internet-based financial services businesses, this is absurdly low for the market leader. The problem is that the big banks are frequently viewed as agents of social security, with howls of anguish accompanying proposals to close branches. Only this week the Financial Conduct Authority warned them to be more caring and sharing.

The latest proposal is for “community banking hubs” which allow all bank customers to do basic banking in one place in a town which would otherwise be bankless. The obvious flaw is that it would accelerate the pace of closures, but the savings might go towards responding to financial technology companies like Wise (£10bn market cap, P/E ratio 322) or Revolut (valued at £24bn at its last fund-raising).

At least the banking authorities have decided that banks can pay dividends after all (very decent of them) out of the surplus capital they all have swilling around their balance sheets. Given how cautious the payments have been so far, it appears that the boards are not yet really free to make the decisions, but if Mr Nunn can’t raise the return to shareholders while improving the lot for customers, he may be on that bike faster than he thinks.

It’s that time of year again. My next column will be published on August 20.

Rather like their customers, the world’s cigarette-makers face an existential crisis. At least, that’s what we’re always being told. After all, a business whose product causes the early death of its customers might eventually run out of them, so there’s a perfectly reasonable business strategy in using the profits to diversify. Following this logic has led the maker of Marlboro cigarettes to try and buy a business that makes inhalers, and has precipitated a fine campaign of manufactured outrage (there’s a lot of it about nowadays).

Nowhere has this outrage been more manufactured than at the World Health Organisation, which is forever going on about the tobacco industry using its “economic power, lobbying and marketing machinery” to propagate sales of the evil weed. It fulminated that a partnership with a health company is just a a typical smokescreen (as the WHO did not quite put it). This is, of course, the same organisation that tried to suppress the suggestion that the Covid virus escaped from a Chinese laboratory, a possibility that remains very much alive today.

The Marlboro Man, Philip Morris, has offered £1bn, or 150p a share for Vectura, gatecrashing the deal the company had agreed at £958m with private equity group Carlyle. Sensing hours of fun, the market quickly marked Vectura shares up past 150p (they were 120p before Carlyle’s approach). The Vectura board and shareholders may have to decide whether Big Tobacco is a worse evil than those beastly short-termists from private equity.

It’s a tough call, but is rather beside the point. Despite being demonised over decades, banned from inside spaces, and constantly harrassed by the medical profession, smoking, like the customers, is taking a very long time to die. While this process is going on, the business is generating cash at a rate beyond the dreams of other industries. Philip Morris is using the money to diversify, but with tobacco shares at today’s rock-bottom valuations, there is a better way.

British American Tobacco shares yield 7.6 per cent on a dividend which is more likely to rise than fall. Each time the price shows a bit of strength, a few more shareholders take a deep breath and sell out, so the shares have gone nowhere for three years. The dividend is clearly wasted on them, diversification is expensive and risks tainting the reputation of any (healthcare) business BAT may buy, as Philip Morris may be about to find out. The solution is to stop paying dividends, and to use the cash to buy in and cancel the shares that fashionable funds do not want to be seen holding.

At today’s price, BAT could buy in the whole of its outstanding capital in less than a decade. I look forward to 2031 in my role as the last outside shareholder, and proud possessor of one of the world’s largest companies. I may even have to start smoking.

My subsidies good, yours bad

Spare a thought today, if you will, for Dave Vince, the founder of Ecotricity, which says all the juice it offers to its customers is green. Of course, neither you nor Dave can tell exactly where his electricity comes from, but he buys the equivalent amount that he sells from the output of windmills and solar panels. Both of these power sources are subsidised by all electricity users, although the suppliers do not generally spell out how much more we are all paying, for fear of scaring the green horses. In total, it’s about £10bn a year.

Now Mr Vince is getting all worked up at the prospect of someone else getting a subsidy, this one for the next nuclear white elephant, sorry, power station. He told the Financial Times: “It’s bonkers we would all have to pay this subsidy for at least a decade of construction and not for power generated.” Well, yes, but man cannot live by wind and solar alone, and if we are going to flagelate ourselves to net zero by 2050, more nuclear capacity is essential.

