This week’s annual meeting of Melrose Industries should be an upbeat affair. The only small cloud on a sunny horizon is a recommendation from one of the professional corporate governance geeks that shareholders vote against the tens of millions on their way to the quartet at the top of the company under an established incentive scheme.

Few shareholders are likely to take the advice. They have done far too well from their investments to cavil at another fortune for chairman Christopher Miller and his “buy, improve, sell” crew. Yet this is a sensitive subject, especially now they are in charge of one of the UK’s biggest engineering companies after winning the battle to take over GKN.

Melrose has been built by the quartet and the band of brothers who backed them financially. All have made magnificent returns from taking over companies that UK politicians have never heard of. With the £8bn tilt at GKN, all that changed. Once the story escaped the business pages of the papers, wild accusations of asset stripping, destruction of a fine old British company and the loss of jobs quickly followed.

Labour’s Jack Dromey and the Tories’ Rachel Maclean encouraged 14 colleagues to jump on the “Save GKN” bandwagon. Gavin Williamson, the Defence Secretary, voiced “serious concern” despite GKN not being among the top 50 suppliers to the MoD, while the COO of Airbus claimed that it would be “practically impossible” for the company to work with a Melrose-owned GKN.

So it went on. It hardly mattered that the asset stripping that Melrose was supposedly bent on would be better applied to GKN’s own makeshift board. After abandoning the absurd “Project Boost”, the directors rushed to sell the driveline business to a US company with a chequered record. They agreed to pay a $40m break fee and the buyer’s costs, on top of £82m paid to their own advisers.

Despite this self-serving behaviour, the result was uncomfortably close, with 52.4 per cent acceptances. This is a shameful reflection on the inertia or lack of analysis from those controlling big blocks of shares, because it has since emerged that the 2017 GKN balance sheet was prettied up by “stretch payments to suppliers”. This is a euphemism for late payment, the sort of behaviour that politicians are always railing against, where small suppliers are bullied by big customers.

Unwinding this, and behaving better, is now the Melrose directors’ responsibility. They are playing in the premier league now, and will have to adjust their game accordingly when it comes to executive rewards.

Last week Euan Stirling of Standard Aberdeen told the directors of housebuilder Persimmon that their fabulous remuneration suggested they had lost sight of their “responsibility to act in the best long-term interests of the company”. Were the GKN directors still in office, he might have given them the same lecture.

Instead, CEO GKN Anne Stevens has returned home to the US, while chairman Mike Turner is spoken of as a possible next head of Barclays. Before deciding, the bank’s search consultants might look at succession planning, corporate responsibility and use of shareholders’ money at GKN. It’s not a pretty sight.

This Asda be stopped

When Wm Morrison agreed to buy an ailing Safeway in 2003 to compete against the big three supermarkets, a dominant Tesco immediately signalled a counter offer. Sir Terry Leahy, then Britain’s all-powerful grocer, knew that any proposal from Tesco, Sainsbury or Asda would be blocked by the Competition Commission, but he successfully snared Morrison in the investigation.

By the time the commission produced the screamingly obvious answer, Safeway was almost dead in the water. Morrison’s takeover, on something close to the original terms, caused years of chaos to Tesco’s benefit, and cost the family control.

It’s unlikely that today’s Tesco boss, Dave Lewis, will try to disrupt Asda’s proposed merger with Sainsbury, especially since he has just got away with buying Booker, Britain’s dominant food wholesaler, but the lesson of history is that he should not need to.

For all the bluster about new competitors, the lack of geographical overlap and lower prices for customers, this proposal is clearly anti-competitive. If the 25 per cent limit on market share from mergers is to have any meaning, the Competition and Markets Authority must block the deal. Its new chairman Andrew Tyrie has much to do.

This is my FT column from Saturday

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What is the point of Hammerson? It’s Where More Happens, according to the accounts, full of happy smiley people gazing into windows in its shopping centres. They are obviously not shareholders or they would be asking how a whole generation of property gains has somehow passed them by.

Thirty years ago, Hammerson shares cost about 400p. Last month, weighed down at the prospect of an ill-conceived merger, they cost 440p. Fifteen years ago, the dividend was 16.83p. The payout for last year is 15.5p. Next month the directors face the unenviable task of asking their shareholders to vote against a deal to which they have pledged “irrevocable” support four months ago.

