The Unacceptable Face of Capitalism – BHS and National Grid

The extraction by Sir Philip Green of £300m from BHS, which led to the business going into decline and leaving the company pension scheme under-funded before he sold it for a £1 to an unqualified chancer was strongly criticised by a select committee of the House of Commons yesterday. To quote from their report: “The tragedy is that those who have lost out are the ordinary employees and pensioners. This is the unacceptable face of capitalism”.

This echoes the comments of Ted Heath on Tiny Rowland of Lonrho where the mud certainly stuck for a very long time.

But I was reminded of that phrase also when I asked a question at the National Grid AGM yesterday. I raised the issue of the number of jobs the Chairman Sir Peter Gershon had, particularly as at the previous AGM he did not seem to be aware that the CEO was planning to leave (the news was given in a press item which he denied at the AGM but a few months later it turned out to be true). Did he have his finger on the pulse of the business at the time was a point I made. Sir Peter also chairs Tate & Lyle and has several other positions. This is contrary to ShareSoc’s policies. It is particularly problematic when a Chairman holds more than one such role in a larger company (Tate & Lyle is now a FTSE-250 company but it is still relatively large and National Grid is one of the largest FTSE-100 companies).

Moreover, the Senior Independent Director pointed out that he did not consider it a problem as Sir Peter is only contracted to do 2 days per week. So how much does he get paid for this? About half a million pounds per year!

This seems rather excessive to me, and unjustifiable. He should do more hours and/or get paid less I suggest. So how many investors voted against the Remuneration Report or against the Chairman? Actually only 2.9% and 1.4% respectively.

Surely this is the kind of “unacceptable face of capitalism” that our new Prime Minister, Theresa May, has said she will tackle. But it will take a lot more than improved reporting and more votes on pay to tackle this problem.

Sir Peter was only slightly less dogmatic in his approach to responding to shareholders questions than he was the previous year. I will write a full report for ShareSoc members as soon as possible.

Roger Lawson

NewRiver Retail (NRR) Reconstruction and Complex Pay Scheme

NewRiver Retail announced before their AGM on the 12th July that they were going to change their domicile from Guernsey to the UK. This will assist with their move to the main London market which is in the process of being pursued. NewRiver is a commercial property REIT and it seems unlikely that shareholders will oppose this move which will involve a “scheme of arrangement”. Moreover, from questions posed at the AGM it was clear that there was to be a one-for-one share swap and the EPIC/TIDM ticker will remain the same so it should be a straightforward matter for investors.

Incidentally there is a report published on the ShareSoc Members Network of the Annual General Meeting which investors in the company might find interesting. One question not asked by me, or anyone else, at that meeting was what would happen to the existing director remuneration schemes as I rather assumed there would be no reason for major changes as neither the company or its directors were changing although obviously there are more obligations for fully listed companies in terms of remuneration reporting and votes thereon.

The actual Notice of a Court Meeting and EGM was subsequently issued. It is a long and complex document. In addition to voting on the Scheme of Arrangement itself, there are two other resolutions being put to the shareholders. One is to permit General Meetings to be called at 14 rather than 21 days notice. I always vote against such resolutions because I believe they are unnecessary and prejudice many shareholders. Many people, particularly overseas investors and those in nominee accounts, have difficulty in getting their votes in on time within 14 days.

Another resolution is to approve amendments to four bonus and share option plans. It seems that because of the company reconstruction awards under the previous bonus and option schemes will be crystallised as it will be considered a “change of control” under their rules. So awards under the Deferred Bonus Plan will vest in full. Awards under the Performance Share Plan will vest pro-rata subject to performance achieved. Holders of share options will be invited to exchange their options for new ones in the new company. It is expected all employees will agree to this although there is no compulsion to do so.

