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

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

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

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

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

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

We’ll pay you to go away

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

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

Vultures can be Co-operative too

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

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


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

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

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

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

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

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

Bye-bye buyback?

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

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

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

Think of it as a bridging loan

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


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

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

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

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

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

Forecasting is hard, especially for the future

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

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

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

No whining, please

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

Nobody loves Big Oil. Filling up the car is sometimes described as a distress purchase, meaning that you want to escape as soon as possible, and investors seem to have a similar desire to escape from the shares of BP and Royal Dutch Shell. Last week the unpopular pair produced results to show how profitably they can live with $50 oil, and their shares merely recouped the previous few days’ losses.

The green lobby argues that the oil age is over, and that far-sighted investors should help themselves as well as the planet by getting out of a dying industry. By appealing to self-interest as well as do-gooding, environmental groups have persuaded some institutions to throw out their oil shares on principle, regardless of valuation.

Both stocks now yield over 7 per cent, implying that the green argument that dividends are unsustainable in the long term, and that the shares should be rated as wasting assets, seems to be gaining traction. It may even be true that “peak oil” will mean peak demand, rather than the previous use of the term to describe peak supply. Then we were told (sometimes by the same environmental groups) that the stuff was running out. Today’s best guess is that any peak is some years away, and decline likely to be slow. Oil will run the world for many decades yet.

The argument against oil stocks mirrors that against the tobacco companies, when the combination of relentlessly rising taxation and public health education appeared to be an existential threat to the industry. Institutions were lobbied to sell their holdings, to save their investors from future losses and to feel better about themselves. The industry consolidated, profitability rose, and new entrants were discouraged. Results last week showed Imperial Brands in better health than its customers. Oh, and Imps’ share price has multiplied nine-fold since 2000.

Both BP (with the Macondo disaster) and Shell (with the overpriced purchase of BG) have demonstrated that there’s a deal of ruin in an oil company. Both are now earning their dividends at today’s crude price. They may never be loved, any more than Big Tobacco is loved, but with yields like these, us unemotional investors can live with a little unpopularity.

Oggi e sciopero*

“The problem,” says Carlo Calenda, “is that Alitalia is too small.” No, the problem, dear economic development minister, is that the staff believe that there’s always more Italian government money to keep it (and them) flying. Here, have another €600m, and please don’t call it nationalisation. It’s a “bridging loan” – to a business in administration.

You can hardly blame the 12,000 employees who rejected the latest union-approved attempt to cut costs. In previous crises the financiers have always blinked first. It is only three years since the last rescue, by Etihad of the United Arab Emirates, and even now it seems that the supply of other state-backed airlines waiting in the wings is far from exhausted.

Alitalia has long given the impression to passengers that it is run primarily for the benefit of the workforce, which is why it has been murdered in the marketplace. Ryanair and the other low-cost airlines have captured nearly half the Italian market from scratch. This may have done wonders for the Italian tourist industry, but it’s a demonstration that size has little to do with it, whatever Mr Calenda says.

It’s all pretty simple, really

Ever wondered how a bank chairman is chosen? Standard Chartered’s accounts thoughtfully include a timeline leading to Jose Vinals’ appointment last December. The process is stately, to say the least, since Sir John Peace had announced his intention to go in January 2015, and it took until that December for senior independent director Naguib Kheraj to assemble a short list.

So slow was the process that a “refreshed” list was needed in early 2016, and Mr Vinals started to emerge from the pack. After countless meetings over the summer with and without him, he was offered the job in July. Mr Kheraj was made deputy chairman, doubtless in return for all that hard work.

*Today a strike


These are strange days in the lucrative world of M&A. The shareholders are revolting, and the share prices of companies involved with mergers and acquisitions are not behaving as the playbook dictates. Last week, for example, Deutsche Borse’s ill-starred attempt to take over the London Stock Exchange finally collapsed under the weight of its internal contradictions.

It fell to the European competition commissioner Margrethe Vestager to deliver the coup de grace (we shall miss her forensic independence when we’ve gone) but far from sliding back in disappointment, the LSE share price scaled new heights. Still cheap without a bid, says RBC.

Then there is Unilever; the share price without a bid is now above the proposal from Warren Buffett and Kraft. One of the world’s most analysed companies, Unilever is now valued at £20bn more than a few short weeks ago, even though a takeover looks more unlikely than ever.

At the other end of the scale is Tesco’s cosy deal with Booker. Richard Cousins, Tesco’s senior independent director, felt so strongly that CEO Dave Lewis has quite enough to do without buying more stuff that he quit. Two major shareholders now agree with him.