Their gushing enthusiasm in December to buy Intu has this week turned into a cringe-making “withdrawal of recommendation” written by the company’s general counsel. In between, as the statement does not add, Hammerson’s share price crashed from 530p to 440p, while the board threw out a cash-and-shares proposal worth 615p from Klepierre of France, a bigger operator of shopping centres.

The Hammerson board saw no need to inform shareholders of the approach, and when it leaked, dusted down some boilerplate about “very significantly” undervaluing the business. When Klepierre raised the price to 635p, Hammerson said it again.

The board now believes the net asset value is a magnificent 790p, far ahead of the price at which it was happy to issue new shares to buy Intu. With the shares at 519p now, the best thing the Hammerson directors can do is pledge to realise that 790p as speedily as possible and return the proceeds to the shareholders. The second best thing would be for chairman David Tyler and CEO David Atkins to resign at the meeting. Their credibility is destroyed.

 

Going green about the gills

There are few things that government ministers like doing better than announcing crowd-pleasing policies with a target date far into the future. Labour got a warm glow in 2008 when the Climate Change Act imposed a legal obligation to cut Britain’s carbon dioxide emissions by 80 per cent by 2050, a date by when those passing the legislation will be (mostly) dead.

A decade on, and the costs of that feelgood factor are starting to appear. Governments of both colours have pinned the blame for rising electricity prices on the supplying companies, obscuring the hidden subsidies for windmills, solar farms, wood pellets and assorted “green” schemes that have kept costs to consumers high in an era of abundant energy.

Rather than admit that the Act was a mistake, the UK government is doubling down, with Energy Minister Claire Perry suggesting that there may be a case for even tougher limits by 2050. This is still a politically comfortable 32 years away, by which time this administration will be as far into history as the Thatcher years are today.

This virtue signalling of green credentials is producing more immediate results elsewhere. The decision by the May administration to demonise diesel and ban the production of non-electric cars by 2040 sent shock waves through the industry. Having been encouraged to save energy by shunning petrol, motorists are now punished for buying diesel cars. Sales have (predictably) collapsed, and 1000 contract jobs are going at Jaguar Land Rover.

The motor industry has systemic problems of its own. The end of PPI compensation payments, that £30bn of quantitative easing for the masses, removes a powerful stimulus to demand, which has also been sustained by the modern-day version of hire purchase. Demand for electric cars is sluggish, despite substantial subsidies which one day will have to be replaced by tax. Of course, Ms Perry and today’s administration will be long gone by then.

No more on this account

Today’s company reports are completely accurate and totally incomprehensible, the accounts as bloated as the choice of auditor is skinny. For big companies there are only four firms after the fifth, Grant Thornton, threw in the towel on FTSE100 pitches. Audit reports are frequently so qualified as to be meaningless and offer no guide to the true state of the business. Now John Kingman has added to his portfolio by chairing the review of the Financial Reporting Council, accountancy’s hopeless regulator. Whatever he recommends, let it not be disclosure of more incomprehensible detail.

Once upon a time, following the great inflation, the Bank of England started issuing bonds with a return linked to the Retail Prices Index. Since inflation rots bonds, these linkers would provide an asset which would rise when other bonds were falling.

This iron logic has proved false. Quiescent inflation encouraged investors to accept lower rates, both nominal and real.  According to the 2018 Barclays equity gilt study, published last week, the real return on conventional gilts has been 4 per cent, exactly the same as from linkers over the last decade. Over 20 years, conventionals have returned 3.6 per cent, against 3.9 per cent for linkers.

This annual orgy of statistics, now going back 118 years, shows what fine long-term investments shares are (5.1 per cent real, compound since 1899). However, for those whose horizon is rather nearer, the picture is more muddled. Over both 10 and 20 years, UK government bonds have returned more than equities with 3.2 per cent each time (both have easily beaten cash, but you would expect that) and had shares not done so well last year, the picture would have looked even worse.

