The Harmsworth dynasty has lost none of its capacity to set puzzles for the stock market. This week, the current scion, Jonathan Rothermere, pulled another financial rabbit from his portfolio with a plan to take his company, Daily Mail & General Trust, private. Everyone had great fun pointing to the Daily Mail’s own coruscating campaign against private equity, but since he already has all the votes, the outside shareholders have limited leverage if they don’t like the plan.
Before they decide, they will have to work out what it means. As usual, this is not easy. Indeed, when it comes to impenetrable financial engineering, DMGT’s recent constructions would put the most ingenious private equity planner to shame. It is barely two years since it finally divested its residual holding in Euromoney, a business started by Rothermere’s grandfather with a £5,000 loan from the parent, and now worth £1.1bn.
That divestment involved outside investors getting 0.19933 of an Euromoney Share, 68.13p in cash, and a reduction of 0.46409 of an A Share for each one they owned. The “insiders” got 25.53p in cash, and each of their A shares was reduced by 0.03946 of a share. It may be possible that the outside shareholders could do the maths there, but it was almost impossible to work out which side got the better deal.
Something similar is at work this week. The group is effectively being broken up, as a result of enthusiasm from buyers for some of the bits, none of which have much to do with the Daily Mail, and everything to do with the entrepreneurial streak which runs through the dynasty. Earlier investments and disposals include property search company Zoopla, education technology group Hobson and, finally, second-hand car business Cazoo, now about to be floated in New York. DMGT proposes to give the outsiders the Cazoo shares and use its own share of the money to buy them out.
Rothermere’s father Vere was, perhaps inevitably, called “Mere” (though not to his face) but the soubriquet was not deserved. The newspaper business was never very profitable when the trades unions called the shots, but the long-term return from investing in DMGT has been outstanding. Even in the last 10 years, Morningstar calculates that the shares have returned 12.2 per cent annualised. Many shareholders will be reluctant to see the business disappear from their portfolios. Some may face a capital gains tax liability that the insiders are trying to avoid.
The outsiders have no votes, but are not entirely without clout if they think the deal is too mean. They cannot be forced to accept an offer, and a scheme of arrangement would require 75 per cent acceptances from them to take out the rest. The price was curiously unmoved on the announcement, but had risen strongly to today’s £11.10 in the weeks beforehand. It’s the sort of movement that might raise reporters’ suspicions. Perhaps not on the Daily Mail in this case, though.
Going out with a Bang
It seems like something from another world. Indeed, it is so long ago that there’s a generation for whom the expression “Page 3 Girl” is meaningless, with the Mail on Line’s Sidebar of Shame its nearest current equivalent. In 1987, in an inspired piece of mischief, The Sun’s City Editor organised a protest by these girls (with their clothes on) to harrass the chairman of the London Stock Exchange, with “Goodison must go” emblazoned across their T-shirts.
Nicholas Goodison, who died last week, had fought a doomed campaign to keep the LSE out of the 20th century, preparing a million-document defence against legal action from the Office of Fair Trading, which had sought to end fixed commissions on share trades. Up against the ferocious director-general, Gordon Borrie, Goodison knew he never stood a chance, but understood that this would mark the end of the division of labour between stockbrokers and jobbers (market-makers).
The change destroyed the cozy carve-up, but precipitated unexpected windfall gains for the partners in the broking houses, and swimming pools all over Surrey, as the banks rushed in to buy their businesses following the City’s “Big Bang”. What looked from the outside to be a technical rule change has had a profound impact, with competition creating wealth on an unforeseeable scale.
Goodison failed to see it himself, missing the opportunity to buy the London Financial Futures Exchange. He considered it too marginal, too expensive and rather vulgar. In fact, it represented the next step in the financialisation of the West’s economies, a process that has produced ever-expanding markets in ever-more exotic derivatives ever since. What had seemed to some like a disruption which would threaten City jobs has turned out to lay the foundations of a world-class industry. You could say that Goodison got the right answer for the wrong reason, rather like the protest from those Page 3 girls.
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If only they had shareholders
It’s John Lewis and (fewer) Partners. The department store which had for so long seemed to be a model of how retailing should be done is swinging the axe again. This time it’s 1,000 from what is delicately described as “a layer of management” who will join the 4,423 partners who have been let go since the start of the pandemic. This will, we’re told, allow the business “to reinvest in what matters most to our customers.”
Ah yes, reinvest. The systemic problem with a partnership structure is that it has to generate its own risk capital, since there are no greedy outside shareholders to stump up when the going gets tough. Generating it from cutting costs is a long process, especially given the price of paying people to go away.
Sharon White, the whirlwind chairman since February last year, cannot be accused of lacking courage, and there remains a deep well of goodwill towards this business. However, it is not as deep as it was, and on-line shopping has done for the “Never knowingly undersold” mantra. Plans to turn car parks and unwanted stores into flats are all very well, but residential development is another business. It, too, requires capital, and Croydon Council has proved that it is potentially disastrous. There is no rescue if she gets it wrong.