Sizewell C: Don’t go nuclear over this offer
Would you like a share in a nuclear power station? A slice of Sizewell C that the UK government is taking from the Chinese, now that they are no longer our friends, but are voracious interlopers set on World Domination? This week’s fantasy deal involves offering their 20 per cent to the investing public. It is about as likely to fly as Hinkley Point, the only nuclear power station currently being built in Britain, is to come in below budget.
Investing in UK nuclear power is jinxed. Even when the fleet was privatised in 1996, it dared not speak its name, sailing under the bland “British Energy” label. Its unhappy history on the public markets is chronicled here and is surely enough to discourage even the most pro-nuclear investors this time.
The problem with nuclear is not safety (it’s safer, on all rational measures, than any other significant source of energy) but the widespread fear that any amount of radiation, however small, is lethal. The result has been escalating safety measures, so that the cost of building new stations outruns any gains from previous experience, even where local opposition can be overcome.
Successive UK governments have decided that the political cost of more nuclear was more than they could tolerate, but this kite-flying about offering shares in Sizewell C may indicate an understanding that without more nuclear power, hitting the UK’s zero-carbon targets is effectively impossible.
Unfortunately, the experience with British Energy, for those old enough to remember, should be enough to dissuade anyone from buying shares in a new reactor. The long-term reward may be keeping the lights on, but history says the risks are such that investors are likely to lose their shirts in the meantime.
They’d be BATty not to
Last week British American Tobacco tapped the bond markets. Nobody noticed. The €2bn raised is little more than routine housekeeping for a company this big, but the terms highlighted the dramatic mismatch between BAT the borrower and BAT the purveyor of death sticks to the world. Nobody loves the latter; many investment mandates specifically bar funds from buying tobacco shares, while others just don’t want to be seen owning them.
It’s a different story in the bond markets. If you can bear to struggle through the 150-page prospectus (including 27 pages of risk factors) for the pair of perpetual subordinated fixed-to-reset rate non-call securities, you would learn that the company is paying 3 per cent for five-year money and 3.75 per cent for 8-year money. Should BAT decide not to redeem either at their first end-dates, the interest is reset at higher rates.
The details need not concern us here. They show that BAT can borrow at much less than 4 per cent, while the shares at £26 (after a nasty fall this week) yield over 8 per cent on the last twelve-months’ dividends. Tobacco companies are always under siege, in the long term they are expected to be as dead as their customers. The prospect is of a mix of ever-tightening legislation and legal action, as it has been for decades now. Yet there can hardly be anyone on the planet who fails to understand the serious health risks, and as a result, there are no new entrants to the industry, allowing tobacco to become the ultimate oligopolistic cash-generating business.
The mismatch between the different capital markets is absurdly wide, and really demands that BAT looks again at its dividend policy. Instead of forever paying out to us ungrateful shareholders, BAT should use the cash flow to buy in its own shares. At a price of £26 the money saved from not paying the 213p (the last four quarterly dividends) would purchase the entire outstanding share capital inside a decade. In practice, the lenders might get nervous long before that happened, but probably not before the process had driven the price to the point where paying dividends once again made more sense.
I’m sorry, I’ll read that again
“BHP shareholders urged to vote against climate plan” read the headline in the FT on Tuesday. “Glass Lewis says miner’s targets for reduced gas emissions not based on science”. Just for a moment, it seemed that the worm had turned, and that BHP shareholders were being urged to put their interests ahead of the global warming bandwagon.
Glass Lewis is a “proxy advisory services company” which tells big shareholders how to vote, thus saving fund managers the bother of actually trying to understand the issues before them. Alas, it turns out that’s not Glass’s advice on BHP at all. It has decided that the miner’s Climate Transition Action Plan to cut its carbon emissions is just not good enough. Worse, it may not be sufficiently scientific.
That’s almost certainly true, since whatever the UK’s Climate Change Commission may say, the science on the impact of rising CO2 emissions is all over the place. The board of BHP – which is soon to decamp from London to become a pure Aussie company – might ask its major shareholders where they think their interests lie. Winning iron ore from the Australian desert and shipping it to China will always take rather more energy than the local sunshine can provide.
BHP generated much synthetic outrage with its plan to leave London, but the decision to get out of oil and gas looks much more painful. The sale to Woodside Petroleum smacks of passing the environmental buck, since the hydrocarbons will still be extracted. Now ratings agency S&P is worrying that BHP’s near-total reliance on iron ore threatens its credit rating. The timing of the sale looks rotten, too. Since the news broke in August BHP shares have slumped from £23.58 to £18.88 in London, while Woodside shares are up by a fifth. The buyer is too small to find the estimated $13bn in cash, so it is paying in shares, which BHP has promised to give to its shareholders. A much-needed slice of luck for them, then.