Elecosoft AGM, British Land, Apple, Social Media and GDPR

Yesterday I attended the Annual General Meeting of Elecosoft (ELCO) as a shareholder. Elecosoft produce software products for the building/construction industry. It’s a fairly new purchase of mine so I thought I would go along and get an impression of the company and its management.

The meeting was held in the City of London at the convenient time of 12.00 noon and there were about 20 shareholders present. That’s more than I expected given the size of the business (market cap only £56 million). The share price has been rising recently after the company now seems to be growing rapidly after a period of relative stagnation. But like many software companies they capitalize a lot of software development which will not please some investors. They do have substantial recurring revenue from maintenance contracts which is an aspect of software businesses I always like. The company issued a positive trading update on the morning of the AGM.

The Executive Chairman, John Ketteley, is a former merchant banker apparently. He commenced by welcoming attendees to the 78th Annual General Meeting of the company (did I hear that right?), and that he found that easy to remember as he was also 78 years old. Yes this is a somewhat unusual leader for a software business.

The Chairman then launched straight into the formal business of the meeting without inviting questions – not a good sign – so I had to interrupt him. Questions should be taken first.

I asked why the company was requiring shareholders to “opt-in” specifically to receive a cash dividend rather than a scrip dividend. I have never seen this before in any company. The answer given was because those in nominee accounts had difficulty in taking up scrip dividends instead of receiving cash. But I had to tell him that as some of my holding was in a SIPP I had queried how they were going to handle this option and was advised that they took up the cash option for all investors in such cases, which rather defeats what the Chairman was trying to achieve. Some shareholders, like me, tend to prefer cash dividends as otherwise it can get complicated keeping track of one’s holdings. Only those with large direct holdings (not in tax free ISAs or SIPPs) are likely to want to take a scrip dividend.

There were a few questions from other shareholders. Might the company consider moving to the main market from AIM (or moving back as it turned out)? The Chairman saw no benefit in doing so and two shareholders say they would be definitely opposed. There are good tax and other benefits for shareholders from being on AIM. Another question was on moving to SAAS platforms – it seems some of their software is still PC based, but new development is moving to the web.

I would not say the Chairman handled the meeting particularly well despite his experience. Perhaps his age is showing. I did speak to him directly after the meeting and asked about the high number of management changes in the last year and whether he was considering retiring. He indicated that he needed to rebuild the team and that he was now very confident he had a good team in place. But succession planning does not seem to be a priority.

But it was a useful and interesting AGM, as many are. They often turn out to be more interesting than expected. There was also a goody bag of useful kit – a baseball cap (something us baldies can always use as I said to the Chairman), a UBS Memory Stick and a Notebook.

Let’s now consider two companies at the other extreme in terms of size. Firstly British Land (BLND) – a property company with a market cap of about £7 billion. This company has a large portfolio of City offices and retail stores. I first invested in this company in December 2015 when I bought a few shares at 795p on the basis that the falling prices of property companies due to fears over Brexit were overdone. The share price is now 695p so not exactly a great initial purchase!

But the share price has been recovering and in fact taking into account dividends received I am now at breakeven after some more purchases when it became even cheaper. But it has certainly been a poor investment in comparison with other property companies I hold (e.g. big warehouse providers). Any company with an interest in the retail sector has suffered and British Land has been selling such properties. That has reduced their income and impacted profits.

But I do like to have some more defensive large cap stocks in my portfolio to offset the more speculative small cap stocks such as Elecosoft (I run a “barbell” portfolio in essence). When I first purchased British Land it offered a yield of 3.6% and was at a discount to net asset value of 10%. The prospective yield is now 4.4% and the discount is over 25% even after recent share price rises, which is unusual for a property company.

British Land seemed to adopt a defensive stance although City centre office values have not been declining as expected. The company has been reducing debt with LTV (loan to value) now down at 28% based on the full year results published yesterday. Perhaps the lesson here was not to buy shares that start to look cheap unless they become really, really cheap. But non-executive director Preben Prebensen just spent £140,000 on buying shares so perhaps the future is looking brighter.

