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Nov 6, 2009

Shareholders bear privatised pensions pain: Neil Collins

LONDON, Nov 6 (Reuters) – It’s a long time since Cable &
Wireless <CW.L> and British Airways <BAY.L> were sold off by
the UK government, in that helpful confluence of party ideology
and the need for money that gave the world privatisation. Yet
only now is the true cost of promises made to their employees a
generation ago becoming apparent.

On Friday, buried deep in its long, gloomy statement, BA
revealed the latest state of its old, closed pension funds.

Oct 23, 2009
via Breakingviews

Can Tesco really be as cheap as chips?

(Refiles on October 19 to add disclaimer for author’s personal investment.  Neil Collins owned shares in Tesco when he wrote this article.)

Matthew Truman doesn’t just think Tesco shares are undervalued. He thinks you’re getting one free with every three you buy at today’s price. The Nomura analyst and his team have written 112 pages to back up their contention that they are worth 526 pence each, against yesterday’s close of 389 pence.

Oct 22, 2009
via Commentaries

Aviva ceo gets vote of confidence from chairman. Oh dear.

It’s an iron law of business that whenever a chairman talks publicly of his complete confidence in his chief executive, he hasn’t got it. Andrew Moss must be hoping that Aviva, the UK’s biggest insurance group, is the exception that tests the rule.His chairman, Colin Sharman, told The Times about his “full confidence” following the disclosure that Moss has left his wife for a relationship with a director from the company’s HR department.As Alphaville was quick to point out, Aviva’s interim report for 2008 dribbled on about a rather different sort of triangle. This one “has been developed to explain the purpose, vision, targets and strategic priorities of the group”. I make that four sides, but never mind.Insurance companies are not the only ones that seem to have been taken over by people to whom English is a foreign language, but perhaps it’s the nature of what they do that encourages elision and obfuscation. Here’s the “group strategy” from that same interim statement:

Aviva’s purpose is to deliver prosperity and peace of mind to our customers. We will achieve this by realising our vision: “One Aviva, twice the value”. By working together across our businesses, we will optimise our performance in the global marketplace and maximise the value we can generate for our stakeholders.

Of course, Aviva is the company that threw away (at great expense) a perfectly good brand name in Norwich Union. No wonder they can’t cope with triangles.

Oct 22, 2009
via Breakingviews

Dear Adam, Are you lost in the post?

Dear Adam CrozierI see that I’m not alone in wondering why you’ve been so reluctant to step into the limelight for your 15 minutes of fame. If you don’t do so soon, many others will start to wonder what you actually do for your very substantial reward.When you’re chief executive of a business as high profile as Britain’s Royal Mail, you must lead from the front when it comes to a strike. The man who brought you in, Allan Leighton, would never have let things slide so far. Mind you, he’d have also discouraged Peter Mandelson from taking a line sufficiently belligerent to make union leader Billy Hayes look cuddly and reasonable.This strike is supposedly about industrial logic. The postal service cannot go on as if the internet, emails, and private delivery services do not exist. But the posties’ action looks like a cry of pain at the failure of management to cope with the changes everyone knows must come.You may have been working on this 24/7, but I sense a great divide between the workers who are being forced to do more, and the bureaucracy which appears to have time for role-playing games in working hours.Reports like these, even if anecdotal and out of date, are symptoms of a business in distress, and while you have more than your share of troublemakers in your ranks, distress is ultimately the fault of the management. Describing the strike as “appalling and unjustified” as you did last week will not help you win the battle for public opinion.When all three political parties agree with you, as they appear to on this issue, then we should watch out. The Royal Mail touches everyone’s lives. We grumble about it all the time, but the alternatives seem worse. Its finances look grim, but that’s because the business has been forced to recognise the cost of public sector pensions on its balance sheet. You might care to make this point if you can face an interview with Jeremy Paxman or John Humphries. If you can’t, then it really is time for another career – your fourth, by my reckoning, and you’re only 45.Finally, I hate to lower the tone, but you really are rewarded beyond your pay grade; 995,000 pounds last year may look like slim pickings against the 3,044,000 pounds of 2007/08, but as Billy Hayes might say, it would buy a lot more of the footsoldiers you are attacking.I’d send you this, but you know how it is with the post these days.Yours electronicallyNeil Collins