The problem with nuclear is that the projects are vast, the risks substantial, and the technology is losing the race with health’n’safety demands. Even a guaranteed payment of twice today’s spot price for the output from Hinkley Point leaves the builders apprehensive about their risk. They are not keen to shoulder another one at Sizewell. Faux de mieaux, the UK government looks set to approve what is delicately called a “regulated asset base” model. Mr Vince prefers to call it by its proper name, a mechanism that forces customers to pay long before they see any output.

In theory, the builders are liable for cost over-runs during construction, but if you believe that, you’ll believe that HS2 will cost less than £100bn. Of course, there is a simple way out of this problem. Abandon the arbitrary 2050 target, admit that fossil fuels have many more decades left, and hope that science and technology will eventually find a way to replace them. Too big a helping of humble pie needed there, obv.

Drop the Dutch, Ben

The beasts from the black stuff, those horrid polluters at Royal Dutch Shell, have decided to appeal the ruling stuck on them by a Dutch court in May. In a particularly impressive moment of judicial over-reach, Judge Larisa Alwin had decided that Shell’s target for cutting its CO2 emissions wasn’t good enough, and that the company had a “human rights obligation” to do more, so she imposed a stricter one.

The Dutch wing of Friends of the Earth, which has negligible economic interest in the company, had brought the action. Its response this week was to tell Shell to save the lawyers’ fees and get on with it. (I told you there was a lot of outrage about). The appeal makes sense as far as it goes, while CEO Ben van Beurden had already promised to try and save some more CO2.

He would be better employed working on a Unilever solution, to move Shell’s domicile to its logical home in the UK, leaving the Dutch subsidiary to try and comply with Ms Alwin’s crowd-pleasing ruling if the appeal fails. It took a campaign and some revolting shareholders before Unilever saw sense. It also cost the (Dutch) CEO his job.

The Harmsworth dynasty has lost none of its capacity to set puzzles for the stock market. This week, the current scion, Jonathan Rothermere, pulled another financial rabbit from his portfolio with a plan to take his company, Daily Mail & General Trust, private. Everyone had great fun pointing to the Daily Mail’s own coruscating campaign against private equity, but since he already has all the votes, the outside shareholders have limited leverage if they don’t like the plan.

Before they decide, they will have to work out what it means. As usual, this is not easy. Indeed, when it comes to impenetrable financial engineering, DMGT’s recent constructions would put the most ingenious private equity planner to shame. It is barely two years since it finally divested its residual holding in Euromoney, a business started by Rothermere’s grandfather with a £5,000 loan from the parent, and now worth £1.1bn.

That divestment involved outside investors getting 0.19933 of an Euromoney Share, 68.13p in cash, and a reduction of 0.46409 of an A Share for each one they owned. The “insiders” got 25.53p in cash, and each of their A shares was reduced by 0.03946 of a share. It may be possible that the outside shareholders could do the maths there, but it was almost impossible to work out which side got the better deal.

Something similar is at work this week. The group is effectively being broken up, as a result of enthusiasm from buyers for some of the bits, none of which have much to do with the Daily Mail, and everything to do with the entrepreneurial streak which runs through the dynasty. Earlier investments and disposals include property search company Zoopla, education technology group Hobson and, finally, second-hand car business Cazoo, now about to be floated in New York. DMGT proposes to give the outsiders the Cazoo shares and use its own share of the money to buy them out.

Rothermere’s father Vere was, perhaps inevitably, called “Mere” (though not to his face) but the soubriquet was not deserved. The newspaper business was never very profitable when the trades unions called the shots, but the long-term return from investing in DMGT has been outstanding. Even in the last 10 years, Morningstar calculates that the shares have returned 12.2 per cent annualised. Many shareholders will be reluctant to see the business disappear from their portfolios. Some may face a capital gains tax liability that the insiders are trying to avoid.

The outsiders have no votes, but are not entirely without clout if they think the deal is too mean. They cannot be forced to accept an offer, and a scheme of arrangement would require 75 per cent acceptances from them to take out the rest. The price was curiously unmoved on the announcement, but had risen strongly to today’s £11.10 in the weeks beforehand. It’s the sort of movement that might raise reporters’ suspicions. Perhaps not on the Daily Mail in this case, though.

