Be wary as private equity backed IPOs may be about to return
This article first appeared in Aimzine, www.aimzine.co.uk
With some reluctance, I went on my first ever cruise this month. My reluctance wasn’t the fear of being on a large piece of floating steel in the calm waters of the Med for a week, but rather the thought of being captive in a mobile hotel with a very large number of Americans. I suspect that like most Brits, there are certain things about America that I love such as its energy, optimism and vibrancy but there are other things which cause me, at best, concern and at worst total dismay. Putting aside serious matters such as the possibility that a Soccer Mom might become the next President, the unquestioning support by successive American governments for brutal dictatorships and the huge amount of US government debt which will one day cripple the global economy, my greatest concern and dismay right now is over the import into the UK of the US concept of the Prom Party. This phenomenon is growing massively in the UK with more and more schools every year organising these over-glamorised school-disco celebrations of insignificance.
The Prom Party is good news for some people though; most notably retailers. Rob Templeman, soon-to-depart Chief Executive of Debenhams says that for his company it is now the second largest sales peak of the year, second only to Christmas. That’s probably little comfort for his shareholders who have seen the Debenhams share price fall from 195p at IPO in 2006 to around 70p currently.
Large dividends
The IPO price although at the bottom end of the range at the time still delivered a good return for the private equity firms which had originally taken Debenhams private in 2003. CVC, Texas Pacific and Merrill Lynch tripled their £600m investment during the three years the company was in private equity ownership, partly through selling properties, increasing the company’s debt and taking out large dividends.
Since the company listed on the stock exchange with shares being bought by reputable institutions there have been numerous questions raised about the growth prospects for Debenhams, even before gloom descended on the high street. Strong sales growth was essential to service the debt that had been foist on to it by the private equity firms, as well as to meet the largely fixed costs of a retail business. However, that sales growth hasn’t come through with the last reported figures showing like-for-like sales excluding VAT being down by 1.5%. Moreover, after repeated profits warnings and dividend cuts the Chairman admits that the current outlook is “no real change in consumer confidence”.
So for institutional shareholders who bought shares at the IPO it has been a fairly torrid time made worse by knowing that the previous shareholders managed a phenomenal return on their investment.**
I was reminded of the Debenhams saga during the month as another private equity backed clothing retailer New Look revealed that it wouldn’t be seeking an IPO in the near future. Looking through the results they announced for the year to March 2011 that was hardly surprising as like-for-like sales were down by 5.5%. This downturn in revenues contributed to a fall in Operating Profit from £162m last year to £98m; quite a problem when the company has net debt of over £1 billion on its balance sheet. No doubt though that the current owners of New Look, the private equity firms Apax and Permira, will do what they need to do to prepare the company for IPO at some point in the future, and pass the problems on to some nice-but-dim fund manager.
Successes and failures
Of course, over the years, there have been some cases of private equity successfully improving performance in acquired businesses, including Halfords, the Automobile Association, Homebase and RHM. There have of course been notable failures, the most spectacular being the imminent failure this month of the care homes business, Southern Cross, previously owned by another private equity group, Blackstone. Southern Cross provides a further example of property sales followed by increased debt and massive dividends for private equity groups, ending up with an IPO, although in this case of course its failure has more serious consequences for its customers than a high street retailer disappearing into receivership.
Most recently this month, Aviva announced that it was selling its RAC roadside rescue business to the private equity group Carlyle for £1 billion. The managing director of Carlyle, Andrew Burgess, said he saw a “strong longer-term potential to grow the business by investing in new and innovative financial services offerings, such as motor and household insurance”. No mention of course of selling properties, increased debt or huge dividends for Carlyle. However, bank debt is becoming more available for these types of deals and is likely to be used in the RAC deal; infact JP Morgan which ran the sale process for Aviva is also making finance available for the successful bidder which will put debt on to RAC’s balance sheet of up to seven times the company’s operating profit.
What is certain is that at some point RAC will come back to the public markets along with other PE-backed companies such as Merlin, the owner of tourist attractions including Madame Tussauds, Phones4U, and numerous other companies being lined up for IPO. Ernst & Young, a leading accountancy firm estimates that there are fifty private equity backed companies intending to IPO in the near future and looking to raise around £10 billion in aggregate.
The question for investors both institutional and private is if by the time they get on board the party will still be going on or whether it will be about to fizzle out leaving the new shareholders to do the clearing up.