However, there has to be an upper limit to the value of a bond. Already buyers of linkers are locking in guaranteed real-terms losses of around 1.5 per cent, while the UK government is paying 1.7 per cent for conventional 40 year debt. Now this financial suppression that followed quantitative easing is being unwound. Governments face relentless demands for more spending without more taxation, and there will be no shortage of new issues of gilt-edged stock in the next few years.

On the other hand, a buyer of Diageo, say, starts with a yield of 2.5 per cent, and the world shows no sign of becoming teetotal. Any long-run chart of share prices shows a steady upward climb, regardless of the colour of the governing administration, and what seemed at the time like dramatic corrections are barely perceptible dips. Bonds are just debt, while shares are stakes in rising prosperity, which is why they are ultimately more rewarding than lending to the government.

Bridge over troubled water

The threat from the internet to traditional clothing retailers is not as bad as you thought. It’s much worse. Not only is it eating market share, but the on-line sales are inherently much less profitable, especially in a market where growth is hard to find.

A summary of this “channel shift” was included in last month’s results from Next, a business whose publications contain more useful information than many boardroom papers. The analysts at UBS now conclude that “the downside from lost in-store sales was much higher than the gain from additional online sales.” They add that since the “profit bridge” across the digital divide is costing Next 13p off every pound of sales, the outlook for less well-managed businesses is dire indeed.

The point here is that the damage to margins could be permanent, even for retailers who do not fall off the bridge. On the UBS projections, Next’s experience translates into 12 per cent off M&S’s pre-tax profit, and a gruesome 78 per cent off Debenhams’. There are going to be many more drownings in this industry.

Tyrie: storm warning

As is traditional for any MP member of the awkward squad, Andrew Tyrie stepped down at the last election with no gong despite his masterful chairmanship of the UK Treasury committee. He now has a chance to shine as chairman of the Competition and Markets Authority. As a strong believer in both, he might start by looking at the City’s unofficial underwriting cartel.

Last week was the turn of Provident Financial to pay what is effectively a tax on listed companies for raising risk capital. To raise £300m, Provident’s shareholders had to pay £31m in fees and commissions. In theory, there was a risk that the underwriters of the issue would be left with any stock the shareholders did not buy.

In practice, there was no risk. The shares would have had to halve in six weeks from an already depressed price which had been softened up in anticipation. In fact, the price jumped, and has hardly moved between the day after the announcement and this week’s subscription deadline. Plenty for Mr Tyrie to do, then.

This is my FT column from Saturday. If you know anyone who might like to see it, ask them to put neilcollinsxxx into their favourite search engine, and hope the firewall doesn’t block it. Follow the links to get it sent every Monday (well, nearly every Monday).

 

 

 

 

The board of Unilever regrets any inconvenience caused, but the directors believe that it is in their best interests to disenfranchise UK shareholders. This is not a description of their latest proposal they will much care for, yet in anything but the short term, that would be the inevitable result.

The plan, heavily trailed and finally revealed last month, is to unify the two classes of share, Unilever plc and Unilever NV. Newnilever, as the company certainly will not be called, is to be incorporated in Rotterdam with a primary listing in Amsterdam.

The justification, that there is a greater daily trade in NV than in plc shares, is a canard; the principal market for both is in London. Amsterdam is a financial backwater. The deepest market in Europe, and thus the cheapest cost of capital, is in London. More than twice as many Unilever employees work in Britain as in Holland.

Unilever’s CEO, Paul Polman, was keen to emphasise that the three new principal operating businesses would all be based in the UK, but this is no more than an attempt to throw up a smokescreen over the significance of the decision, and to distract attention from the plan’s central weakness.

Without a principal listing in London, Unilever will no longer be eligible for inclusion in the FTSE100 index, of which it is the third largest constituent. It would no more be British than are the UK subsidiaries of IBM or Nestle, and many funds would become forced sellers or risk breaching their mandates by holding a Dutch share.

Many thousands of individual investors would feel further removed from a business which has long been a core holding in any portfolio. There is no upside in this proposal for us, while new investors, with their inevitable focus on domestic stocks, would no longer consider it for their portfolios.

The company’s response has been to encourage shareholders to lobby the London Stock Exchange to keep Unilever in the FTSE 100 index, a move which would make a mockery of the rules, and is hardly the role of the shareholders.

