HBOS and Lloyds Legal Case

This week sees the start of the legal case in the High Court by investors in the Lloyds TSB over the acquisition of HBOS – opening submissions are on Wednesday and it’s scheduled to run through to March next year. Anyone can attend these hearings of course but I think it will take a very patient person to sit through all of it. I have submitted written evidence on behalf of the litigants (represented by Harcus Sinclair) but it seems I am unlikely to be called for cross-examination by the defence which is somewhat disappointing.

I cannot comment further for that reason, but the claim is in essence based on the allegation that relevant information was not disclosed in the prospectus that was issued at the time in 2008 when investors in Lloyds TSB approved the deal. Lloyds reject that the claim has a sound basis, but the cross examination of former directors Sir Victor Blank and Truett Tate should provide some excitement and will no doubt be assiduously reported upon by the press. The directors who signed off the prospectus are of course defendents in the litigation as well as the company.

This is a similar case to that of the Royal Bank of Scotland (RBS) litigation which was recently settled before it got into court, which is the way these matters often end up. Sky News has reported that Harcus Sinclair have offered to settle the case but that has been rejected by Lloyds. As in the RBS case, legal costs on both sides will no doubt be enormous.

Lloyds Banking Group are also involved in claims over the activities of management in HBOS (particularly in the Reading branch) which has resulted in the conviction of several people for fraud. The FT Magazine ran a very good, and lengthy, article on this subject in their October 7th edition. In summary this was where people exploited the fact that businesses in financial difficulty, who were dependent on loans from the bank, via consultancy fees and other strategies extracted large sums of money or gained control of businesses from the original owners. Large numbers of business owners lost their companies and in some cases were forced into poverty as result. This disgraceful episode was very similar to the activities of the Global Restructuring Group at RBS which I covered in a previous article, but will not be raised in the current legal proceedings. Lloyds are compensating the people affected, at least to some extent.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Obituary – Steve Marshall

The Daily Telegraph ran a lengthy obituary on Steve Marshall today, who died recently at the young age of 60. It covered his financial career in a not particularly complimentary way although some might say he took on a lot of difficult positions.

He first came to public prominence when he became CEO of Railtrack after Gerald Corbett was forced to resign, despite having minimal experience of the railway industry. Railtrack was part of the former British Rail that had been privatised and then ran into a number of problems. Indeed the financial difficulties seemed to escalate under Marshall and the company had to be nationalised (Marshall promptly resigned) as it was on the verge of bankruptcy according to the Government. Shareholders got some compensation but only after a fight. The business was renamed Network Rail and is a rather peculiar private “not for profit” company. If Jeremy Corbyn ever gets elected, he may change the status and ownership yet again.

Steve Marshall was an accountant by training and served as finance director of Thorn EMI before his stint at Railtrack. The Telegraph mentions the disappointment of some bondholders in Thorn EMI when the company was sold to Nomura.

After Railtrack, Marshall took on the role of troubleshooter being involved with Queens Moat Hotels, Delta, Torex Retail, Balfour Beatty, Biffa and Wincanton. The Telegraph has nothing positive to say about any of these roles.

I had some contact with Marshall when I represented shareholders in Torex Retail. We were so concerned about the actions of Marshall, and the company’s banker’s (RBS) after the company ran into financial difficulties due to an accounting fraud that a requisition for an EGM to remove him and the other directors and replace them was submitted. There was a good chance of winning the vote. This was pre-empted when Marshall promptly invoked a “pre-pack” administration – a good example of the dubious nature of such transactions.

There were other offers on the table to that from the buyer preferred by the board and RBS but they were ignored. I never did understand why, but it was certainly plain that the interests of RBS seemed to take priority over that of the ordinary shareholders. It has of course subsequently become apparent that RBS treated many of their customers who got into financial difficulties and got involved with their “Global Restructuring Group” in the most appalling manner – see the internet for lots of examples of how money was extracted and business ownership coerced.