Going out with a Bang

It seems like something from another world. Indeed, it is so long ago that there’s a generation for whom the expression “Page 3 Girl” is meaningless, with the Mail on Line’s Sidebar of Shame its nearest current equivalent. In 1987, in an inspired piece of mischief, The Sun’s City Editor organised a protest by these girls (with their clothes on) to harrass the chairman of the London Stock Exchange, with “Goodison must go” emblazoned across their T-shirts.

Nicholas Goodison, who died last week, had fought a doomed campaign to keep the LSE out of the 20th century, preparing a million-document defence against legal action from the Office of Fair Trading, which had sought to end fixed commissions on share trades. Up against the ferocious director-general, Gordon Borrie, Goodison knew he never stood a chance, but understood that this would mark the end of the division of labour between stockbrokers and jobbers (market-makers).

The change destroyed the cozy carve-up, but precipitated unexpected windfall gains for the partners in the broking houses, and swimming pools all over Surrey, as the banks rushed in to buy their businesses following the City’s “Big Bang”. What looked from the outside to be a technical rule change has had a profound impact, with competition creating wealth on an unforeseeable scale.

Goodison failed to see it himself, missing the opportunity to buy the London Financial Futures Exchange. He considered it too marginal, too expensive and rather vulgar. In fact, it represented the next step in the financialisation of the West’s economies, a process that has produced ever-expanding markets in ever-more exotic derivatives ever since. What had seemed to some like a disruption which would threaten City jobs has turned out to lay the foundations of a world-class industry. You could say that Goodison got the right answer for the wrong reason, rather like the protest from those Page 3 girls.

If only they had shareholders

It’s John Lewis and (fewer) Partners. The department store which had for so long seemed to be a model of how retailing should be done is swinging the axe again. This time it’s 1,000 from what is delicately described as “a layer of management” who will join the 4,423 partners who have been let go since the start of the pandemic. This will, we’re told, allow the business “to reinvest in what matters most to our customers.”

Ah yes, reinvest. The systemic problem with a partnership structure is that it has to generate its own risk capital, since there are no greedy outside shareholders to stump up when the going gets tough. Generating it from cutting costs is a long process, especially given the price of paying people to go away.

Sharon White, the whirlwind chairman since February last year, cannot be accused of lacking courage, and there remains a deep well of goodwill towards this business. However, it is not as deep as it was, and on-line shopping has done for the “Never knowingly undersold” mantra. Plans to turn car parks and unwanted stores into flats are all very well, but residential development is another business. It, too, requires capital, and Croydon Council has proved that it is potentially disastrous. There is no rescue if she gets it wrong.

There has never been a financial food fight quite like this one. Wm Morrison now has three buyers fighting to get to the supermarket checkout, and a share price 50 per cent higher than it was at the recent annual meeting – at which the shareholders savaged the directors for their full-fat pay policy. So is Morrison a National Treasure, full of laughing, happy employees toiling away on the company farms, its fishing trawler and its freehold stores, to be preserved as a symbol of all that’s best in British food? Or is it a commercial enterprise in a highly competitive market, whose customers will go wherever their view of price, quality and choice takes them?

The current leading bid from an outfit called Fortress is 252p a share, along with a clutch of warm, fuzzy but not legally enforceable agreements to keep things just as they are; no financial engineering here, honestly. The Morrison directors, perhaps believing they are also part of Fortress’s glittering future, have rather foolishly been seduced into recommending it. Lurking in the wings is Apollo, another private equity group, which may, or may not, bid more. Perhaps they will say they love the executives even more than Fortress does, and promise to behave even better in the fields.

Or perhaps they will bring the question back to earth, by simply bidding more, and propose to run the business to maximise profits. Legal & General, a big Morrison shareholder, is already having an attack of the vapours at the thought. Andrew Koch, its senior fund manager, worries that Fortress may be bidding “for the wrong reasons”, whatever they may be. However, his request for more details of the Morrison property portfolio is the least the Morrison board can do now.

L&G is a fan of ESG investing, and under CEO Nigel Wilson has shown great imagination in building assets to match long-term liabilities. Its vast share portfolio, on the other hand, is mostly in passive tracker funds, where investments are made mechanically to match chosen indices. It seems quite possible that Apollo will offer more for Morrison, without the green and pleasant land stuff, offering L&G the choice of looking woke or getting the best price for its policyholders (who will not be consulted either way).