Oct 21, 2009
via Breakingviews

Cadbury gives sweet update, shares unmoved

Todd Stitzer and his colleagues at Cadbury must surely have hoped for more. Wednesday’s eagerly-awaited trading update chewed up the outside forecasts and showed there is nothing Flake-y about this business. Growth in sales in the last quarter was 7 percent, against the previous guidance of 4-6 percent. Margins are improving and the future’s coming up Roses.He might have expected the figures to have lifted the value of the Cadbury business beyond the reach of Kraft, but the share price was hardly changed. There wasn’t even much turnover, reinforcing the pattern since the Kraft approach at the beginning of September.After a spike on Sept. 7, trading volume quickly sank back to pre-approach levels, while the shares have not moved more than a few pennies from the 794 pence where they ended that day.By today’s standards, this is curious. The arbitrageurs are conspicuous by their absence, while the bigger holders have resisted the usual temptation to top-slice their holdings. In other words, they believe that Cadbury’s sticker price is 8 pounds, and the upside from a small premium beyond that equals the downside from Kraft walking away.Kraft now has to decide whether to pay it. Its own update is due on Nov. 3, and its put-up-or-shut-up deadline is Nov. 9. Its shares are not joining in the general surge on Wall Street, implying that investors fear it will overpay, even without Bruce Wasserstein’s encouragement to bid-’em-up.A hostile bid at 8 pounds risks a fight and an embarrassing defeat, while paying a little more to gain agreement looks like a bid too far — with subsequent further damage to its share price. The approach was clearly well researched, as the details of the cost savings showed on Day One, but unless the Kraft management can engineer a change in sentiment towards its shares, the odds are just in favour of Cadbury escaping.

Oct 20, 2009
via Breakingviews

Another Punch on the nose for shareholders

It’s barely four months since Punch Taverns, the company that brought financial engineering into the British pub, was rescued by its shareholders. After a struggle, and 25 million pounds in fees to Goldman Sachs and Merrill Lynch, Punch managed to raise 350 million pounds in new shares at 100 pence each, a 32.7 percent discount to the previous day’s price.In a sense, the banks earned their fees, since they picked the peak of the recovery in the share price. Since the issue, it has slumped again, on the realisation that Punch’s problems are worse than simply a pressing need to repay a maturing bond.Those who did subscribe at 100 pence are now sitting on a loss, with the shares at 88 pence. So it’s just the moment for Punch’s remuneration committee to award chief executive Giles Thorley and his fellow executives their LTIPS. Fritz Ternofsky, the chairman of the remuneration committee, reckons the directors deserve the right to buy 4,444,440 shares at 90 pence each under this scheme, part of what the accounts describe as measures to “attract, motivate and retain” these highly-paid people.The Punch annual report devotes 12 pages to directors’ remuneration. The collapsing share price has done serious damage to their rewards. Thorley, the architect of the business model, found his pay cut to 632,000 pounds from 2007’s 875,000 pounds.It’s been no fun being a pub landlord recently. Even before the recession, the industry had been clobbered by duty rises, a smoking ban, a higher minimum wage and health and safety demands. But Punch was never much interested in running pubs. It is the industry’s equivalent of the property owner expecting to make his fortune from buy-to-let mortgages – a gamble on cheap money and rising prices. The executives, newly attracted, motivated and retained with their below-the-rights options, now have to prove that their version of the model is not broken beyond repair.

Oct 19, 2009
via Breakingviews

Us bid for you? I thought you’d never ask

(Refiles on October 19, 2010 to add disclaimer for author’s personal investment. Neil Collins owned shared in National Express when he wrote this article.)

The drunken Glaswegian bruiser has the perfect explanation for joining a fight: “He was asking for it”. Brian Souter is not from Glasgow and he’s a teetotaller, but he’d recognise the sentiment. As the consortium bid for National Express, the UK bus and train operator, collapsed last Thursday, he was on the phone asking about the scope for a “merger” with Stagecoach, the similar business he runs.

Oct 16, 2009
via Breakingviews

National Express misses the train (again)

(Refiles on October 19, 2010 to add disclaimer for author’s personal investment. Neil Collins owned shared in National Express when he wrote this article.)

You know how it is. You wait patiently while the train announcer keeps telling you the 5.00pm is delayed, until the next announcement which informs you that it’s been cancelled. Shareholders in National Express got that same sinking feeling on Friday, when the bidding consortium abandoned its takeover approach.