Apple Inc (AAPL) is the largest company in the world with a market cap of $919 billion. That’s still ahead of Amazon. I don’t hold Apple directly although some indirectly in the investment trusts I hold. Some people have questioned whether Apple can continue to grow and maintain its profit margins when a lot of the revenue comes from iPhone sales. Surely the mobile phone market is now quite mature with everyone having one (indeed some of us have two) and new models not providing much in terms of new features?

I can possibly provide some light on this having just upgraded from an iPhone 6 to an iPhone 8. They look and weigh the same. I only changed because of contract expiry and a concern that the battery was wearing out, but in fact I think the poor battery life was down to using a smartwatch which connects via bluetooth. The new phone has very similar battery life. Perhaps the camera is a wee bit better, but then I don’t use it a great deal. So in essence, I think I have wasted my money in upgrading. This surely brings into question how long Apple can continue to grow unless some of their other products take off. Their smartwatch has not been as successful as might have been expected – smartwatches still seem to be a minority interest.

Finally let me say some more on the issue of the abuses in social media which I covered in a previous blog post. Just to clarify one point, when I suggested a Government inquiry into social media, I was not necessarily advocating more legislation. I think laws can be very ineffective in mandating or enforcing social norms. For example, one existing problem is that libel laws are pretty useless to most people – only the wealthy can afford to pursue libel cases and even if they do, enormous costs end up being paid to lawyers while the resulting remedy may be ineffective. Making them criminal offences would be no more likely to be effective partly because the police have no resources to enforce most existing laws.

I think there needs to be an inquiry into the causes of the breakdown in social norms about what is and what is not acceptable behaviour. The fact that folks can post garbage anonymously is one issue to look into. Is education a solution perhaps? Or perhaps another solution might be to enable “trusted” reviews to be invoked – for example Wikipedia seems to be good at ensuring reasonably accurate and responsible public information and commentary even though in essence there is complete freedom for anyone to post there. Moderation of posted material is obviously advantageous which some platforms do not do, or do in a very limited way. Simply the publication of a “standard” or set of norms for public forums (as Wikipedia also has of course) might assist. A combination of approaches might be the solution, and perhaps more research into the causes is required. Those are the issues that a public inquiry might look into and provide some recommendations upon.

At present there is a focus on making the national press more responsible (the Leveson inquiry and its recommendations) while ignoring the new world of social media, blogging sites and other forums. They need to be embraced also as there is no longer a firm dividing line between media. Perhaps a social media regulator is required to take responsibility for and provide guidance in this area, as the Information Commissioner does for Data Protection? But with a lighter touch than we are getting with the GDPR rules which seem to be another example of excessive regulation from the EU which is unexpectedly imposing major costs on even the smallest organisations. I am not convinced the new rules will stop the spam that we all receive.

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

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LoopUp, Audioboom, Social Media Abuse and a VCT AGM

LoopUp (LOOP), a small AIM listed company that provides audio conferencing and in which I have a small holding, have announced a proposed acquisition of a company in the same business – MeetingZone Group. This will more than double the size of LoopUp so it constitutes a reverse takeover. As they are paying cash for MeetingZone it will be financed by a term loan and a large placing. The placing will be at 400p per share, when the share price last night was 435p so it’s only a small discount. The share price normally falls to the placing price in such circumstances but it actually rose today which suggests investors like the deal.

MeetingZone is profitable and is being acquired at 12 times EBITDA. The plan is to deliver a “timely transition of the MeetingZone Groups audio conferencing business to the LoopUp platform” as the announcement says. This is clearly potentially a significant step up in the size and profitability of the merged entity, but my slight concern is the risks involved in this transition as it means the customers will need to learn a new system. Such transitions are never easy.

Another small AIM company is Audioboom Group (BOOM) whose shares have been suspended for some time after they announced a proposed acquisition, with a fund raising to finance it. Yesterday they announced it had been impossible to complete the placing to fund the deal and the company now needs to raise some money just to cover its working capital needs. Audioboom is primarily a podcast hosting platform and revenue has been increasing but for the year to November 2017 it was still less than £5 million and the loss was expected to be a similar figure! Accounts have yet to be published though. Needless to say perhaps, I have never held shares in this company because I considered it to have an unproven business model. Such early stage companies are surely best financed via private equity who can accept the risks rather than public market investors. I wish them the best of luck in raising more funds.

