AstraZeneca and Pfizer merger definitely off

Pfizer have conceded defeat in their proposed offer for AstraZeneca (AZN). Ian Read, the Chief Executive of Pfizer, said it was a “missed opportunity” for both the UK and for AZN shareholders. He also said we could have had the worlds largest pharmaceutical company domiciled in the UK which would have been good for science and manufacturing in this country. He surely has a point there.

In addition he complained about the Takeover Panel rules as contributing to thwarting the deal, but surely this was more a symptom of his tactics proving defective. Is it wise to make a “full and final offer” which puts your target on the spot and leaves them little room for manoeuvre? In addition the offer was indicated as being subject to the consent of the AZN board from the start, an unnecessary handicap which gave them a very powerful negotiating position.

But the board of AZN are surely also to blame. This was a company that the market (and by implication the analysts who advise most investors) valued at £35 in January this year. An offer of £55 seems generous does it not?

Can AZN management really justify a higher figure than £55 for the company as an independent entity?  Bear in mind that Pfizer would have gained some tax advantages and other synergies from the merger that would have justified a higher valuation than that for AZN as an independent business. But Pfizer were never given the opportunity to fully evaluate the business because the AZN directors consistently rejected the offer out of hand as unworthy of consideration and hence no due diligence was allowed.

Major investors were from media reports in two minds about the offer. Some thought it was worth considering but others were doubtful and considered a higher price more appropriate or simply thought they would prefer the company to stay independent. The directors of AZN did not seem to spend a lot of time debating the matter though. When the final offer of £55 was made they did not appear to consult their major shareholders and it was apparently a short conversation only with Mr Read on the subject.

Surely it would have been wiser for the AZN board to allow the offer to be put to shareholders even if they had reservations about it? It is often the case that the directors of a company value it more than outsiders. This is from hubris or because they think they know more about the business and its prospects than others. But the market should be the decider because the wisdom of crowds is superior to the wisdom of a small clique. At least they should have consulted more widely.

Investors never did see a full defence document, so that independent analysts and investors could be given the opportunity to consider it in detail. All we got was huffing  and puffing from both sides.

In summary, investors have been poorly served by both parties in this battle. There is nothing substantially wrong with the Takeover Panel Rules which simply provide some clarity and discipline to the process.

Pfizer can come back in three months time (with AZN’s consent), or in six months with a contested bid. Let us hope they do the latter so we get more out into the open. Shareholders can then make up their own minds on whether they like the merger and the offer price or not.

Roger Lawson

Carpetright – Lord Harris finally bows out.

Last week (on 21/5/2014), Lord Harris announced that he was leaving the board of Carpetright where he has been Executive Chairman since last October when his succession planning went awry. Lord Harris had been running Carpetright and similar businesses selling carpets for over 50 years. Darren Shapland had been appointed as Chief Executive with Phil Harris stepping up to non-executive Chairman but Shapland left abruptly after three profit warnings. It is of course never ideal when a former Chief Executive moves to Chairman particularly when he controls a very large shareholding in addition (the Harris family own over 20% and Phil Harris also had his son, Martin Harris, on the board as Development Director).

Lord Harris is now leaving the board altogether in September and a new Chairman is being sought. In addition Martin Harris is leaving the company. A recently appointed COO is also departing. New recruit Wilf Walsh is to become Chief Executive.  Mr Walsh does not appear to have much knowledge of the furnishings retail sector but he did get retail experience at HMV – whether that well qualifies him for this position is perhaps debateable.

However as this writer said in October 2013, “yes it’s surely time for real change at Carpetright rather than a reversion to the old guard“. It looks like the board, no doubt supported by investors, have finally bitten the bullet on this issue.

With Lord Harris at age 71, and as a former shareholder in this company (and past employee in a previous company), this writer could see that reviving this business was not going to be easy and a new broom was probably required. 

The carpet market remains very tough and because of the structure of the business, Carpetright is operationally geared. As a result profits have been in the doldrums for some time. Despite that the company’s share price has held up remarkably well, presumably based on prospects of recovery. But with a prospective p/e of over 100, and the risk of a share overhang if Lord Harris chose to sell some of his holding, they are looking very vulnerable.

Let us thank Lord Harris for his past business successes and his current charitable activities (where no doubt he will be able to spend more time now), but it was time to move on.