Oct 15, 2009
via Breakingviews

Bye bye bid-’em-up Bruce

Bruce Wasserstein hated the soubriquet “Bid ’em up Bruce”, perhaps because the truth is always the worst insult. Wasserstein was the driving force behind some of the worst deals of recent history. They generated vast fees for the banks he ran, but frequently failed to create any value for the shareholders who were ultimately paying them. Too many among the $250 billion of deals he squeezed through have proved to be lemons.An early example was Du Pont’s white knight takeover of Conoco in 1981. The $9 billion acquisition was founded on the doubtful premise that Du Pont’s chemicals would benefit from ownership of Conoco’s crude. Buying your supplier seldom makes business sense, and the merger was unwound 16 years later.The leveraged buyout of RJR Nabisco in 1988 by KKR, advised by Wasserstein, was a spectacular example of the power of gearing up with debt, at a time when the market’s appetite for junk bonds made hubristic bids possible. The deal was a  financial coup, but the businesses were effectively smothered under the mountain of debt. As Andrew Beattie put it: “Tobacco and food were separated and recombined in a shuffle involving almost as many players as the original dance.”Perhaps the most impressive example of value destruction is the string of deals which first combined Time Inc and Warner Communications, and rammed Time-Warner into AOL, then the leading internet media group. The earlier merger, in 1990, had been a real blood-and-thunder affair, with a competing bidder for Time and two court cases, and set the tone for Wasserstein’s later deals. The merger was not a runaway success, and when the infamous $350 billion top-of-the-market deal dreated AOL Time Warner in 2000, some suspected that each partner was trying to escape its own concealed weaknesses. By 2003, following the collapse of the dotcom boom, the lawsuits were flying. To be fair, the 2000 deal had been so big that there was a place for almost every banker on the slate, and Wasserstein did not play a major role. He did, however, publish an excoriating report in 2006 calling for it to be broken up again, before pitching for the business.Over his career, he changed the way Wall Street takeovers were conducted, rather as Sigmund Warburg did in London. The direct approach to shareholders, the active use of public relations and lawyers to exploit the rules, the day-by-day operations in the markets during the contest were hallmarks of both men’s banks.Joseph Perella, his partner for 16 years, described him as “a rare talent”, noting, “this is a great loss for Wall Street.”  In the middle of a $16 billion bid for Cadbury, this is undoubtably true. Whether his career would pass Adair Turner’s test for being socially useful is a much more awkward question.

Oct 14, 2009
via Breakingviews

Who’s buying long-dated bonds at these crazy prices?

Bad news for holders of UK Government index-linked stocks: the value of their investments has shrunk by 1.4 percent in the last year. Both the capital and income of these stocks are linked to the Retail Prices Index, and September’s measure, released on Tuesday, was 1.4 percent below the figure this time last year.Yet the prices of the index-linkers were hardly affected. This is a strange market indeed. The stocks promise to repay in the equivalent money of the day, and the one which matures in 2013, for example, effectively merely gives a buyer his investment back, four years hence.Further out, things are odder still. The longest-dated stock, which doesn’t mature until 2055, promises a real return of a tiny 0.4 percent if held for the next 46 years.  It only looks worth considering as an investment when set against the equivalent “conventional” stock. Repaid in pounds which will have been ravaged by the next half-century’s inflation, it returns a pitiful 4.08 percent.These prices allow investors to calculate the break-even inflation rate, the rate where the returns (pre-tax) from both investments will be the same. For the 2055 stocks, the figure is 3.62 percent. This is a triumph of hope over experience, since British inflation has not averaged anything like this over any half century since paper money replaced precious metals.The buyers, of both sorts of stock, are not using their own money. They are the managers of pension funds, pushed into a grotesquely overpriced market by their actuarial advisers. The actuaries urge the companies to buy government stocks because they are the least poor match to the future liabilities in final salary pension schemes.Actuaries love doing arcane sums – their qualification depends on this ability – and the predictablke stream of income from long-dated bonds allows them to generate those scary numbers for shortfalls in pension funds. Income streams from shares are far less predictable, so the actuaries dislike them. Thus, the most suitable asset class for a long-term fund is being increasiongly marginalised in favour of portfolios of  IOUs.Share prices are volatile, as well as being hard to predict, but index-linked stocks can swing violently, too. The yield on the 2055 index-linkers has been as high as 1.2 percent and as low as 0.25 percent within the last 15 months. Their prices have also tended to move much more in line with conventional gilts than theoretical models had earlier suggested.Shares are, to some extent at least, a measure of the wealth of a country, while government stocks are merely liabilities on future generations. Even after this year’s dramatic rally, the FTSE 100 index returns 3.4 percent, a yield which in all probability will rise faster than inflation over the medium term. British shares may not be cheap, but compared to the price of UK government stocks, they look an absolute steal.

    • About Neil

      "City Editor, The Daily Telegraph 1986-2005 City Editor, The Sunday Times, 1984-1986 City Editor, Evening Standard, 1979-1984 Director Templeton Emerging Markets Investment Trust plc, Finsbury Growth and Income Trust plc Passion: fly fishing (and wife Julia and seven-year-old twins)"
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