There are then 26 pages (p. 66 to 92) which define both the old and new remuneration schemes and the latter are quite incomprehensible. These cover:

  • A “Deferred Bonus Plan”
  • A “Performance Share Plan”
  • A  “Company Share Option Plan”
  • An “Unapproved Share Option Plan”

The principal T&Cs for these seem utterly opaque and entirely at the discretion of the Remuneration Committee – especially with respect to quantum and performance conditions. Moreover there are provisions to make post-hoc adjustments to performance criteria, and for additional shares to be awarded in respect of dividends paid to shareholders during the pre-vesting period. At least that appears to be the case although understanding these complex schemes is not easy.

This is surely an example of how remuneration schemes have become over-complex and need simplifying. This would have been a golden opportunity to do so. Instead we have proposals that few shareholders will comprehend or even study. So I will vote against the relevant resolution on remuneration while supporting the scheme of arrangement. I suggest other shareholders might wish to consider doing likewise.

Roger Lawson

British Land (BLND) AGM Report

It was a hot day in London yesterday for the British Land AGM, but shareholders stayed cool in the meeting despite the share price being way down from last year. This is a only a very brief summary of the full report I have written for ShareSoc members and just covers the interesting aspects so far as investing in commercial property is concerned.

First a bit of background. British Land is a FTSE-100 company REIT with assets of £9,619 million. It’s a favourite of retired investors who appreciate its high dividend yield (currently 4.5% which is a lot better than keeping your money in the bank), and its historic stability. The share price reached a peak of about 875p in mid 2015 but it’s been downhill since. It’s been as low as 550p recently and at the time of writing is 640p. The causes of the unusual decline, and volatility, seem to have been some recognition that commercial property had been on a long bull run and may have reached it’s peak, then the uncertainty of the Brexit referendum on property prices (might deter foreign investors who are the big buyers of commercial property) and the result of the referendum was the final nail in the coffin as it was perceived that City of London offices might become vacant as financial institutions moved some of their staff to Europe. Of course this is all guesswork as what ultimately drives prices is often difficult to determine.

British Land has two main focuses for its assets which are split roughly 50/50 – retail/leisure property around the UK and offices/residential in London. They own such properties as the Meadowhall retail development in Yorkshire and the Leadenhall building (the “Cheesegrater”) in London.

Opening the meeting, the Chairman referred to Brexit by saying change presents opportunity and he is confident they will be successful in the new world we are entering. He said they are entering it with the best management team in the industry.

They have low capital commitments, high resilience including long leases which are on 99% occupancy) and modern buildings. Their loan to value ration is less than 30% and the average interest rate is 3.5% with no need to raise new finance for 4 years. Note: the last property crash was caused by property companies becoming highly geared and interest rates then rising sharply causing major distress with banks unwilling to refinance loans – that seems a very different scenario to the present difficulties in the property sector where prices have come down in general not just in the share price of British Land. The problems of open-ended property funds have been widely reported of course.

The Chairman said that current development plans are modest. They are developing the portfolio so it keeps up to date with market demands. Place making is at the heart of what they do.

The CEO then spoke. He said they want to own places where they can control the environment – in retail and offices campuses in London. In retail, 90% of spending is still in stores. Retailers need a broad mix of store sizes integrated with their on-line investment. Foot-fall is 300 million per year and it was up 3%. Retail sales are up 2.4%.

In offices, they are diversifying occupiers (only 2 of the top 20 occupiers are in the financial services sector). Rental growth was 10% last year. There was a significant uplift in historic rent reviews. Profits were up 16%. They are particularly pleased by the rental growth.

They issued a convertible loan note with a zero interest coupon. Total accounting return was 14%.