So in conclusion, are there any investors who gained from Marshall’s activities in the companies with which he was involved? Now is the time to speak out if so!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Accrol and Pricing Power

I won’t be the first to comment on the events at Accrol (Kate Burgess covered it well for example in this mornings FT), but the surprise suspension of the shares from AIM on the 8th October caught a lot of investors by surprise. The latest announcement this morning said: “The Directors believe that the current challenges facing the Company relate largely to FY18 and are likely to have less of an impact on the Company’s trading performance in FY19. The Board are therefore confident that, whilst there can be no guarantee, a solution will be found to the Company’s short term funding requirements. The Directors continue to review the position and, as part of this review, the Company is engaging with its major shareholders and its bank.” 

To paraphrase the above, “we’re in a hole, our bankers are unhappy and we are talking to everyone about a way out but it may all come good in the end”.

To remind you Accrol (ACRL) is a company that listed on AIM in June 2016. The full year results published in July 2016 were very positive, but the Chairman also mentioned the following: “The listing has reduced the Company’s debt burden….” and “The listing also provided a partial exit for the founders, the Hussain family, and NorthEdge Capital who invested in Accrol in July 2014. The family will continue to support the management team as external consultants and I would like to thank both the Hussain family and NorthEdge Capital for their support and commitment”.

On the 7th September, the company announced the appointment of Gareth Jenkins as CEO to replace Steve Crossley “who is leaving the Company and stepping down from the Board with immediate effect….”.

On the 8th October, the company warned that profits were down, margins had fallen, debt was rising and the dividend was under review. In addition, it warned about a possible large fine over a Health & Safety issue that was apparently not disclosed in the listing prospectus.

Accrol processes paper rolls into toilet paper, paper hankerchiefs and kitchen rolls. It sits between the large paper mills and the large retailers who are their customers for “own-label” products. Now having looked at the prospectus back in 2016 it appeared the company was growing rapidly, albeit debt had been high, but I declined to invest in it. That was not just because I am very wary of all IPOs – these are events where the sellers have more knowledge of the product being sold than the buyers. For investors it’s rather like buying a used car. Is that newly polished vehicle a good runner, or is it a tired beast with hidden problems in the chassis? Only the seller really knows.

In addition, the company is “puffed up” to look attractive to the investors who take up such initial public offers. So my tactic is even if I like a company based on its prospectus, I would probably leave it for some months, or even years as good companies will likely remain so, to see how it fares as too many IPOs, particularly AIM ones, run into problems quickly. But there were several other aspects that concerned me about Accrol.

In this case, one of my other concerns was how defensible were its profit margins. In essence the pricing power of an intermediate processor, buffeted between the big supermarkets and the paper manufacturers is bound to be low. They may simply have been making hay while there was a surplus of paper being produced (paper production requires large capital investment, rather like steel mills, with long lead times on new plant so production volumes are lumpy as more capacity is built, or older inefficient plants are closed down). Paper is also a commodity product subject to the vagaries of commodity pricing.

This appears to be the source of their current problems, apart from the little (maybe big) issue of a possible large regulatory fine that will impact their cash substantially. Is this going to be another case where the investors launch legal action over the failure to disclose all the relevant facts in the prospectus one wonders?

Is my analysis of this company sound, or have I missed something? As Kate Burgess said in her article, “management will have a lot of explaining to do to investors” as will the Nomad no doubt (Nomad is Zeus Capital). With the shares still suspended, which always annoys investors and frequently leads to worse news in due course, there is not much investors can do at present.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Theresa May’s Speech, Housebuilding and Organ Donation

Theresa May’s speech to the Conservative Party conference was indeed a debacle in terms of presentation. But the content was worthy of more analysis.

The shortage of houses, particularly in the South-East of England, is a persistent and major political problem. Young voters have great difficulty in finding accomodation, while the old profit from rising (and unaffordable to the young) house prices. This leads to divisions in society that populist and left-wing leaders can exploit.

So what is the Prime Minister and the Government going to do about it? They have promised to spend another £10bn on the “Help to Buy” scheme which has improved the share prices of the housebuilding companies I own already. This may well enable some people to buy houses that they could not otherwise manage to do, but it is also likely to increase house prices rather than reduce them.

In addition, she has committed to spending £2bn to fund more affordable housing with measures to ensure councils release more land for housing, and encourage developers to actually build more homes.