** For anyone wanting to understand the fascinating case study of Debenhams from its purchase by private equity in 2003 through to its profit warnings and dividend cuts as a public company, contact me on the email address below for an excellent academic research report.
Tuesday, 5 July 2011
Saturday, 7 May 2011
Are you free Mr Lucas?
Shareholders are getting more information but do they feel they are being served?
This article first appeared in Aimzine, www.aimzine.co.uk
I’m not sure why but I look back on the 1970’s with a degree of nostalgia. It could be the three day week resulting from the miners’ strike, or the country declining to the brink of bankruptcy or the ever present threat of nuclear annihilation. I suspect though that, as a child at the time, part of the nostalgia is down to having shared experiences such as most of the country simultaneously watching programmes like “Are You Being Served?”. So it was with some momentary sadness that I read of the death last month of Trevor Bannister who played Mr Lucas in the series. Another 70’s great passes away even though most of us probably never realised he was still alive.
Roll forward to the late 1980’s and the miners had been defeated in the return leg of the strike fixture, the economy had been brutally beaten into shape and as the USSR disintegrated, nuclear annihilation suddenly became further into the future than just four minutes. It was around that time that I was approaching graduation and wondering what I could do with my life to avoid practising my degree subject of pharmacy. I started to consider accountancy amongst other things, and one of the ladies I worked with in Boots during my pre-registration training suggested I have a chat with her son, Chris Lucas, who had joined Price Waterhouse a few years earlier. I met with Chris and his enthusiasm for accountancy was a key factor in my subsequently joining the profession, albeit with the slightly cuddlier firm of KPMG.
I haven’t seen Chris Lucas since but to be fair to him he hasn’t really been free. He’s been busy firstly rising to partner at what is now PricewaterhouseCoopers, then to Head of PwC’s Banking Practice, being the lead partner on the Barclays Bank audit, and then more recently becoming Group Finance Director of Barclays.
Close monitoring
With an audit partner becoming the Finance Director of a client, there is always, quite rightly, a closer monitoring of the individual’s role and whether the gamekeeper turned poacher has any implications for corporate governance and financial reporting. In this case, to their credit, Barclay’s dealt with the potential issue by appointing Sir Michael Rake as a non-executive director not long after. Sir Michael was previously Chairman of KPMG International and is one of the biggest hitters in accountancy circles.
We don’t know what impact Sir Michael has had on the governance of Barclays. In fact, shareholders seldom know what is happening behind the scenes in a company. Annual Reports and trading updates often refer to business activities in a rather perfunctory way. Although, regulators have tried to change this by requiring companies to discuss business operations and risks in more detail there has seldom been any discussion about why the numbers reported are as they are.
That box-ticking landscape began to change recently because Sir Michael as head of the Audit Committee of Barclays wrote a few paragraphs in his Audit Committee report about certain judgements the Committee discussed with the auditors. Whilst not very long this section highlights five issues which could have been accounted for differently and, if so, would have had a material impact on the numbers that Barclays subsequently reported for 2010.
Although shareholders cannot work out what financial impact there would have been if the issues had been accounted for differently they do provide an invaluable insight into the prudence applied or otherwise in preparing the accounts. This is the type of information which hitherto never went beyond the audit committee, board and auditors.
Methods and judgements
No doubt Sir Michael’s decision to introduce this improved reporting may be connected to a document issued by the Financial Reporting Council on Effective Company Stewardship (1) which is well worth a read and, amongst other things, highlights the reliability of financial statements being increasingly dependent on matters such as “the methods and the judgements made in valuing assets and liabilities”. In Barclays case for example, whether the fall in value of its investment in the fund manager Blackrock (to which it sold Barclays Global Investors) should be charged against reserves or go through the profit and loss account and hit earnings per share. Not surprisingly, Barclays chose to take it through reserves and not through the P&L, but at least it was highlighted and there was a rationale given for that decision.
Unfortunately, the significance of this improved reporting and of Barclays leading the way has been drowned out by the continuing public and shareholder anger at banker’s bonuses; the 2010 bonus pool at Barclays was £2.6 billion compared to dividends to shareholders of just £645 million.
So, whilst Sir Michael deserves a knighthood if he didn’t already have one, important improvements such as this one will be overlooked if more pressing business issues aren’t addressed by management teams, and if shareholders continue to feel that they aren’t being served by the people their company employs. In the case of Barclays, if Mr Lucas is free he might want to consider whether the cost of bonuses at this level makes business sense or whether a rebalancing with the dividend might prove to create more shareholder value.