The Morrison board, having made the mistake of accepting the Fortress price, has a variant on the same problem, should a bid from Apollo materialise. It’s hard not to sympathise, though, given the ever-growing pile of bureaucratic garbage that quoted companies must deal with. This week Peter Harrison, the CEO of Schroders (with £570bn under management, much of it in active rather than passive funds) called for a reform of the rules. The UK governance code is “written at the expense of public companies” and could be “very onerous” on them, pointing at everything from disclosure requirements to remuneration rules. Actually running the business is taken for granted.

That is all on top of the tax advantages of private equity. In an era of administered interest rates, debt is dirt cheap and can be offset against corporation tax on profits, unlike equity. To make matters worse, the executives at private equity businesses routinely have a “carried interest” which is a seven-figure payday thinly disguised as a capital gain, and which attracts tax at 28 per cent rather than the 45 per cent on income. Small wonder, then, that the Morrison executives can see the broad sunlit uplands – and not necessarily on the company farms.

A new Shell game

There are only two numbers that really mean anything in the bloated accounts of big oil; the debt and the dividend. Everything else is adjusted, restated, subject to interpretation or plain incomprehensible (just take a look). The analysts may be diligent and make detailed projections ahead of the figures, but they’re almost as much in the dark as the rest of us.

So confidence in both those numbers matters. You would hardly think so from Royal Dutch Shell’s latest update. In March last year the board panicked and slashed a dividend that had not been cut for half a century by two-thirds. Perhaps the directors thought the end of the oil world was nigh, or they feared that all that debt would overwhelm them. Who knows?

When the world failed to end, six months later, they decided they had overdone the slashing, and raised the next quarterly payment, although only by 4 per cent, with an ambition to keep it going up. Last quarter they raised it again, but Jessica Uhl, still Shell’s chief financial officer, warned that “we are not anticipating a further increase” in the dividend for this year.

Well, it’s a fast-moving world, oil, and that was then. Now we have a new strategy. Shell has noticed that the oil price has gone up quite a lot, and so it can let the shareholders have between 20 and 30 per cent of cash flow, either by higher dividends or share buy-backs. The previous strategy, to get debt down to a mere $65bn, has been “retired”, although we are not told what has replaced it.

This is pathetic. It is high time CEO Ben van Beurden, whose strategic purchase of BG at an inflated price gave Shell the debt problem in the first place, was himself retired. He might start to redeem himself before he does by pulling Shell out of the Netherlands to escape the judicial over-reach of the Dutch court in ordering the company to cut its CO2 emissions. Oh, and his successor might find a finance director who could see beyond the end of her nose, too.

Rishi Sunak was busy announcing the launch of green bonds this week. These are the same green bonds that he announced in the Budget, and in neither case was there any indication of what they are, how they will work, and whether they are a good idea. In this dance of the seven green veils, we have got to about number three, accompanied this time by 31 pages of lyrical prose which only lacked a Vaughan Williams soundtrack to complete the picture of sunlit zero-carbon uplands ahead.

Green Savings Bonds “will be critical in tackling climate change and other environmental challenges, funding much-needed infrastructure investment, and creating green jobs across the UK”. Of course. The “framework” might even help businesses looking to tap this source, if they can wade through what has become the standard regurgitation of How Green Was My Government, if only aspiration could make it so.

Nowhere are the real questions answered, because deep down we know that green bonds are a con. They either con investors into putting up capital for a return below what they can already earn by lending to the government, or they con the taxpayer by having incentives for holders which make them more expensive than other government borrowing. There are fancy ways that either can be disguised, as has been practised for years with premium bonds, where holders are essentially betting the interest for the (almost zero) hope of a big prize.

It is possible that enough savers will want greenery so bad that they will accept near-zero interest on their money in return for a warm glow from simply holding the bonds, although gathering £15bn this way could be quite a challenge. The historical precedent is War Loan, which was finally paid back, in much depreciated pounds, in 2014. The money was originally invested by savers who were urged to “save your way to victory”, helped by the lack of other homes for their money in wartime. Perhaps Mr Sunak has something similar in mind, like “save your way to save the world”, or perhaps he will just go on announcing that they are coming, because his helpers can’t answer the awkward question above.