Fortunately, it is not too late for a rethink. The proposal needs a 75 per cent majority from plc shareholders, and already two of the top 10 shareholders have expressed serious misgivings. Between them, the 10 control 19 per cent of the votes, enough to defeat the proposal on any likely turnout.

Mr Polman has enhanced Unilever’s reputation both as a long-term investment and as a responsible corporate citizen, but this proposal is a serious misjudgment. To some, it looks like a way to protect his board from the possibility of another takeover bid. Others suspect that the UK incorporation of subsidiaries makes a break-up of the group easier.

Unilever denies any such thoughts, but there is more than a touch of hubris, or even  petulance, in the way the company is behaving towards its plc shareholders. Mr Polman is coming to the end of his term, and will thus escape the long-term consequences of this historic decision.

He need not look far for a solution. Royal Dutch Shell has its headquarters in The Hague, but is incorporated in Britain, with a primary listing in London. Unless Mr Polman wants to risk a showdown at the meeting in September, this is the model he should follow.

Time to sink this barrage

Here’s how decisions on big projects get made in Britain. The latest pitch from Tidal Lagoon Power, which wants to build a £1.3bn barrage in Swansea Bay, is: Look, this semi-aquatic white elephant is now even cheaper than Hinkley Point!

The barrage, 9km long, threatens Hinkley’s crown as the country’s most expensive electricity generator. The backers have squeezed a subsidy from the Welsh assembly, and so they can now argue that the cost to central government is less than the ruinously expensive nuke which no outside analysis says is worth doing.

Armed with its first taxpayer bung, the company is now putting the bite on business secretary Greg Clark, with moving stories of redundancy among the 50 staff should he fail to throw taxpayers’ money at the barrage. In a recent letter to Carwen Jones, the Welsh first minister, Clark described tidal lagoons as “an untried technology with high capital costs and significant uncertainties”. Quite right. This scheme makes no economic sense. Don’t weaken, Greg.

 

 

It was a close run thing, but the foreign marauders have been seen off. The long-term value creators have triumphed over the short-term deal-makers, despite a shocking, and shockingly-expensive, campaign to discredit the bidders. That this victory was made possible with the backing of new holders trying to profit from the gap in value between their cost and the market merely adds to the irony.

The triumph is, of course, Melrose’s £8bn takeover of GKN, achieved despite an extraordinary defence which sneered at the opposition, conjured up a deal to sell two-thirds of the business to a foreign company with a dodgy record, and which changed tack more often than a boat in an America’s Cup race.

The result was close thanks to the power of spin over substance, with all sorts of people who should know better weighing in: it was against Britain’s industrial policy: we should disenfranchise short-term holders: we cannot accept one of our suppliers being taken over: the Melrose share price offered a “fake premium.”

None of these slurs survives examination. The deal to sell the automotive driveline business to Dana was, we were told during the bid, well under way before Melrose arrived. We will learn just how well once the new team examines the documents. Suffice to say that GKN was such a tough negotiator that Dana threw in a secondary London listing and an extra $140m after the deal was agreed.

Britain’s industrial policy is a chimera. There were no credible grounds for the state to interfere, while any logic disappeared when GKN agreed to deliver driveline to an American company. Disenfranching short-term holders is not only impractical but self-defeating, since it would be simple to leave the nominal voting rights with the seller, to be exercised by the buyer. That is quite apart from asking why such “long-term” holders were selling in the first place.

Then there was the response from Airbus. Tom Williams, its chief operating officer and friend of Mike Turner, GKN’s chairman, said it would be “practically impossible” to award new work were GKN to be taken over. So does each Airbus supplier require approval from Mr Williams before any change of ownership?

As for the suggestion from GKN’s stopgap CEO, Anne Stevens, that Melrose offers a “fake premium”, the Melrose share price has hardly changed since GKN revealed the approach and suddenly decided to give her the job. Her appointment is unlikely to be the reason for the jump in the GKN price from 330p to 440p that day.

The increasingly desperate missives to GKN shareholders from Mr Turner rather gave the game away, as did Ms Stevens’ petulant response to the confusion over whether she is 70 or merely 69. As a farewell present to the new owners, the GKN board agreed to pay advisory fees of £82m, plus a further $40m break fee to Dana.