Roger Lawson

SSE Results – not all they seem at first glance

SSE, the energy company formerly called Scottish & Southern Energy, published their  annual results yesterday (for the year to March 31st).  The first page of the “preliminary announcement” looked positive. It talked about Adjusted Earnings per Share up 4.1%, Adjusted Profit before Tax up 9.6% and the Full Year Dividend increased by 3.0%, among other things.

But this writer was immediately suspicious because there was no mention of revenue trends in these “headline” figures – something of importance and usually included. Revenue was in fact up by 8% but did not seem to meet analysts forecasts for a rise of 14%. Was that why it was not mentioned?

The Adjusted Earnings were ahead of forecasts, but it’s worth examining  the “Adjustments” made.  Adjusted Profit was given  as £1,551m but the “Reported Profit” according to the normal accounting statements was only £573m. What accounts for the difference? After all a billion pounds is not trivial.

The “Adjustments” are £212m of Movement on Derivatives, £747m of Exceptional Items and a couple of other minor items. The paragraphs that describe the Exceptionals  are well worth reading.  I repeat some of it here:

“The pre-tax exceptional charges totalling £747.2m have come as a result of two main factors:

– the announcement, on 26 March 2014, of a ‘value programme’ of disposals of a number of non-core assets and businesses and the identification of further operational efficiencies; and

–  a further significant review of the operational plant in SSE’s Wholesale segment, with a specific focus on thermal power generation plant and gas storage facilities. 

 The value programme is designed to ensure SSE is well-positioned for future challenges arising from the energy ‘trilemma’. As part of it, SSE announced its decision to scale back its commitment in relation to offshore wind projects and has also conducted a review of its onshore wind development projects. Non-core businesses identified for disposal include SSE’s portfolio of PFI street lighting contracts, a Telecoms data centre and the gas connections activity within Other Networks. As a consequence, SSE has recognised provisions for certain exceptional closure and exit costs associated with the programme. The announcement also referred to a programme of voluntary early release for which 600 employees have successfully applied and which will have the effect of reducing headcount across all business areas. In total, therefore, SSE has recognised exceptional asset and investment impairment costs and other charges associated with the announcement of £272.6m.

 In addition to this, SSE has conducted a further significant review of its operational plant with a specific focus on thermal power generation plant and gas storage facilities. These value of these plants, which include the coal-fired power generation plants at Fiddler’s Ferry and Ferrybridge, are considered to be at specific risk due to low forecast operating margins, increasing uncertainty over coal-fired generation viability, changes arising from market reform including the creation of a Capacity Market in 2018 and the Supplemental Balancing Reserve and the ongoing economic issues associated with gas storage. Total exceptional charges of £428.2m have been recognised in respect of these asset and investment impairments, which also included £36.2m in respect of Retail-related system and software development. In addition, a provision for the settlement of a contractual dispute, of £46.4m, was also recognised as an exceptional charge in the year. “

Are these really exceptional items? In the dynamic modern world, there will no doubt be a constant need to change facilities to keep up with Government and market demands. But as they are “non cash” items, it may be best just to look at the cash flow statement. That shows cash generated from operations as £2,408 million but then they spent £1,835m on purchased tangible and intangible assets. So the leaves only £573m free cash, but oddly enough this is exactly the same as the conventional “Reported Profit” given above.

Investors might consider that the more realistic real figure for sustainable profits, because there were similar massive “Exceptionals” in the two prior years also.

Perhaps investors are buying the shares for the reliable dividend stream (current yield about 5.5%) and commitment to at least increase it in line with inflation. But they should bear in mind that the forecast p/e is not the 13.5 reported by many financial web sites, but might be more like 35 based on real cash profits.

Roger Lawson

Internet for Investors Course

Do you make the most of the internet when investing? Are your investments based on the most intelligent research and can you easily monitor them using the internet? Even if you use the internet extensively already, you might be missing out on many useful information resources.

Our new training course entitled “The Internet for Investors” aims to improve your skills in this area. It will cover:

  • News and alerting services.
  • SharesSoc’s own websites and member network.
  • Fundamental data & portfolio analysis sites (four sites will be covered).
  • Discussion sites and bulletin boards (there are gems to be found amongst the dross!).
  • Online share dealing.
  • Social media for investment.

