Takeover panel rule change – foreign companies now covered

A little reported change to the Takeover Panel Code that took effect today will strengthen the rights of shareholders significantly. In future those companies that are registered in the UK but have their operations overseas will be bound by the Code. Previously they were not. So for example, AIM companies such as Globo (operations in Greece) or Pan African Resources (operations in South Africa) will now have to comply with the Takeover Panel Code.

The Takeover Panel Code helps to protect the interests of minority investors, particularly in takeover situations. It contains rules on disclosures and the procedures to be following when a bid is made. So this change is to be welcomed as previously companies could register in the UK and hence apparently be subject to the normal provisions of UK Company Law. But if their operations were based overseas they could ignore the expected bidding process.

Roger Lawson

Dotcom bubbles – Mark 2 – ASOS

It’s noticeable that the price of on-line retailer ASOS has fallen back slightly of late. It seemed a good idea to look at what the current share price is assuming in terms of forward projections on growth in earnings. Now you can debate whether the near-term growth is 20% per annum or 30%.  Analysts’ projections seem to assume about 30% for future growth, whereas the interim results only showed growth of 22% (although sales were up 34%).

The following tables show the current p/e ratio and projections for what it might be over the next few years if the share price remains unchanged (i.e. remained at the current level of 5110p). If your target is for a p/e of somewhat over 20 which might equate to that of other retailers showing reasonable growth might be valued at, then it will take the company to 2019 to get down to that level of p/e at 30% growth. If you assume 20% growth, it will take until 2022. And that assumes no hiccups along the way.

 

ASOS

as at 26/9/2013

         
                       
   

2013

2014

2015

2016

2017

2018

2019

     

At 30% growth

EPS Forecast

48.8

63.4

82.5

107.2

139.4

181.2

235.5

     
 

SharePrice

5110

5110

5110

5110

5110

5110

5110

     
 

p/e

105

81

62

48

37

28

22

     
                       
   

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

At 20% growth

EPS Forecast

48.8

58.6

70.3

84.3

101.2

121.4

145.7

174.9

209.8

251.8

 

SharePrice

5110

5110

5110

5110

5110

5110

5110

5110

5110

5110

 

p/e

105

87

73

61

50

42

35

29

24

20

Now investors might have faith in the company that it will continue to grow at that rate, and in 2019, or 2022, that projected future growth is still as high but it is surely taking a lot on trust. And that is assuming the share price remains unchanged, i.e. investors get no capital returns between now and then.  Future growth after 2019 or 2022 would need to be high also if the share price was to continue on it’s upwards trajectory. It all looks rather unlikely does it not?

It certainly looks as though buyers have been driving the share price up not on any fundamental valuation but by speculating on what others might pay for the shares, i.e. it’s the typical “tulip” bubble when stock is in short supply.

I hope to do a future article on companies like Monitise, Blur and others which are even more difficult to value because they have no current earnings which one can project forward.

Roger Lawson

FTSE100 pay still not under control

Remuneration consultants MM&K have reported that the total remuneration of FTSE100 chief executives has risen by 5% over the past year, to £4.4 million. That compares with not much more than 1% for all employees in the country. But MM&K do suggest that future earnings might be slightly moderated with “future awards” and bonuses down and salaries only up by 2.5 per cent.

Comment: a lot of investors would like to see the overall remuneration cut not by 1%, or by 5%, but by 50% so as to bring it down to a more sensible level. It is simply not necessary to pay these enormous sums to obtain competent executives who will work hard. In essence we need much more substantial reformation of the pay determination system in place in public companies, and for institutional investors to take more vigorous steps to control pay. The looming regulations on “votes on pay” may help a wee bit, but unless Remuneration Committees are forced to change, I am not hopeful that substantial change will take place.

The facts of grossly excessive pay for the executives of large companies have been apparent for many years, but those who could control it have not done so. That is the issue that has to be tackled.

FTSE100 CEOs pay is now 120 times the average pay of their employees. It’s worth noting that in the USA the SEC is introducing a “pay-ratio disclosure” regime where companies will have to report the ratio of the pay of their CEOs to the median pay of their employees. Companies and investors have both objected.

The problem is that such ratios need to be treated with a lot of care. For example, employees in Starbucks on average might be lowly paid (the ratio in that company is about 1,000 times apparently). But employees of Oracle, where there are lots of highly paid sales and software staff might show a lower ratio (Oracle’s CEO was the most highly paid in 2012 with pay of $96m!).

What do investors in the UK think about this suggestion? Would it help to highlight excessive pay? It has been put forward as a good idea but did not end up in Vince Cable’s proposals for pay reporting reform probably because of mixed responses.

Roger Lawson

Victoria AGM Report Summary – Chickens home to roost

After last year’s battles for control of this company, yesterday’s Annual General Meeting was a tepid affair (see past ShareSoc press releases and AGM Forum  reports for more information on the past fights).

