Tesco Investor Compensation and Booker Opposition

Tesco (TSCO) have agreed a Deferred Prosecution Agreement with the Serious Fraud Office (SFO) over the overstatement of profits which came to light in 2014. Tesco has also conceded to a finding of market abuse by the Financial Conduct Authority (FCA) in relation to a trading statement issued in August 2014. As a result the company has agreed to establish a compensation scheme for purchasers of Tesco’s ordinary shares or bonds between the 29th August 2014 and 19th September 2014 (inclusive). Compensation will be 24.5p per share plus interest. So any investors in Tesco should check whether they will be eligible.

Note that the overstatement of profits went back several years so this offer may not let Tesco off the hook completely as law suits may still be pursued by disgruntled investors.

The SFO is still pursuing criminal proceedings in relation to individual persons involved in the matter but so far as the company is concerned that seems to conclude the matter as regards regulatory legal action. Tesco will take an exceptional charge of £235m for the compensation and other associated costs (that’s more than the profits they declared last year but only a small fraction of what they used to report annually).

The Financial Times reported this morning that there is opposition from major shareholders Schroders and Artisan to the proposed takeover of Booker by Tesco. Together they hold more than 9% of the company’s shares and Schroders have written to the Chairman urging him to withdraw the bid. Apparently the high price being paid for Booker is the concern.

Comment: the prospective p/e of 25 for Booker certainly makes it look a high price for what is basically a low margin food wholesaler even if Booker has grown profits rapidly in the last few years. There are also clear synergies between the businesses that can be exploited by Tesco. So this is not a clear cut matter it seems. If any readers have any views on it, please add your comments.

Roger Lawson

Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

Secret Cautions by the FCA

The Financial Times reported this morning that it had obtained information from the FCA on the number of private warnings it had issued over the last 5 years using a Freedom of Information Act request. The answer given was that there had been 39 of them.

ShareSoc has complained about this practice in the past, particularly with regards to AIM companies where the LSE has a similar approach. Indeed we complained about the use of private warnings in our submission to the FCA’s consultation on its “mission” only in January.

John Mann, M.P., who sits on the Treasury Select Committee was quoted in the FT article as saying: “Transparency is absolutely key. Anything that allows things to be dealt with in secret is damaging to the whole culture of financial services, and opens the regulator up to challenge”. One surely cannot but agree with that. Justice must be seen to be done as the well known aphorism goes.

Shareholders in companies do need to know if the FCA has criticised directors in the past, and the details of any such complaint. It also apparently causes problems for those handled in this way because they do have to disclose private warnings to new employers and can only appeal them if challenged with a judicial review (an extremely expensive process).

It’s that old “city club” mentality again. “We’ll just have a quiet word with the chap” rather than disclose it in public and damage his/her reputation seems to be the attitude. It’s surely time such practices were dropped. If it’s serious enough that the FCA formally investigates the matter, then any conclusion should be made public and the people involved named.

Roger Lawson

Clamp Down on CFDs – ShareSoc’s Comments

The Financial Conduct Authority (FCA) is proposing to clamp down on CFDs (contracts for difference) and similar financial products such as binary bets. CFDs are complex financial products that have historically been used by sophisticated traders. But they have been growing rapidly in usage by small retail “investors” and the FCA reports that 82% of them lose money based on a review of such accounts.

ShareSoc has now published it’s formal response to the FCA’s consultation on their proposals to tackle this problem. You can read it here: http://www.sharesoc.org/CFDs-Conduct-of-Business-Rules-Response-2017-03-03.pdf

In summary we support the FCA’s proposals with only minor reservations.

Roger Lawson

AIC Response to Green Paper

The Association of Investment Companies (AIC) have published their response to the Government’s Green Paper on Corporate Governance. One recommendation contained therein is that “The AIC also recommends that a detailed study to assess retail investors’ access to voting services on platforms and other nominee account services is undertaken to identify any necessary reforms”. This is of course a very positive endorsement of an issue that ShareSoc has been campaigning upon for some time – see our campaign page here: http://www.sharesoc.org/shareholder-rights.html

In addition if you read the detail submission, they say “Additionally, the study should assess any barriers to switching providers that may be preventing shareholders, that do want to vote but are unable to, from moving to a provider that does offer this service”. This is indeed a very important issue also as currently it takes way too long to switch between brokers or platforms. For example, my latest broker switch has now been running since last October. And that’s not the first time I have experienced such delays. Anyone who experiences this problem should complain to the FCA as I have already done in the past – but they clearly do not get enough complaints about it because no action has been taken and the response did not likely indicate any will be.