(1) http://www.frc.org.uk/images/uploaded/documents/Effective%20Company%20Stewardship%20Final2.pdf
This article first appeared in Aimzine, www.aimzine.co.uk
I’m not sure why but I look back on the 1970’s with a degree of nostalgia. It could be the three day week resulting from the miners’ strike, or the country declining to the brink of bankruptcy or the ever present threat of nuclear annihilation. I suspect though that, as a child at the time, part of the nostalgia is down to having shared experiences such as most of the country simultaneously watching programmes like “Are You Being Served?”. So it was with some momentary sadness that I read of the death last month of Trevor Bannister who played Mr Lucas in the series. Another 70’s great passes away even though most of us probably never realised he was still alive.
Roll forward to the late 1980’s and the miners had been defeated in the return leg of the strike fixture, the economy had been brutally beaten into shape and as the USSR disintegrated, nuclear annihilation suddenly became further into the future than just four minutes. It was around that time that I was approaching graduation and wondering what I could do with my life to avoid practising my degree subject of pharmacy. I started to consider accountancy amongst other things, and one of the ladies I worked with in Boots during my pre-registration training suggested I have a chat with her son, Chris Lucas, who had joined Price Waterhouse a few years earlier. I met with Chris and his enthusiasm for accountancy was a key factor in my subsequently joining the profession, albeit with the slightly cuddlier firm of KPMG.
I haven’t seen Chris Lucas since but to be fair to him he hasn’t really been free. He’s been busy firstly rising to partner at what is now PricewaterhouseCoopers, then to Head of PwC’s Banking Practice, being the lead partner on the Barclays Bank audit, and then more recently becoming Group Finance Director of Barclays.
Close monitoring
With an audit partner becoming the Finance Director of a client, there is always, quite rightly, a closer monitoring of the individual’s role and whether the gamekeeper turned poacher has any implications for corporate governance and financial reporting. In this case, to their credit, Barclay’s dealt with the potential issue by appointing Sir Michael Rake as a non-executive director not long after. Sir Michael was previously Chairman of KPMG International and is one of the biggest hitters in accountancy circles.
We don’t know what impact Sir Michael has had on the governance of Barclays. In fact, shareholders seldom know what is happening behind the scenes in a company. Annual Reports and trading updates often refer to business activities in a rather perfunctory way. Although, regulators have tried to change this by requiring companies to discuss business operations and risks in more detail there has seldom been any discussion about why the numbers reported are as they are.
That box-ticking landscape began to change recently because Sir Michael as head of the Audit Committee of Barclays wrote a few paragraphs in his Audit Committee report about certain judgements the Committee discussed with the auditors. Whilst not very long this section highlights five issues which could have been accounted for differently and, if so, would have had a material impact on the numbers that Barclays subsequently reported for 2010.
Although shareholders cannot work out what financial impact there would have been if the issues had been accounted for differently they do provide an invaluable insight into the prudence applied or otherwise in preparing the accounts. This is the type of information which hitherto never went beyond the audit committee, board and auditors.
Methods and judgements
No doubt Sir Michael’s decision to introduce this improved reporting may be connected to a document issued by the Financial Reporting Council on Effective Company Stewardship (1) which is well worth a read and, amongst other things, highlights the reliability of financial statements being increasingly dependent on matters such as “the methods and the judgements made in valuing assets and liabilities”. In Barclays case for example, whether the fall in value of its investment in the fund manager Blackrock (to which it sold Barclays Global Investors) should be charged against reserves or go through the profit and loss account and hit earnings per share. Not surprisingly, Barclays chose to take it through reserves and not through the P&L, but at least it was highlighted and there was a rationale given for that decision.
Unfortunately, the significance of this improved reporting and of Barclays leading the way has been drowned out by the continuing public and shareholder anger at banker’s bonuses; the 2010 bonus pool at Barclays was £2.6 billion compared to dividends to shareholders of just £645 million.
So, whilst Sir Michael deserves a knighthood if he didn’t already have one, important improvements such as this one will be overlooked if more pressing business issues aren’t addressed by management teams, and if shareholders continue to feel that they aren’t being served by the people their company employs. In the case of Barclays, if Mr Lucas is free he might want to consider whether the cost of bonuses at this level makes business sense or whether a rebalancing with the dividend might prove to create more shareholder value.
(1) http://www.frc.org.uk/images/uploaded/documents/Effective%20Company%20Stewardship%20Final2.pdf
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