Apart from the depressed state of the retail carpet sector, the wholly unnecessary exceptional costs incurred in that battle, and the subsequent restructuring of the business (which was long overdue in my opinion) resulted in an overall loss of £2.7m for the year ending March 2013. Revenue fell from £77m in the prior year to £71m. As new Executive Chairman Geoff Wilding said in his Chairman’s report, “2013 was the year when the chickens came home to roost at Victoria”.

There were about 25 shareholders turned up for the AGM, and it was certainly a more subdued atmosphere than last year.

One question asked by a shareholder, was “Are you confident you can return the UK business to profit?”. Mr Wilding’s answer was a positive “Yes”.  That’s certainly good to hear because he needs to do that to obtain the promised remuneration under the “Contract for difference” which was one of the disputed issues last year. Last year he got paid very little.

A full report is present here on the ShareSoc Members Network: http://sharesoc.ning.com/forum/topics/the-agm-forum?commentId=6389471%3AComment%3A23489

Roger Lawson

Share Options and Perverse Incentives (Nokia and Elop)

Outrage about the amount Stephen Elop is getting (Euros 18.8m) for selling the mobile phone part of Nokia to Microsoft extends from the Finnish Prime Minister to the editor of the Financial Times. It is not helped by the fact that Mr Elop left Microsoft to join Nokia as CEO, and is now returning to them. Mr Elop did not manage to really revive the mobile side of Nokia while he was there, although some might say he established a base for the future, and it was a pretty dire situation when he joined in 2010.

What are the facts of the matter? Most of the above compensation arises from share options that are “crystalised” because of the change of control. It is very normal to have a change of control clause in share option agreements and there is a very good reason for such a clause. If for example, you worked for a public company, but it was taken over by a private company, then your options would potentially have no value because there would be no market for the shares you have options over.  That would also generally apply if you are taken over by a public company where typically the company shares of the takeover target are delisted. So if share options are a substantial part of your potential overall compensation, no executive would sign a share option agreement without such a clause in it.

The main reason why Mr Elop is “earning” such a large figure is apparently because he was granted large numbers of options at a low price, and the share price of Nokia shares has gone up by two-thirds since the deal was announced.

One has to question whether such arrangements provide perverse incentives though. Obviously it made more financial sense for Mr Elop personally to close this deal with Microsoft rather than wait for a recovery of the company.

This is not a new problem. It arose, for example, at BAE Systems when the merger with EADS was being proposed. The CEO, Ian King, was reported at the time to likely obtain £18m from the crystalising of share options if the deal went through. You can see why he might have been keen on it, when others thought it was a pretty daft idea that would never get approval by shareholders.

Now share option agreements usually have performance clauses, and of course time duration clauses (not all options vest immediately). But these clauses can be wiped out by the “change of control clause”, so performance does not have to be achieved, and in no period of time. The problem therefore is not the principle of cystalisation, but the details of the contract. In addition, some share option contracts are simply too generous.

As it was, the board of Nokia agreed Mr Elop’s contract so they need to pay up. But at least they have persuaded Microsoft to pay 70% of the award.

Roger Lawson

Diageo votes at AGM – more opposition

This morning Diageo announced their voting results from the poll at their AGM on the previous day. Isn’t it annoying when the poll is not declared at the meeting so shareholders cannot question the board on the results?

But that aside, they got 11.8% against the Remuneration Report, up from 7.5% last year. This rather reflects the complaints in the meeting itself about the general level of remuneration in such large FTSE-100 companies. It seems likely that last year’s figures were somewhat flattered by the goodwill to the new Chairman of the Remuneration Committee but that has obviously now evaporated.

The company also got 14.6% against the change to 14 days notice for General Meetings, up from 10.5% last year. Will the company pay attention to the rising opposition or continue to ignore shareholders on this point? ShareSoc has consistently opposed such resolutions as both unnecessary and prejudicial to shareholders’ interests. At least it’s good to see opposition growing rather than such resolutions being considered “normal”.

A full report on the Diageo AGM is present on the ShareSoc Members Network (AGM Forum).

Real Good Food –an example of poor AIM corporate governance

Chris Spencer-Phillips, a ShareSoc Director, attended the AGM of Real Good Food last week. This is typical of many AIM companies in that it has very poor corporate governance. They have an Executive Chairman, who refused to answer the questions from a shareholder at the meeting. In addition they have pay which is wildly out of line with the profitability and general size of the company. That includes £798k (including consultancy fees) to the Chairman, plus share options; and one of the Non-Executive Directors gets £135k which for an AIM company probably takes some beating.

As we said to the FRC at a meeting with them this week, corporate governance in many AIM companies is a major problem and unfortunately the LSE don’t seem to wish to tackle this problem. All shareholders can do in the meantime is avoid such companies.

You can read Chris’s full report on the AGM here on the ShareSoc Members Network: http://sharesoc.ning.com/forum/topics/the-agm-forum