But I did have some contact with the company after a certain person posted a podcast which contained abusive comments about me. So my lawyer asked politely that it be removed which the company did simply because it did not comply with their policies. The result was a torrent of abuse about Audioboom by the same aforementioned person which was totally uncalled for. But now the same person has been on the receiving end of an attack from someone else where he has even had to call in the police for assistance.

Postscript: Let me make it clear that I do not condone racist or other illegal communications of any kind. They can never be justified. I have only recently been informed of the content and likely reasons for it which has resulted in the aforementioned communication being referred to the police.

This is a typical example of the problems of social media and blogging sites which have been getting a lot of media coverage in the last few days. Facebook have reported that 2.5 million posts alone that included “hate speech” were removed in the last 3 months of 2017, and there were many more violent, terrorist or pornographic posts they also removed. However, they cannot easily identify lies, fake news, fraudulent advertisements and common abuse. In other words, the social norms about what should be “published” in a public forum are completely breaking down. Nobody can, nor does, police the internet.

This is now proving to be a major problem for anyone in public life such as politicians. Free speech is a good concept in essence, but when it degenerates to allowing irrational and unconsidered abuse and false allegations to be propagated then surely something needs to be done about it. The laws against “hate speech” and libel law hardly provide effective remedies to stop the kind of behaviour that is now becoming so prevalent. I suggest that the Government needs to undertake a full blown public inquiry into this problem.

It is particularly serious in the financial world where bad behaviour can affect the business of a company and its share price, effectively leading to “market abuse”.

Yesterday I attended the Annual General Meeting of Maven Income and Growth VCT 4 Plc (MAV4). There were only about half a dozen shareholders in attendance in the City of London.

I raised a number of issues and posed questions. Subjects covered were:

  1. The poor performance of the company last year, which I calculated to be a total return of 1.72% (i.e. less than inflation). Total return includes asset growth and dividends of course, and although the company paid out dividends of 12.45p last year representing a yield of 16.5% on the share price at the end of the year (tax free of course), it’s the total return that really matters. Otherwise shareholders are just getting their assets returned to them.
  2. Inadequate explanation for the poor performance in the Annual Report. It does mention that “one of the larger portfolio companies suffered a write down in value which diluted the overall performance in the financial year, but more explanation would have been preferable.
  3. The length of service of the board directors. Apart from director Bill Nixon, who represents the fund manager and which I do not accept should be a director simply for that reason, the other three directors including the Chairman have all served since 2004. So this is one of the few companies where I voted against the reappointment of all of them. I made it clear that the board should look at succession and they indicated they may do so.
  4. The high overhead costs in this VCT – total administration and management expenses I calculated to be 4.0% of net assets at year end, although Bill Nixon disputed this figure.
  5. There was a suggestion made that with high returns of cash to shareholders last year, and a new fund raising, there might have been some “cash drag” in the performance data.
  6. I questioned the impact of the new VCT regulations, and Bill Nixon said the market was getting “frothy” with valuations difficult to sustain. The inability to write debentures on investments limits the amount of control they will have in future. The manager has reshaped the investment team to adjust to the new focus – they now have 4 PHDs. They rarely back start-ups and prefer to back teams with successful track records – they don’t “want them to be learning on our money”.
  7. Advanced approval from HMRC on new investments is getting better (this has been a major concern for many VCTs of late as it delays closing deals). Now closer to 30 to 40 days. There is also a proposal for a “self-certification” scheme where a qualified independent person gives a positive opinion. This might be of assistance but there are still potential problems if a business is subsequently found not to qualify.
  8. The company is looking at using the funds raised to make 10 to 12 investments in the current year, so the new rules about what kinds of businesses can be invested in are apparently not proving to be a major problem. But Bill said the result is they are moving from investing in “old” economy companies to “new” economy runs. This is likely to mean that portfolio volatility will increase so overall returns (and hence dividends) may fluctuate more from year to year.
  9. Bill thought VCTs will raise less money this year so new offerings may be in high demand.