The Chairman then invited questions. Here are a few of the questions and responses:

  1. Phil Clark – a “happy shareholder” said the company had a robust position but the share price has taken a beating. He invited comments on that. The Chairman said they are the most liquid stock in the FTSE and their shares qualify as a liquid asset for open-ended property funds. They have been forced sellers of the shares to meet redemptions which has depressed the British Land share price (and also that of Land Securities).
  2. A spokesman from the LAPF complimented the company on renewable energy use and asked questions on the key risks mentioned in the Annual Report – Brexit and the new Mayor of London. How will it impact on development plans? The Chairman said that as regards Brexit, “clearly you all voted for it”. They took prudent steps to protect your interests and they have great “optionality” in the development portfolio. The cost of capital is at an all time low, the loan to value ratio near its low. He looked forward to the future with confidence.
  3. A shareholder commented that many people believe share price falls were caused by panic created by the Chancellor, Mark Carney, et al. Chairman: they are prepared for any eventuality. Brexit affected them because most of their investments are in the UK and they have not benefited as have other companies from the fall in the pound.

We then moved to a vote via poll cards – highly unsatisfactory and the proxy counts were not displayed so one could ask questions on the figures before the meeting closed. In reality though the poll results announced later in the day showed all resolutions passed with very large majorities with minor exceptions. Remuneration report got 3.99% against, 2.87% against the Remuneration Policy, 3.03% against Lord Turnbull (Chair of Remuneration Committee), 9.45% against share allotment limit, and 17.15% against change to the notice period for General Meetings – this shows that they probably have a high percentage of foreign/US shareholders.

This rather demonstrates how difficult it is to get institutional shareholders to vote against large pay awards (the CEO got a single figure remuneration total of £3.7 million last year although this was down on the previous year when he got £6.5 million, and the Non-Executive Chairman got £429,000 last year which was higher than the previous year!).

In general this was a useful meeting to attend in terms of the questions answered. The Chairman ran the meeting well. Whether commercial property is a good investment at this time is something you will need to judge yourself. Property prices can be volatile in the short term but ultimate value is driven by rental demand and rental price levels/yields. I think this company is particularly suffering because it has “British” in its name and is focussed on British assets so far as overseas investors are concerned. But as we have seen recently with ARM, some British assets are now more attractively priced so far as overseas investors are concerned, so the worm might turn.

Roger Lawson

Bonds, Insider Trading and New Business Secretary

The risks inherent in open-ended property funds have received a lot of media coverage of late – see my blog post of the 5th July which simply said they should be avoided. With many such funds closing so that investors could not take their money out, the risks inherent in providing liquidity to investors when the underlying assets (namely buildings) are highly illiquid have become apparent.

Paul Killik had an article published in Saturday’s FTMoney (16/7/2016) that made some highly intelligent comments on the general risks of bond funds. Unfortunately if private investors wish to invest in listed bonds, they have few choices. Not many bonds are listed on the ORB retail bond platform run by the LSE where they are available in sizes suitable for retail investors. Most listed sterling or EU bonds are only available in very large lot sizes which effectively excludes most private investors. In general private investors are encouraged to invest in bond funds because the terms on individual bonds may be complex. Mr Killik puts this down to the EU Prospectus Directive rules, encouraged by product manufacturers and bankers. He also argues that bonds are no more complex than equities and hence encouraging investors into bond funds makes no sense.

That is particularly so when one bears in mind that bonds are now at an all time high because of record low interest rates. Although bonds in general may be more liquid than direct property, if there is a rush for the exit then bond funds might not have the cash resources to meet redemptions. He says “my fear is that bond funds could be gated for many years given the likely absence of alternative buyers” in such circumstances.

Perhaps his concern is overdone, but certainly it might be preferable to consider only holding short-term bond funds at present as interest rates surely can’t go much lower. Funds holding short term bonds would also be quicker to wind down if need be.

Insider Trading

Gavin Breeze, a director of Proxama, has been fined £60,000 by the Financial Conduct Authority (FCA) for insider trading. He tried to sell his entire holding in MoPowered where he was a non-executive director after being told confidentially that it was about to launch a share placing and was offered shares at the discounted price. In reality he only managed to sell 10,000 of his 1.3 million shares after he told his broker to sell them all “at any price”. He will be compensating those who purchased the shares.