This is very much a hands-on training session and attendees will receive individual help to enable you learn how to make the most out of the resources and tools available. To facilitate this, we are holding this course at the well equipped computer laboratory of the University of Westminster, Marylebone Campus, conveniently located opposite Baker Street Station, London.

The course will be held on 25th June, from 11:00 – 16:30. A sandwich lunch will be provided. On the day, the registration desk for delegates and a welcome tea/coffee will be available from 10:30. For those who would also like to attend the ShareSoc growth company seminar, held the same evening, there is a direct underground link from Baker Street to Liverpool Street, making it easy to do.

This is a chargeable event as a lot of effort has been put into its preparation, but think how much profit you miss out on by picking poor investments! Full members of ShareSoc may purchase tickets for this course at a reduced price. Associates and others will receive a year’s free Full ShareSoc Membership by purchasing a normal price ticket.

Don’t delay – book your place now as capacity is limited to ensure it’s a truly interactive event. Click on this link for more information and to register: https://www.eventbrite.co.uk/e/the-internet-for-investors-course-tickets-11569451541

Please contact Mark at mark.bentley@sharesoc.org if you have any questions or wish to pay by alternate means.

Mark Bentley

Surprises on Remuneration at the Kentz AGM, and opposition also at Hiscox

Surprises on Remuneration at the Kentz AGM,  and opposition also at Hiscox

Last week (on Friday the 16th May), both the Remuneration Policy and Remuneration Report resolutions were voted down by shareholders at the Kentz Annual General Meeting. This is one of the few companies where such resolutions have been lost in the current AGM round and the first where the Remuneration Policy vote has been defeated. That vote was only introduced in the last year by new Government legislation, but oddly enough Kentz was one of the few UK fully listed companies who did not legally have to hold one as they are registered in Jersey. So at least they appear to be trying to adhere to good UK corporate governance practice.

Even more difficult is trying to understand why there was so much opposition to these resolutions. The total remuneration of the CEO, Christian Brown, was certainly a large figure last year (at $3.6m), but it only rose by 1.3% over the prior year when earnings per share rose by 17.3%. Otherwise it looks the typical package of high base and aggressive bonus/LTIP packages common in large public companies.  Base salary of the CEO is proposed to be $803,400 in 2014, only up by 3% over 2013 although he did get a 38% rise last year.

Needless to point out that no institutions turned up at the AGM to explain why they voted against, and only 3 individual shareholders attended. Perhaps it was the 9.00 a.m. start time that put them off. This did get some negative comment from investors, but was put down to the CEO having a commitment in the USA later in the day.

Last year the company hastily withdrew resolutions on LTIP awards and share options before they were put to the AGM as it was clear there were going to be substantial votes against, so this is not the first time that the company has failed to line up its major shareholders properly in advance of the meeting. After this years AGM the company issued an announcement saying they had begun consultation with the shareholders to “determine how these concerns can best be overcome”.

A full report on the Kentz AGM is present on the ShareSoc Members Network.

Another company that does not legally require a Remuneration Policy vote is insurer Hiscox who are registered in Bermuda, but they also included a vote on Policy at their AGM on the 15th May. They managed to get 42% of votes opposed to the Remuneration Policy resolution but got 97% in favour of the Remuneration Report resolution. Manifest, a proxy voting advisory service, apparently were concerned about the lack of bonus caps, lack of clawback arrangements and other issues.  Unlike Kentz they made no announcement after their AGM about consulting further with shareholders on Remuneration Policy.

Comment: these votes suggest that the directors of both companies need to try harder. In other words, they need to spend more effort ensuring that their proposals on remuneration are both understand and are acceptable to the vast majority of shareholders.

Roger Lawson

Should you buy shares in Saga?

Here are some quick comments on the Saga IPO from skimming the prospectus before all the media do their in-depth analysis of what will no doubt be examined as a possible punt by both the millions of Saga customers and stock market speculators. Saga customers are favoured slightly in that they get one free share for every 20 purchased if they hold them for a year – hardly enough I suggest to sway my decision being one of their customers. But I thought it best to declare my interest.