Finally, there is the match made in Scotland between Standard Life and Aberdeen Asset Management. Perhaps the enthusiasm for the deal from the local government should have alerted us, but the market’s (interim) verdict is that the two-headed merger will destroy value rather than creating it. The combined value of the pair is now almost £1bn below the total just before the deal was announced.

So far, there is no sign of a shareholder revolt here, perhaps because life insurance is harder to understand than food retailing. Still, strange days indeed.

They’re jolly productive, really

Britain’s low productivity is the fault of its bankers (among others) rather than those who actually make things, the Office for National Statistics revealed this week. How unfair. Look, for example, at the productivity of the crew from Bank of America Merrill Lynch with their tireless work for their faithful customer, the defence manufacturer Cobham.

Three years ago BoA advised on the $1.5bn takeover of Aeroflex, a US rival, taking a highly productive fee. Sadly, nobody noticed that Aeroflex had, ahem, flexed its balance sheet, not necessarily in a good way. In addition, the financial structure of the deal, surely the bank’s area of expertise, was not a success. Still never mind, BoA was there to help with a rescue rights issue, pitching the price so its underwriters bore virtually no risk, and taking a productive slice of the £20m fees.

Cobham’s woes continued, but BoA was there throughout. The latest rescue rights, finally launched this week, raises £512m. The new shares are underwritten at 75p, a socking 41 per cent discount to a price which had already adjusted in anticipation of the forthcoming issue, so the old shares barely moved from 128p on the news. There is a vanishingly small chance of the underwriters being called upon, and the £15m which sticks to the shovels of the banks is effectively another tax on the owners of the business. That’s productivity!

It’s financially radioactive

Just how much worse does it have to get before we see that nuclear power will never pay? This week Westinghouse filed for Chapter 11 bankruptcy protection in the US, as its once-mighty parent Toshiba tries to to avoid being brought down by its nuclear construction subsidiary.

Despite this industry’s relatively trouble-free half century in the UK, it is clear that it will never make a profit, as the combination of rising safety demands and decommissioning costs will always outrun the gains from experience and technological progress. Almost every nuclear construction project in the world is running late and over budget.

Yet the British government is persevering in the face of the evidence from all sides with the money sink that is Hinkley Point, and has not ruled out building more power stations like it. There are other ways of keeping the lights on at a price we can afford. It is surely time to admit defeat on nuclear.

How do you like your inflation? To be really up with the zeitgeist, you favour CPIH, the trendy new version of the Consumer Price Index, with added housing. Mind you, according to the Office for National Statistics, this is “not a national statistic”, although any minute it will become the officially recognised measure of inflation. Helpfully, both measures came in at 2.3 per cent for February.

Official recognition does not mean everything will be judged by this new yardstick. The even older one, the Retail Prices Index (also “not a national statistic”) will still dictate the changes for index-linked bonds, National Savings and much more. Economics purists dislike the RPI because it is not rigorous enough. The government dislikes it for the systematic upward bias it produces for its inflation-linked obligations.

Switching to CPI saves it money. Given the relentless rise in house prices, you might think that switching to CPIH would produce a higher figure. You would be wrong. A retrospective analysis from Bond Vigilantes demonstrates that CPIH lags CPI by 0.15 per cent a year. So the change both sounds more comprehensive and saves the state money.

Inflation, usually defined as a change in the general level of prices, is hard to measure accurately, so the temptation for governments to fiddle the figures is never far away. The RPI may be flawed, but it was generally accepted as a reasonable proxy for a move in the cost of living, which is what matters.

The more the government changes the measure, the greater the opportunity for lobbyists to claim that a special (higher) rate should apply to media, pensioners or some other interest group. The public has been persuaded to say RIP RPI, which was hardly even reported this week, but each change risks damaging credibility. For the record, the RPI rose by 3.2 per cent in the year to February. Ouch.

Dear keep it simple

David Richie was paid his contractual entitlements when he “stepped down” as boss of Bovis, the housebuilder that makes all the others look competent. There’s a £242,180 lump sum, £338,250 in lieu of notice, a £55,000 bonus (sic) which may be subject to clawback, and a contribution towards “outplacement counselling.” A long-term incentive plan could yield close to another half million pounds, depending on the share price.

During his nine-year tenure, housebuilders made out like bandits. Bovis, mired in problems from selling unfinished homes last year, is now the subject of at least one takeover bid, and it’s safe to say that Mr Richie’s reign was not a resounding success. However, he can’t be blamed for taking the money. A contract is a contract. The real blame lies, as so often, with the remuneration committee and its advisers.