The Head of Enforcement at the FCA said “Mr Breeze’s misconduct demonstrates the abuse of insider trading is still not well understood or appreciated, even by experienced industry professionals”.

This is a complex area of law however and the new EU Market Abuse Regulation (MAR) has some impact – see this article by Slaughter & May on its impact: https://slaughterandmay.com/media/2535170/the-new-eu-market-abuse-regulation-an-overview-for-uk-issuers.pdf .

It is of course problematic when a company can undertake “market soundings” about possible placings (and the share price and volumes obtainable) and hence inside information becomes more widely known. That is why I have previously supported the idea that shares should be suspended immediately a placing is contemplated.

But there are simple rules about when directors in a company can trade shares which were obviously ignored in this case.

New Business Secretary

Greg Clark has been appointed Secretary of State for Business, Energy and Industrial Strategy, i.e. will head the BIS Department which has a major role in business regulation.

Mr Clark is M.P. for Tunbridge Wells, was Director of Policy for the Conservative Party from 2001 to 2005, and subsequently has had a number of ministerial positions. That includes Financial Secretary to the Treasury from 2012 to 2013 (i.e. about a year). Before politics he worked for Boston Consulting Group and as head of Commercial Policy at the BBC.

I cannot recall meeting Mr Clark, but I did write to him in early 2013 when he was at the Treasury on the subject of AIM market regulation. It explained the problems of the existing LSE “self-regulation” of the market and the Nomad system. If anyone would like a copy please let me know. I did receive a response from one of the Minister’s civil servants which was not particularly helpful. Well it’s now 3 years later and the problems of AIM still remain and we are still pursuing some reform.

But I wish Mr Clark well in his new position. There is a lot to do in his department.

Roger Lawson

McColls Retail Group – A Transformational Deal?

McColl’s Retail Group is a chain of 1,352 “convenience” and “newsagent” stores. After the market closed last night they announced the acquisition of 298 convenience stores from the Co-Op with a placing to fund part of the cost. The company described it as a “transformational deal”.

McColl’s Retail (MCLS) listed in 2014 but the share price has headed mainly downhill since. Revenue last year was £932 million with profits before tax of £21.1 million. I bought a few shares earlier this year and attended their AGM in April (and wrote a report which gives some more background to the company which is on the ShareSoc Members Network).

The stores are either branded Martins or McColls which is somewhat odd (indeed in my local area there are the two kinds quite close together – I did visit them to see how they appeared and I would rate the stores I saw as somewhat “basic” but with room for more products).

IGD have forecast growth in the convenience store sector of about 2% per year in future. Shopping is moving to more “little and often” in style with “food-to-go” on the rise and more “top-ups” to people’s main shopping trips. Comment: You can of course see these trends in other retailers with the major chains opening “local” branches and Greggs expanding their food-to-go offerings so there is also more competition.

But the sector has some strategic challenges. The first one was the Government policy on the Living Wage as the company has many low paid employees. The threat of Brexit has also had an impact as it has on retailers in general. Those factors and others led to the shares being on a historic p/e of 8.5 and yield of 7.75% on the day of the deal announcement.

The acquisition of the Co-Op shops will give them another 298 convenience stores with an EBITDA of £16.4m in 2015 (excluding central costs which presumably may be largely lost as McColls can absorb those in their existing systems). They are paying £117m in cash which implies they are paying a multiple of 7.1 times EBITDA, or 5.9 times when adjusted for freeholds and rent.

The deal is being financed by a placing at a discount of only 2.7% to the previous share price to raise £13.1 million with the rest financed by a bank facility. The new shares will represent 10% of the enlarged share capital (i.e. that’s the dilution).