Going cheap: finest Columbian

Greenwash of the week: no more coal to be burnt in the UK to make electricity from 2024. This, apparently, sends out a clear signal to everyone else to follow suit. You can see how successful this has been so far by the hundreds of new coal-fired stations being built in China, India and elsewhere in the Far East, where the need for affordable energy is rising rapidly.

Well, we must do our bit. Drax, once the UK’s biggest coal-fired station, built on a near-inexhaustible supply of the stuff, is now burning wood pellets imported from the US, a switch which produces a fine stream of subsidies from the taxpayer for what may, or may not, be a marginal cut in CO2 emissions. Ivan Glasenberg is doing his bit, too. Glencore, the mining company he built, is helping Anglo American and BHP to pacify the green hordes by taking their Columbian coal businesses off their hands.

To see how keen the vendors are to wash out the black stuff, consider: by the time the deal closes late next year, the business will have generated so much cash that the $588m Glencore is paying for the two-thirds it doesn’t own will have effectively shrunk to $230m. The price to the Anglo and BHP shareholders of compliance with the mob has never been higher.

As Mr Glasenberg has pointed out, sloughing off unfashionable coal this way makes no difference to the amount that gets dug. It merely transfers the ownership to obscure businesses (unlike Glencore, of course) who have a rather more, er, flexible approach to how they operate and are less exposed to the climate activists. Investment in new coal mines has fallen as big players have been bullied out, and the price is at a 10-year high as a result. Something similar is happening in oil, where western companies have cut back exploration, and the price is rising in anticipation of shortage. The state-owned operators in Russia and Saudi Arabia can hardly believe their luck.

As for Mr Glasenberg himself, he has decided that 19 years in charge is long enough, so this week was his last. His reign has been entertaining, as long as you weren’t a shareholder. As he plunged into mining, the shares wilted. They have never again seen their 500p flotation price exactly a decade ago, and survived a near-death experience in 2015 which required an emergency share issue. Despite the coal cash flow, they do not look particularly attractive at today’s 314p. Glencore grew fat on its ability to trade commodities. Making money from digging them out has proved a whole lot harder.

Not very competitive

Andrew Tyrie always was a square peg for a round hole. A ferocious chairman of the treasury select committee, he was always too feisty and outspoken for ministerial preferment. When he quit parliament, and resurfaced as chairman of the Competiton and Markets Authority, we had high hopes he would wake it up. Alas, after two years he was out. Now he has fired a broadside at it from the Centre for Policy Studies which, while undoubtably deserved, may just bounce off.

Apparently, two-thirds of businesses have no idea what the CMA does, while too much of its work is delegated from the board to groups of executives, resulting in it starting cases “that have little strategic justification or connection to the lives of ordinary consumers.” He advocates “greater openness to consumer complaints, through the introduction of a simple online form to alert the CMA to rip-offs in products and services.” A simple form! The very heaven in our bureaucracy-choked world, where lifting a pencil requires a risk assessment.

Like so much legislation designed before the digital age, the legal framework for competition and consumer protection policy is “struggling to keep pace with the growing power of online platforms, and the scope for the growth in consumer detriment in much of the economy that they make possible.” It’s a familiar refrain, and hard to disagree. It would have helped had he still been in the chair to push the changes through.

With hindsight, Wm Morrison was a sitting duck, nicely trussed up and oven ready for a private equity buyer. A poor share performance, low yielding assets in its own farms and a balance sheet stuffed with freehold shops was attractive enough even before considering the delicious cash flow that characterises food retailing.

The Morrison directors had already been softened up after a bruising clash with their shareholders just a fortnight ago, when a stonking 70 per cent of votes cast rejected the remuneration report. The shareholders – or rather, the big institutions who control the votes of their underlying investors – objected to the cynical way the calculation of bonuses had stripped out the impact of Covid on the bottom line. Ahead of the annual meeting, the rem. com. had been widely pilloried.