This booming industry presumes that every CEO must be festooned with complex incentives to get the boss out of bed every day. There is little evidence that these incentives really work for the long-term benefit of the business or its shareholders. Of course, if the board said: “Here’s the salary, do you want the job?” there would be no reason for the consultants to charge all those fees.

Mixing business with pleasure

You may not be able to tell Stork from butter, or Fever-Tree’s fancy tonic water from Schweppes, but there is no arguing that it is the stand-out new issue of 2016. It is now valued at the same price as Britvic, and nearly three times that of AG Barr, of Irn-Bru fame, whose sales are 2 1/2 times Fever-Tree’s £100m.

Despite the world-conquering prospects, this valuation looks, well, feverish. However, Fever-Tree is quoted on London’s junior market, and a quirk of inheritance tax rules that shares quoted on AIM are not really quoted at all, and attract the same breaks as unlisted investments.

Those, ahem, elderly investors wealthy enough to have one eye on IHT avoidance are likely to have the other eye on the evening G&T, perhaps powered by Fever-Tree’s mixer. It’s a business they can understand, and if they suspect they may not be able to enjoy many more sundowners, the price paid for their shareholding is not that important, provided it holds up longer than they do. Chin chin!

This is my FT column from Saturday

Time to raise a Magnum Black to Warren Buffett and his Krafty krew. In a single month they have added £20bn to the wealth of Unilever shareholders, without our having to do anything, let alone agonise over whether Dove is a national treasure or a commercial enterprise.

The share price is now above the (presumably) sighting shot of $50, which shows how clever Mr Buffett was to spot an undervalued business. Whether by luck or judgement, Unilever CEO Paul Polman had his defences in place, allowing him to set off a fine display of defensive fireworks without breaking Takeover Panel rules.

We don’t need Kraft; we have our own version of zero budgetting; we’ve got plans to bring the future nearer, and we’ve got so much capital that we could borrow to give some away. This is called “making the balance sheet more efficient” and next to an actual takeover, it’s what investment bankers like to do best.

What’s more, it can be worth doing for the company too. Unfortunately for the bankers’ bonuses, it’s hard to see why in this case. Risk capital allows more risk, to reap higher long-term rewards. The chart of the Unilever share price looks less like one for a steady supplier of soaps and fats to the world than that of a dot-com rocket, only measured in decades rather than months. Over the years, investors who have taken their capital out of the business have lived to regret it.

Yet despite this record, Mr Polman still feels Unilever has had a lucky escape from the ravening beasts of Kraft. The takeover rules are strict about forward-looking statements, and he was fortunate to have sufficiently worked-through plans to respond immediately without breaking them.

Now he wants those rules to be tilted towards the defence of “national champions”. Never mind that Unilever’s structure structure already makes it a dual-nationality champion, this is a thin argument. The Marmite manufacturer is not a national champion but a commercial business owned by its shareholders. If they collectively decide to sell it, they may be misguided, but should be free to do so.

There are always things that a big company can do better, and jolts like this provide the impetus to find them. Mr Polman should thank Mr Buffett and keep Unilever looking to the long term. It seems to work.

Our money down the drain

Macquarie is finally cashing in its Thames Water chips. The investment bank has made a stonking return from a low-risk investment, although exactly how stonking is hard to say. Infrastructure consultant Martin Blaiklock, a careful analyst of opaque utilities, puts it between 20 and 27 per cent annualised over the decade of ownership.

He can’t be more accurate, he says, because it’s unclear about a little matter of where a £500m dividend went when Macquarie bought the business from RWE. Then, the last vestiges of transparency disappeared via the Cayman Islands, leaving Thames Water Utilities, which actually runs the water, submerged under seven corporate layers.

The steady replacement of equity with debt contributed to Thames’ inability to pay for the super-sewer now starting to grind its way under the river. A separate company, also Macquaried,  was needed, offering the prospect of more specialist, opaque financial engineering now the Thames Water game is over. Not for nothing is Macquarie dubbed Australia’s version of Goldman Sachs.

He’s blue as well as purple

It’s hard to blame the executives at Purplebricks, the new model estate agent, for selling a slug of their holdings. The shares had more than doubled since Christmas when in February the company announced plans to conquer America, raising £50m at 220p a share, a small discount, to pay for the adventure. The price carried on, mysteriously, all the way to 360p ahead of last week’s shareholders’ meeting to approve selling the new shares to outsiders rather than to existing owners. They’ve since come back to 307p, and on Thursday the executives placed £24m-worth at 300p. Spare a thought, though, for lettings director Richard Jacques. On January 20, he sold 35,000 shares at 160p. Seven days later,  after the price hit 193p, the company issued a “no idea why” statement. How true.

This is my FT column from Saturday