There has never been a financial food fight quite like this one. Wm Morrison now has three buyers fighting to get to the supermarket checkout, and a share price 50 per cent higher than it was at the recent annual meeting – at which the shareholders savaged the directors for their full-fat pay policy. So is Morrison a National Treasure, full of laughing, happy employees toiling away on the company farms, its fishing trawler and its freehold stores, to be preserved as a symbol of all that’s best in British food? Or is it a commercial enterprise in a highly competitive market, whose customers will go wherever their view of price, quality and choice takes them?
The current leading bid from an outfit called Fortress is 252p a share, along with a clutch of warm, fuzzy but not legally enforceable agreements to keep things just as they are; no financial engineering here, honestly. The Morrison directors, perhaps believing they are also part of Fortress’s glittering future, have rather foolishly been seduced into recommending it. Lurking in the wings is Apollo, another private equity group, which may, or may not, bid more. Perhaps they will say they love the executives even more than Fortress does, and promise to behave even better in the fields.
Or perhaps they will bring the question back to earth, by simply bidding more, and propose to run the business to maximise profits. Legal & General, a big Morrison shareholder, is already having an attack of the vapours at the thought. Andrew Koch, its senior fund manager, worries that Fortress may be bidding “for the wrong reasons”, whatever they may be. However, his request for more details of the Morrison property portfolio is the least the Morrison board can do now.
L&G is a fan of ESG investing, and under CEO Nigel Wilson has shown great imagination in building assets to match long-term liabilities. Its vast share portfolio, on the other hand, is mostly in passive tracker funds, where investments are made mechanically to match chosen indices. It seems quite possible that Apollo will offer more for Morrison, without the green and pleasant land stuff, offering L&G the choice of looking woke or getting the best price for its policyholders (who will not be consulted either way).
The Morrison board, having made the mistake of accepting the Fortress price, has a variant on the same problem, should a bid from Apollo materialise. It’s hard not to sympathise, though, given the ever-growing pile of bureaucratic garbage that quoted companies must deal with. This week Peter Harrison, the CEO of Schroders (with £570bn under management, much of it in active rather than passive funds) called for a reform of the rules. The UK governance code is “written at the expense of public companies” and could be “very onerous” on them, pointing at everything from disclosure requirements to remuneration rules. Actually running the business is taken for granted.
That is all on top of the tax advantages of private equity. In an era of administered interest rates, debt is dirt cheap and can be offset against corporation tax on profits, unlike equity. To make matters worse, the executives at private equity businesses routinely have a “carried interest” which is a seven-figure payday thinly disguised as a capital gain, and which attracts tax at 28 per cent rather than the 45 per cent on income. Small wonder, then, that the Morrison executives can see the broad sunlit uplands – and not necessarily on the company farms.
A new Shell game
There are only two numbers that really mean anything in the bloated accounts of big oil; the debt and the dividend. Everything else is adjusted, restated, subject to interpretation or plain incomprehensible (just take a look). The analysts may be diligent and make detailed projections ahead of the figures, but they’re almost as much in the dark as the rest of us.
So confidence in both those numbers matters. You would hardly think so from Royal Dutch Shell’s latest update. In March last year the board panicked and slashed a dividend that had not been cut for half a century by two-thirds. Perhaps the directors thought the end of the oil world was nigh, or they feared that all that debt would overwhelm them. Who knows?
When the world failed to end, six months later, they decided they had overdone the slashing, and raised the next quarterly payment, although only by 4 per cent, with an ambition to keep it going up. Last quarter they raised it again, but Jessica Uhl, still Shell’s chief financial officer, warned that “we are not anticipating a further increase” in the dividend for this year.
Well, it’s a fast-moving world, oil, and that was then. Now we have a new strategy. Shell has noticed that the oil price has gone up quite a lot, and so it can let the shareholders have between 20 and 30 per cent of cash flow, either by higher dividends or share buy-backs. The previous strategy, to get debt down to a mere $65bn, has been “retired”, although we are not told what has replaced it.
This is pathetic. It is high time CEO Ben van Beurden, whose strategic purchase of BG at an inflated price gave Shell the debt problem in the first place, was himself retired. He might start to redeem himself before he does by pulling Shell out of the Netherlands to escape the judicial over-reach of the Dutch court in ordering the company to cut its CO2 emissions. Oh, and his successor might find a finance director who could see beyond the end of her nose, too.