The bid approach from private equity has produced a screeching U-turn in the coverage. Suddenly, Morrison is a national treasure which must be protected from the Barbarians at the Gate. Goodness, after Asda has fallen to an unknown pair of petrol station operatives, bought with borrowed money, whatever next? Sainsbury’s? Tesco, even? Then all our leading supermarkets will be in the hands of financial manipulators, and then where would we be?

Well, calm down dear. As with almost every other commercial activity, competition is the lifeblood of food retailing, and with Lidl and Aldi both signalling expansion, there is no shortage. Still, it might be the moment to ask why private equity is on the march, not just in the aisles. Directors of big plcs are very well rewarded, but private equity offers them the chance to become seriously rich for doing effectively the same job. Rather than the incomprehensible bonus set-up of quoted companies, the private equity executives generally have a (relatively) modest basic pay. The real reward comes with “carried interest”, potentially many millions.

Private equity typically loads a business with much more debt than the public markets would tolerate. At today’s interest rates, that debt costs peanuts, so any improvement in profit is dramatically amplified. The interest cost can be set against trading profit, further reducing the corporation tax bill. The carried interest is linked to profit, and for the icing on the cake, the payout bears capital gains tax at 28 per cent, rather than 45 per cent for higher incomes.

There’s another added bonus: the ESG brigade is on the march in the public markets. They are barely concerned whether profits are enough to sustain the business, but are putting pressure on those big (proxy) shareholders to look woke and use their votes to help save the planet. Tracker funds are easy targets, because they are not really interested in the performance of individual shares, as long as they stay in the index being tracked.

The green blob has found it much harder to put pressure on unlisted companies. So: a quieter life, fewer distractions from running the business better, and the prospect of riches. It will take a visit from the ghost of Sir Ken Morrison to persuade the board to turn all that down. Unlike him, they are just hired hands, and at least some of the senior executives will keep their jobs, with the prospect of serious money in front of them. After some token resistance, and a modest increase in the price, it’s likely that Morrisons’ days as a quoted business are over.

The chancellor, with his City background, knows how the tax rules favour debt over equity, the key factor tilting the playing field towards private equity. This is not new, but is particularly acute in an era of administered near-zero interest rates, and the proposed rise in corporation tax will make the balance even worse. If he chose, he could change the rules towards equity capital, which can accept the risk of setbacks, and against debt, which is only concerned with avoiding losses. If this takeover produces sufficient clamour for change, then he might actually do something about it. Too late to prevent Morrison from disappearing from public view, though.

Off the financial rails

And so, with a heavy heart, we come again to the wretched HS2*, the white elephant currently charging its way underneath Chesham and Amersham (stopping only to lose a safe Tory seat) before going on towards Birmingham, leaving destruction and waste as it goes. The cost of this crazy railway, a monument to an era that had passed long before the first sleeper has been laid, has gone up again, this time by an estimated £1.7bn.

The Department for Transport has produced the usual drivel: “Our focus remains on controlling costs, to ensure this ambitious new railway delivers its wealth of benefits at value for money for the taxpayer.” Somebody inside DafT is surely having a laugh.

The £1.7bn extra is just for the first phase, from London to Birmingham, a distance too small for the higher speed to make much difference to the journey time. The increase in cost is more than twice the money the government pledged with much fanfare for the north west, where the need for improvement is shockingly obvious, but for HS2 it is little more than a rounding error.

The project has its own momentum, its own gravy train if you like, as shown by the PR blitz this week that accompanied the start of work at Old Oak Common, inconveniently sited between Heathrow and central London. Yet even now it is still not too late to admit that HS2 is a financial folly and stop it. The FT reported that Douglas Overtree, the proper engineer who looked at the project for the government last year, only recommended continuing because £9bn had already been spent.

He was quite wrong about that. Even in the unlikely event of the line being built for its latest estimate of £106bn, we are far from the financial point of no return. Stopping it now would save tens of billions of pounds, even after compensation payments to contractors. Indeed, rather than take the money, they might be profitably employed instead on the dozens of other rail projects which are actually worth doing.

*My railway correspondent IK Gricer writes: MSL stood for Manchester Sheffield and Lincolnshire and for Money Sunk and Lost. When it built its extension to London it changed its name to Great Central: Gone Completely. So it proved.