A number of companies on which ShareSoc has commented recently were in the news today (23/6/2014) or over the preceding weekend. Let’s cover each in turn:
Kentz
Kentz received a cash offer for the company of 935p from SNC-Lavalin this morning. That’s a premium of 33% to the recent share price. With such a premium and the stated support for the offer from the directors, it looks likely to succeed. This will avoid the directors of Kentz having to deal with the issue of what to do with the problem that shareholders voted down both the Remuneration Policy and Remuneration Report resolutions.
Victoria
ShareSoc was involved in this carpet company when the directors fought acrimoniously over the future of the business. After a poor financial track record, investors (many related to the founders) wanted a new board which they eventually got. Geoff Wilding was appointed as Executive Chairman with a remuneration package based on a CFD – a Contract for Difference (no doubt for tax reasons). Shareholders approved this rather unconventional arrangement. Mr Wilding seems to have subsequently made good progress in reviving and rationalising the business.
Now the company has announced a Special Dividend of £2.95 per share when the share price was only £3.21 the previous Friday. As the CFD was performance based and depended on total return, the Special Dividend payment will apparently crystalise the CFD but instead of taking the remuneration as cash Mr Wilding is taking it in new shares. This will increase his holding to 50% of the enlarged share capital.
So in reality existing shareholders are being offered the market price of the company, and to be left still holding 50% of it. Needless to say the share price rose substantially this morning. But how this deal is to be financed is not totally clear – it may become plainer when the full documentation is provided. But investors must surely be happy with events of late. However not all will be pleased with holding shares where there is a dominant investor with 50% or more of the company.
AstraZeneca
The Financial Times reported on the previous Saturday that AstraZeneca are considering selling the rights to some of its future revenues. It suggested this would “help stifle any renewed takeover attempt” by Pfizer. In other words, this looks like a “poison pill” under another guise. By bringing in billions of dollars in cash, and returning the cash to shareholders, the rump of the business would become much less attractive to a buyer (and of course effectively hamper any future management of the business). Is it not astonishing that the directors of the company would even consider such a proposition? How can this be in the interest of investors or other stakeholders in the company in the longer term? It surely confirms what is already apparent from the past actions of the directors of AstraZeneca – namely that they were intent on thwarting the offer from Pfizer without letting shareholders decide for themselves on the merit of the offer. A highly dubious approach by the directors of the company. Surely the CEO and the board as a whole need to focus on delivering the future drugs pipeline that they have promised, rather than doing clever financial deals that will hogtie the company going forward.
SSE
Lastly we commented on the accounts, and the enormous “adjustments” that were used to get respectable headline profit figures in last years figures from SSE. Reading the Annual Report in full also raises some other issues.
There are 10 directors, including 8 non-executive directors (including the Chairman). We learned from the banking sector debacle that having directors with no experience of the sector in which a company operates to be a big mistake. But the non-exec directors of SSE have the following backgrounds:
Lord Smith: An accountant with a background in financial services (and a director currently of 2 banks).
Jeremy Beeton: A civil engineer with a career in Bectel. At least a background of some relevance.
Katie Bickerstaffe: Previously a director of Dixons, Kwik Save and Somerfield.
Sue Bruce: A career local government officer – currently a Chief Executive of Edinburgh Council.
Richard Gillingwater: Corporate finance background and a director numerous other companies in a variety of sectors (other than where SSE operates).
Peter Lynas: An accountant with a background in defence companies – currently Finance Director of BAE Systems.
Lady Rice: A career banker, currently Managing Director of Lloyds Banking Group Scotland and a director of the Court of the Bank of England.
Thomas Thune: An extensive international career in the oil and marine industries (with A.P. Moller-Maersk).
In summary, it’s difficult to identify that any of these non-executive directors have much experience of the utilities and power generation sector and most have none. So we have a board with only two executives who know much about the industry and 8 non-executives who don’t. You can imagine who might dominate the decision making in that case. In addition, they have non-execs who have full time jobs elsewhere, and even the executive directors have other jobs (for example, the Finance Director is a non-exec at Stagecoach Group).
The Remuneration Policy and Remuneration Report for SSE also shows rapidly rising pay for the CEO and incentives that can add up to 250% of base salary.
But if you wish to attend the AGM to make some comments on these matters, you will need to go to Perth on the 17th July because that’s where the meeting is being held.
Roger Lawson
Victoria Postscript
To follow on from my previous blog post on the Special Dividend at Victoria, having now read the full document on the proposed deal, there does not appear to be anything obviously wrong with the proposal. It’s quite a nice way to ensure shareholders obtain the return they have been wanting for some time. At the time of writing the share price is now about 385p which is higher than it has been for very many years.
The Special Dividend is being financed from existing cash resources and bank debt, and it does appear that after this transaction the company will have significant debt. In addition existing shareholders will be left with only 50% of the company. Valuing the company as it will appear in its new guise is somewhat difficult, although in theory it will have the same revenue and profits (but earnings will be diluted by 50% of course). Forecasting future profits is not easy because Victoria reported interim figures showing negligible profits last November but since then it has acquired Globesign which had substantial profits. It would have been more helpful to have some up to date financial figures, but it does not affect the merit of the proposals. Readers will need to estimate for themselves what the likely future earnings will be, and apply a discount for the large debt, the cost of that debt and the peculiar ownership structure.
However, the proposal will have the advantage of aligning the interests of Geoff Wilding with that of other shareholders as he will now have a major shareholding in the company which he did not before.
The only possible risk is a challenge by HMRC to the arrangements (the contract for difference was an alternative to normal pay arrangements surely), so they might claim National Insurance should be payable on the value, for which the company would be partly liable.
In summary, I can see no particular reason why shareholders should vote against this proposal.
Roger Lawson