Otherwise the AIC’s response to the Green Paper can be read here: http://www.theaic.co.uk/sites/default/files/hidden-files/AICBEISCorpGovReformresponseFeb17.pdf

Roger Lawson

The Future Value of Money

The future value of money was a question highlighted by a Government decision yesterday. The discount rate to be applied to awards to road accident victims and others, to ensure they always have enough to support their future needs, is to be changed to -0.75% (that’s minus 0.75%). Previously, and for many years, it has been assumed that they could invest a cash lump sum at a rate of plus 2.5%. That was on the assumption that they could invest in risk-free assets and get a return of that amount. But the Government is proposing to revise the rate. This will result in much higher payouts for major road accident injury claims, and for medical negligence claims.

There was a negative impact on the share prices of insurers such as Direct Line (down 7% on the 27th Feb), but others such as Admiral and Esure were little changed. However the Association of British Insurers (ABI) called the ruling a “crazy decision” and also said “To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market”. They forecast sharp rises for all forms of vehicle insurance with suggestions being made that it could be as much as £75 extra per car on average.

In addition because the NHS is one of the most frequent defendants to medical claims, it might add £1 billion to their annual bill for such costs. Something that the NHS surely cannot afford at present.

You may be wondering what is the risk free rate of return that one can actually get at present. The best measure traditionally for this has been assumed to be long-dated index linked gilts. The yield to redemption on those is now about -1.6% (see http://www.fixedincomeinvestor.co.uk for a good source of information on those). That’s taking account of inflation of course. In other words, you would actually definitely lose money by investing in them! That of course drives up the capital that is required to cover future investment losses enormously.

Now we all know that the Government has driven down interest rates to a ridiculously low level and negative gilt yields is one consequence. Together with tougher rules for pension and other funds, to ensure they cover future liabilities, this has led to an excess of demand for index linked gilts over their current availability. Hence the below zero interest rates. But surely no sensible person investing for the long-term would at present put all their assets into such gilts?

Even the most conservative and risk averse investor would surely not do so, and it seems unreasonable to argue that beneficiaries of court awards should be assumed to do so. Indeed they probably don’t and it seems unlikely that any financial advisor would suggest they do so either with current interest rates. Having some certainty of future income is important, but having absolute certainty about future finances for those dependent on a court settlement does not seem fair when nobody else does – pensioners for example, many of whom are also incapacitated and rely on Government care assistance, or even divorcees who benefit from other court awards. Incidentally there are specialist firms that look after funds for such beneficiaries such as listed company Frenkel Topping who presented at one of the ShareSoc seminars and there is a big market for “Personal Injury Trusts”.

The ABI previously launched a legal challenge by a judicial review to the Government’s inadequate consultation and decision process on this issue but it was rejected by the High Court.

Roger Lawson

FRC to Investigate Redcentric Audit

Further to ShareSoc’s campaign regarding accounting irregularities and related matters at Redcentric (AIM:RCN), I am delighted to see that the FRC has launched an investigation into the audit of Redcentric’s accounts by PWC: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2017/February/Investigation-in-respect-of-PricewaterhouseCoopers.aspx

The FT also reports on this investigation today, coming hot on the heels of PWC’s embarrassment at the Oscars ceremony: https://www.ft.com/content/4e710e1e-fcfc-11e6-8d8e-a5e3738f9ae4

This article highlights that PWC is also under investigation in relation to audits of BHS; Barclays compliance; Connaught and RSM Tenon. It has already been sanctioned in respect of its audit of Cattles. Further, PWC has been replaced as Tesco’s auditor, following the accounting scandal there, and failed to detect irregularities at BT’s Italian subsidiary.

Shareholders may wish to question any firms currently employing PWC as auditors.

I am also pleased to report that two members of the campaign and I met with the Redcentric chairman and new CFO last Friday. The meeting was productive, and amongst other matters, included discussion of PWC’s performance and action being taken. I will be publishing a report on the meeting for campaign members shortly, and taking further action, as described in the report.

Mark Bentley