These are positive moves, but it’s only tackling one end of the supply-demand equation. One of the core problems is over-population in the South-East and a concentration of business activity in London, which creates a need for more housing, more social infrastructure, more transport, and more land use that simply cannot be satisfied quickly enough, if at all. Rapid growth in population, driven partly by immigration, is one cause that needs to be tackled if this imbalance is ever to be rectified. And a policy to redistribute economic activity more broadly across the country would make a lot of sense surely.

One little reported item in Mrs May’s speech was the announcement that the Government is to make a presumption in favour of organ donation legal. So instead of an “opt-in” system, you will be required to “opt-out” if you do not wish to become an organ donor.

As a kidney transplant patient myself, I view this as a positive step forward to increase the number of donations. As Mrs May said in her speech, 500 people died last year because of a lack of suitable donors. That particulary affects heart donations, but even kidney disease patients have a much shorter life expectancy on dialysis as against having a transplant. The economics are that transplants are cheaper than dialysis, and the quality of life much improved. So I hope this measure will go through unimpeded.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Abcam, Voting and Non-Executives

I am a long-standing holder of Abcam (ABC) and have been very happy with my investment – a compound annual return of 33% p.a. since I first purchased the shares in 2006 according to Sharescope. But the notice of this year’s AGM (to be held in Cambridge as normal) has made me unhappy for other reasons.

Firstly, I tried to vote. Rather than use the paper proxy voting form (I am on the register so I get one) I thought it would be easy to do so electronically using the Equiniti ShareVote service. Even though there were no obvious instructions on the paperwork, I found the web site, entered the required three pieces of id information, and pressed submit. But it would not accept it because I have a pop-up blocker turned on. Grrr…..

Why do companies and their registrars make it so difficult to vote? They will be wasting money now because I will use the pre-paid voting card instead.

I then studied the resolutions:

  • Remuneration too high and the usual horribly complex mix of bonuses and LTIPs – but I told them that at the 2015 AGM. The only saving grace is that as an AIM company they don’t need to disclose all the information or have a vote on it, so it was good of them to do so. But I will be voting against the Remuneration Report.
  • What also attracted my attention is the presence of three non-executive directors (other than the former CEO) who are all women. One is the Chair of the Remuneration Committee so she gets a vote against for that reason alone. But all three have numerous other jobs/roles which exceed the ShareSoc guidelines and some seem to have little relevant experience of the markets in which Abcam operates. So I am voting against all three. Now I know that experienced female non-executives to fill public company boards are in short supply now that everyone wants to be “gender” balanced, so such ladies can line up numerous jobs with ease. But this is simply not good enough.

This is of course the result of the “box ticking” syndrome to keep the institutional shareholders and proxy voting advisors happy. But no non-executive director can do a good job if they have more than 4 or 5 positions.

I think I will have to attend the AGM again this year to make some of the above points.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Back to the Jeremy Corbyn Future

With the latest revelations from the Labour Party conference, we now know what their policies are likely to be if elected. These include

  • Nationalisation of the railways and utilities (including National Grid).
  • Scrapping all Private Finance Initiative (PFI) deals by buying out the owners with Government debt.
  • Rent controls in the private housing sector.
  • Reform of leaseholds.
  • Workers in the gig economy will get full employment rights.
  • The NHS will get more money.
  • Student loan debts will be written off (at least it’s an “ambition”).

Now some of these policies are not totally daft (the last four for example), even if the cost is probably unaffordable at tens of billions of pounds. But for those of my readers who do not remember the times when we had rent controls, and nationalised industries back in the 1960s and 70s, let me remind you.

Rent controls meant that rents stayed low, but private rented housing pretty well disappeared as a result over the years from 1950 to 1960. Nobody would invest in rented housing when they could get better returns on other investments. Or it promoted the spread of Rachmanism where landlords would allow properties to run down and then use aggressive tactics to remove sitting tenants. In other words, a great example of the usual “unintended consequences” of economically illiterate policies.

The control of industries by politicians and civil servants created hopelessly inefficient industries like the nationalised railways, the car industry and the coal industry which should have been shrunk in size well before Mrs Thatcher took steps to do so.