Will the debt cost impact future dividends? Firstly the company states that they expect the transaction to be significantly earnings enhancing as one could also deduce from the figures above. McColl’s like many retailers generates good cash flow, and pays out a high proportion of profits in dividends – historically 60%. They plan to reduce that to 50%, but even so it seems likely the dividends would rise rather than fall unless the business goes seriously wrong in some way (for example by not retaining the Co-Op shoppers).

Clearly there is some risk in the deal from the increased debt and rebranding/re-organising of the Co-Op stores but it certainly looks an attractive deal and the share price has risen this morning as a result.

Roger Lawson

May The Force Be With You

That is surely an appropriate headline to follow the selection of Theresa May as Prime Minister designate. That was particularly so when she promised to attack the company “fat cats” and vested interests.

Specifically for investors she said that “The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders. As we have seen time and time again, the scrutiny they provide is just not good enough”. One cannot dispute that statement.

To tackle these problems she is proposing to have consumers and workers representatives on boards so as to widen the backgrounds of board directors and to have annual binding votes on remuneration.

In addition as regards Brexit she has said that there is a “need of course to negotiate the best deal for Britain in leaving the EU and to forge a new role for ourselves in the world. Brexit means Brexit and we’re going to make a success of it”. That shows a strong commitment to adhere to the result of the Referendum and all the consequences that implies.

In respect to board representation, there are a number of practical difficulties with appointing board members if they are to be constrained in some way. And appointing one or two workers representatives may not change the board dynamics significantly. The devil is in the detail on such matters.

Likewise on remuneration, we already have a binding forward-looking vote every three years in larger companies. If the annual vote on the Remuneration Report is made binding, does that mean that historic pay contracts and awards can be overturned by a shareholder vote?

ShareSoc looks forward to contributing to the debate on these issues. We certainly support some reform in these areas and have recently published our own guidelines on remuneration to try and encourage more restraint on pay – see http://www.sharesoc.org/ShareSoc-Remuneration-Guidelines.pdf

That of course is aimed at working within the existing legal and regulatory framework. But Mrs May seems to have more substantial reforms in mind.

Roger Lawson

A Bouquet and a Brickbat

ShareSoc’s fundamental mission is to improve the landscape for the individual investor in UK shares. One aspect of this is levelling the playing field between individual and institutional investors with respect to access to corporate managements and business strategy presentations.

AGMs are a key opportunity for managements to do this, as they are open to all shareholders equally. To that end, ShareSoc has published a guide for companies on how to run AGMs in a shareholder friendly manner (and for attendees on what to expect and how to behave). Readers will observe that sensible start times, providing presentations at AGMs and publicising what will be provided are key recommendations for companies arranging their AGMs.

In order to further our aim, ShareSoc will seek to publicise those instances where companies do well and where they do not, to encourage them to follow our guidelines and best practice. We will also publicise cases where companies hold “capital markets days” and do or don’t make them accessible to individual shareholders. It is extremely annoying when companies announce such events either on the day they are being held or, sometimes, even after they have taken place! In those cases clearly only a “select few” will have been invited – the opposite of a level playing field.

There were two contrasting illustrations this week. Firstly, on a positive note, Haywood Tyler (AIM:HAYT) have announced an enticing AGM and site visit: http://www.investegate.co.uk/hayward-tyler-group–hayt-/rns/site-visit-and-notice-of-agm/201607060700063412D/ Though the start time for the AGM (held at the company’s HQ in Luton) is a little earlier than we’d ideally like to see, this is compensated for by the company offering a tour of their factory there and a presentation. This is to be applauded, as is the company giving timely publicity to these events. Anyone interested in attending should contact the company’s advisers, as indicated in the RNS.

Turning to the “brickbat”, Plastics Capital (AIM:PLA) have been holding their AGMs at ever earlier times. This week they announced that this year’s AGM was to be held at 9:00am, at a location which will not be particularly easy for investors to reach. As no presentation has been announced either, I expect attendance will be very poor, making the AGM a much less useful occasion and rubber-stamping exercise. Must try harder!

Mark Bentley