Together, these two payments total 17 per cent of last year’s pre-tax profits. The 2016 accounts, the latest available, state the “single figure” pay for the top four executives at £5,447,000, but since three of them have departed, the numbers are a poor guide to the bill for clearing out the current board. Let us hope the compensation figures are less outrageous than the fees Melrose’s bigger band of shareholders will have to meet.

Bohemian Rhapsody

Galileo is a fine example of how the European Union works. This absurd fandango will cost €10bn to duplicate something we already have, free to consumers, in the form of America’s global positioning system. When it finally arrives after 15 years’ gestation, Galileo is supposed to be more accurate, secure and doubtless has a better tune. In reality it is a euro-vanity project in case the beastly Americans turn GPS off (they’ve promised not to) and we all get lost.

The initial pretence, 15 years ago, that the system could pay for itself without forcing euro-contractors to use it, is long gone. Now the EU is threatening to exclude Britain from competing for contracts to develop the system on the grounds that “security” means it must be a members-only project. This has not gone down well in Downing St, but the whole scaramouche is a fine example of how a vainglorious Brussels loads deadweight costs onto producers, and why we voted to leave.

This is my FT column from Saturday

No, honestly, we welcome him as a shareholder. Thus Barclays’ gritted-teeth response to the arrival of Edward Bramson, promising to “engage” with the new five per cent shareholder. Well, not quite five per cent, since under two per cent is shares actually owned by Mr Bramson’s vehicle, Sherborne. The rest is in voodoo financial instruments which entitle him to their votes. No surprise, then, that Barclays failed to see him coming.

The surprise is that it has taken so long for a raider to appear on the books. Barclays shares have been a miserable investment: they were first today’s price in 1996, since when they soared before being poleaxed by the financial crisis.

Barclays may have been the only UK domestic bank to avoid a taxpayer bailout, but it is not only the shareholders who are paying far more than they might have expected. The bank itself and former executives are facing criminal charges for effectively financing the purchase of its own shares.

Unlike the other banks brought low in 2008, Barclays does not seem to be recovering. Jes Staley has been CEO for three years, and while he has a plan, there is little evidence that it is working, and he has become best known for his ill-judged pursuit of a whistleblower in the bank. Even after 34 years with JP Morgan, and recruiting some expensive former colleagues to his team, success in generating investment banking returns at Barclays is eluding him.

It’s unlikely that Mr Bramson has a magic formula for the bank, but he has a knack of spotting undervalued assets, even when it is not clear – perhaps not even to him – how to unlock them. The Barclays directors now know there is a ticking device underneath them. It should concentrate the mind wonderfully.

 

We want experiences, not shops

Westfield, the monster development beside the relic of London’s motorway box at Shepherds Bush, clearly wasn’t big enough. Last week it expanded by 740,000 sq ft to 2.6m sq ft to become Europe’s biggest shopping mall. Reflecting the great British public’s enthusiasm for a grand day out, it will be even harder to park than before.

Co-incidentally, the week also saw more of the walking wounded from the retail revolution limping in. Both Moss Bros and Mothercare are emaciated shadows of their former selves. The traditional hire business looks increasingly hopeless as suit prices fall (only a strong balance sheet is funding the dividend) while Mothercare is hoping its bankers care enough to save the baby.

At Carpetright, it was the increasingly familiar tale of Company Voluntary Arrangements, a sort of near-bankruptcy whereby desperate retailers escape from shops leased at unsustainable rents. Not many CVAs at expanding Westfield, of course, but others are feeling the cold, which brings us to Hammerson, owner of smaller malls, and elegantly skewered by Klepierre, a Paris-listed real estate investment trust.

Hammerson wants to get further into malls by merging with the absurdly-named Intu. Since the deal was announced on December 6, the shares have been, well, hammered, from 533p to 435p by last Friday. Then The Times revealed Klepierre’s suggested 615p offer in shares and cash, and Hammerson shares shot to 570p, on the prospect of holders being saved from their management.