One major problem is that individual investors do not know when they apply what price the shares will be. This will be determined by an opaque process involving institutional investors. The price paid by individuals could be anything between 185 and 245 pence per share, which is a pretty broad range.

Before looking at whether a price within that range might be good value, let’s just review the nature of the business. Incidentally it’s truly astonishing that the Summary Prospectus sent to Saga customers, and which will no doubt be touted by brokers, contains much puffing about the wonders of Saga’s customer engagement, but very little about where the profits come from. You have to go to the main prospectus (all 300 pages of it) to get a breakdown of where even the revenue comes from. Page 99 tells you that 43% comes from Financial Services – mainly Motor Insurance at 28%, 30% from travel, and 25% from Healthcare.  The proportion of it from Motor Insurance fell substantially last year, no doubt partly because of falls in motor premiums which is a general market phenomenon in that sector.  This perhaps explains why overall revenue fell last year and profits in the last three years have been effectively static – post tax profits of £108.2m, £113.3m and £109.6m in 2012, 2013 and 2014 for the years ending in January.

How does the valuation of the company look on post tax profits of £108m? On page 7 of the Prospectus (where the Key Offer Statistics are given – always a page worth reading), it states the market capitalisation will be £2.3 billion at the “mid” offer price of 215p. That implies therefore a historic p/e of 21. That’s not exactly cheap. Admiral, another big car insurance trades on a historic p/e of 13.7 for example.  Brightside, another motor insurer, is just being taken out by a bid at p/e of 10. Esure was a recent IPO of a motor insurer and after a year of trading it’s at a lower price than at which it listed. Do the other parts of the business justify a higher multiple? The company has been making acquisitions in the health sector but there are few direct comparables. However care home business are usually not rated highly.

So where is the growth going to come from to justify the fancy rating? In addition the dividend yield is likely to be no great shakes and the company will still have substantial debt. The fact that the over 50s age segment may be growing might be an advantage, but can they turn this into substantial future growth in profits? They don’t appear to have done so in the last few years. Perhaps that is why the sellers wish to sell.

This is of course a common problem with IPOs where a private equity holder is exiting fully or partially – they know a lot more about the business than any buyer is likely to, i.e. this is the classic “information asymmetry” problem between buyers and sellers, whereas stock markets transactions are normally more of a level playing field.

If the placing price was as low as 185 then that would reduce the p/e to about 18 but that is still no great shakes. So in essence, this writer is sceptical that this is an IPO to jump into. However, I thought that about the Royal Mail offering where it seemed a pedestrian business with major risks attached to it – and look what happened there. It seems one reason that the Royal Mail share price took off was that index funds just had to buy it. They are actually complaining that they were frozen out of that IPO, whereas hedge funds got large allocations, forcing the index trackers to buy shares in the market later.

Saga is expected to join the FTSE-250 and might move up to the FTSE-100 so there may be some forced buying by some funds. Whether that is worth betting on is something you must judge for yourself. Of course if the media comments are favourable and it turns into a populist feeding frenzy then the market could be just as irrational as it can be.

But as a long term investment it looks more questionable unless you believe that Saga is a great brand and there are opportunities to apply it to other business segments to get some real growth back into it.

Delays in SIPP and ISA transfers

Last week I complained to Hargreaves Lansdown about the delay in transferring a SIPP to another broker. The receiving broker has been chasing it but to no effect. It has been “pending” now for almost two months and I cannot understand the reason for such a long delay.

What do I read on Friday but a number of similar complaints from readers of Investors Chronicle. There seems to be a consistent problem here, even where the transfer should be fairly straightforward.

If for example there is a two month delay in the transfer, your holdings are effectively frozen for that period, and if you have significant cash in the account it will lie there uninvested and not generating a return (other than to the broker holding it of course). Just freezing the holdings means you cannot trade them which makes you vulnerable to market or stock specific swings.

Even non SIPP and ISA transfers are affected because you may not want to sell the holdings and reinvest with another broker because you would realise capital gains. What you need is of course and “in specie” transfer.

Both with the changes of charges at Hargreaves Lansdown and other brokers, and the recent customer relations problems at Selftrade, it is quite likely that substantial numbers of clients are looking to change brokers. It should surely be capable of being done in a few days, not months.

Have other investors experienced this problem? If so please contact ShareSoc.

Roger Lawson