There would of course be an enormous flight of capital from the UK if these policies were implemented, and it seems the shadow chancellor is already anticipating a run on the pound. What he could do about it other than get the IMF to bail us out is not clear. To remind my younger readers, this is exactly what happened back in 1976 under Prime Minister James Callaghan when the IMF enforced massive cuts in the UK’s budget deficit as a condition of a large loan (the UK had been living beyond its means for some years, and building up large debts, very much like recent years under another socialist government who invented PFI deals to enable them to borrow money without putting it on the Government balance sheet – but the interest payable has now caught up with us). Would a new socialist Government simply default on the contracts or borrow even more money to get out of the PFI deals? Either way it looks a grim financial future for UK Plc.

The last Labour Government made a big mistake when they nationalised a small UK bank called Northern Rock – we just passed the year anniversary of that event. That proved disastrous when other banks such as Bradford & Bingley, RBS, HBOS, et al, who were dependent on short term money market lending needed liquidity. Nobody was keen to lend to UK institutions so British banks and the UK economy were some of the hardest hit worldwide by the events of 2008/9.

As for renationalising the railways, they may get more subsidies from the Government now than they did when they were last nationalised, but ridership has increased, new tracks are being laid, and services improved. The problem was surely the nature of the privatisation and the fact that all railways are horribly inefficient and an inflexible means of moving goods and people around. Old technology, beloved by users who do not have to face up to paying the real cost of the service.

So the policies of Mr Corbyn and his colleagues may be exhilarating for LabourParty supporters, but no I don’t want to go back to a future set in the 1960s. Been there, done that, and no thanks.

But if the Conservatives wish to win the next election, they certainly need to look at tackling employment law to bring it up to date for the gig economy, to tackle the problem of funding education and relieve students of the enormous debts they are now incurring, to deal with the problem of insufficient housing in the South-East (and associated over-population which is the cause) which is leading to demands for rent controls, and tackle the thorny question of funding the NHS. Yes we need some new ideas, not old policies recycled Mr Corbyn.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Interest Rates and the Gig Economy

You probably don’t need to be told that interest rates are at their lowest for several centuries, if not in recorded history. The fact that the Bank of England is making noises about possibly raising base rate could just be a way to try and rein back inflation (a higher base rate, or prospect of it, causes the pound to rise and that makes imports cheaper – and import costs have been one of the factors in inflation rising). But unemployment is also at its lowest level for 40 years which usually indicates a booming economy and the prospect of higher inflation to come.

Inflation is now at 2.9% measured by the C.P.I., or 3.9% based on R.P.I. which a lot of us like to use instead. Now to me the really astonishing item of news last week was that the large City of London Investment Trust managed to borrow £50 million at a fixed rate of 2.94% for 32 years (I do hold some of their shares). That’s must be one of the best deals ever surely, and shows how investment trusts have the advantage of being able to gear up by borrowing money – and why not when interest rates are so low?

In reality, the lender is not even getting a real positive rate of interest at current inflation rates, and is also betting that it won’t get any worse for the next 32 years. Astonishing, and just shows how the world economy is awash with cash.

Another couple of interesting items of news last week were that Deliveroo lost £129 million in 2016 according to accounts filed at Companies House, on revenue of £129 million. In other words, for every pound paid by customers, they lost a pound. It’s raised $472 million from investors to achieve this wonderful business model (source: FT).

Deliveroo use “self-employed” bike couriers to deliver restaurant meals. Another exponent of this “gig-economy” model is Uber who received the bad news last week that Transport for London were terminating their license to operate in London. More information on that in this blog post I wrote for the ABD: https://abdlondon.wordpress.com/2017/09/23/uber-kicked-out-of-london/ . In there I praised the merits of the service and suggested people sign the petition against it (which is rapidly heading for a million signatures).

But one reason that it is so low cost is because like Deliveroo, Uber loses money in a big way at present. To quote from one report on its financials, “Uber is cheap because the company is heavily subsidising each trip” where it was suggested that Uber’s losses as a percentage of revenue were 129% in the last quarter of 2016. Like Deliveroo, revenue is rising rapidly though.

Do we mind if these companies lose money hand over fist? If they are fool enough to do so in the race to dominate a new market why not let them. But the long term viability of both when there are obviously lots of competitors providing similar services does raise doubts about these businesses, even if London Mayor Sadiq Khan relents over Uber’s license.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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