Rather carelessly, that management had failed to disclose the approach, and now points to 776p of net assets per share. This looks pretty feeble when it is printing new shares at 533p, let alone 435p. Intu, most analysts agree, is not full of hidden gems.

The e-commerce revolution is only starting. The Westfields may survive, and even thrive, but the outlook for the rest is grim. The Hammerson price is a klaxon to the directors; they should swallow hard, exit Intu, and see whether the French will pay a bit more for them to come quietly.

Missing the boat at the Bank

Another month, another missed opportunity for the Bank of England to take a step on the road to normal interest rates. This was a near-painless moment to add 25 points to Bank Rate, up to the dizzying heights of 0.75 per cent. Wages are rising, even before the awards to NHS workers, and the hike in US rates provided the perfect cover. The BoE is being too slow, as usual.

Advice from the City’s finest is magnificently flexible. They can project a miracle boost to a company’s profit margins while simultaneously promising a fat payment to shareholders. They can line up politicians and trade unionists to defend a national champion from an “asset stripper” one day, and announce a deal to sell half the business to a foreign buyer the next. They can mutter darkly about an irrelevant threat to national security. They can press the pensions panic button.

They are, of course, the advisers to GKN, the subject of a takeover bid whose jury-rigged* crew of directors is trying to repel the boarders from Melrose. Advice this flexible does not come cheap. For “financial and corporate broking” Gleacher Shacklock, JP Morgan and UBS will share £60m, while the bill from lawyers Slaughter & May comes to £12m. Add in the rest of the crew and there is no change from £82m.

For just a few weeks’ hard work by not very many people, this is an impressive example of how the City shovels money around and keeps what sticks to the spade, or in this case, the mechanical digger. Of course the GKN board, like a man with raging toothache, was not in a strong position to haggle over the fees.

Not all the money is wasted. What initially looked like a hopeless case for the defence has scored some hits. The price agreed for the automotive drive train business is better than a fire sale, albeit with payment in shares in Dana, a US engineer with a patchy record.

Melrose has added £500m to its offer, handing more of the combined equity to GKN shareholders, while Airbus, its biggest single customer, has helpfully cranked up the pressure by signalling a rather predictable fear of the unknown. The advisers have also persuaded investors to view the businesses in a more positive light, rather than as a tired old engineering conglomerate.

Yet it hardly adds up to any sort of value for money. If Melrose wins the day, its shareholders will write the cheques, as well as paying another $40m bill, in the form of a break fee to Dana. That rises to $54m if the GKN board has a Damascene conversion and recommends acceptance. Since the directors would be out the day after a Melrose victory, that seems unlikely.

It is not hard to see why they are fighting so hard to keep their jobs, but the idea that the final offer “fundementally undervalues” this venerable business, as they claim, is mere takeover rhetoric from a board that can hardly know whether it does or not. Its emergency CEO has come out of semi-retirement, the new finance director is not an accountant, and the senior independent director has just stood down.

Backing GKN’s management is a leap of faith, and shareholders now have a fortnight to decide which way to jump. They might consider that £82m represents the trading profit on £1.3bn-worth of automotive drive trains, or getting on for 15 per cent of last year’s entire pre-tax profits. Can you spot the winners?

Words and figures did not agree

The results from Conviviality Retail two months ago were greeted with something close to rapture by analysts from Investec, N+1 Singer, WH Ireland and Shore Capital. For the purveyors of Bargain Booze and Bibendum, things looked set fair, and CEO Diana (the) Hunter had described the results as “strong.”

Yet as was noted here at the time, something smelled fishy. Despite all this enthusiasm, the shares slumped 11 per cent on the day, accelerating a fall that began before Christmas. The sellers just kept on coming, and the shocking discovery of a £30m tax demand due this month, after almost daily profit warnings, added farce to the tragedy.

Conviviality has now asked its banks for mercy. The business is in such a state that the dividend has been cancelled. The shares are suspended, and Shore fears they may be worthless. It’s hard to avoid the suspicion that somebody knew things were bad, even if they hadn’t actually hidden the brown envelope behind the sofa. It’s enough to drive you to…oh no, don’t say that.

This is my FT column from Saturday

*Jury-rigged: makeshift, improvised (OED)