Votes were taken on a show of hands and the proxy counts circulated after the meeting. Only about 10% of shareholders voted which is the typical pathetic turnout these days from private shareholders in such companies. There were substantial votes against one resolution on share buy-backs but apparently this was mainly from one family who may not understand the issues.

In summary this was a useful meeting and worth attending. I am only holding this VCT for historic reasons after Maven took over management of previously problematic VCTs I invested in years ago. Performance has improved as a result but is still not great and high overhead costs would put me off investing more money in it. I am always surprised that such VCTs are able to raise more funds with such apparent ease.

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

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Wey Education Interims and Sainsbury’s Merger

I attended a presentation by Wey Education to private investors on their Interim Results yesterday evening. The Interim Results were issued in the morning, but the share price fell by 31% on the day even though the company reported turnover up by 44% and an adjusted profit before tax when it was a loss last year. The reasons are not difficult to deduce.

Wey Education is a small education company listed on AIM providing on-line education services. A previous extensive report on the company is present here: https://roliscon.blog/2018/01/11/wey-seminar-the-future-of-education/

An immediate issue I spotted in the morning’s announcement was this statement: “Adjusted profits were £145,000 (2017: £75,000) in line with our expectations for the first half. The figure represents profit before tax adjusted for share based payments (£18,000), amortisation of intangibles (£95,000), acquisition costs (£43,000) and the higher than trend expenditure on marketing and other matters flagged up at the time of the November placing to substantially boost group revenues and underlying profits over the next three years (£143,000).”

I made a note to query the adjustment for marketing costs, but I needn’t have bothered because Leon Boros raised the issue in the meeting before I got a question in. As I said though, it is surely unusual to “adjust” for marketing expenditure. Understanding adjusted financial figures can be difficult enough but marketing costs are surely just part of routine operating expenses. If they are particularly high because of management’s decision to spend more on marketing, even though the returns might come in months later in terms of higher revenue, then this is best handled simply by a note in the accounts.

Executive Chairman David Massie said this treatment was consistent with previous financial reports and he had been advised to do this by the Nomad (WH Ireland). I think he got some bad advice on that point. Profitability is of less concern to investors in such early stage companies than revenue growth and progress with business strategy.

Another possible negative was the prospective partnerships (including joint ventures) in China and Nigeria for which David clearly has high hopes. There was clearly skepticism among investors about the prospects for these ventures and the diversion from the key existing UK markets. David does have experience of doing business in overseas markets which may assist.

One slight hiccup on their internet marketing spend was a decision to change bankers from HSBC who apparently queried some of the payments from overseas. From my experience of dealing with HSBC as a business customer that was probably a sensible decision to take. Simply impossible to deal with sensibly and quickly.

One interesting point in the presentation was a description of their interest in AI which I was skeptical about if you read my previous report. It seems this is being funded by the EU which pleases me even if it is still a management diversion. A demonstration of the wonders of IBM’s Watson as being implemented by Vodafone for answering customer queries fell flat as it did not provide sensible answers. My experience to date of voice response systems is consistently bad. Even the much-vaunted Google or Apple’s Siri can be very annoying in comparison with a human being, or a written query. Still requires further development to meet real users’ needs I think.

WH Ireland have revised their estimates for sales down for 2018 as a result but eps unchanged. Revenue now forecast to be £4.1 million and “adjusted” EPS of 0.39 but bear in mind the comments above. As others have said, the share price probably got ahead of what is a sensible valuation for this business. Even if David Massie has ambitions to grow it into a world leader, he has a way to go to demonstrate that this can be achieved. But he does seem to be building an organisation that might do so. One of those “wait and see” investment propositions it seems to me at this point in time.

Sainsbury’s Merger. On the opposite end of the financial scale, size wise, the proposed acquisition by Sainsbury (SBRY) of the ASDA UK stores from Walmart has had a very positive effect on the share price. The announcement on the 30th April caused the share price of SBRY to rise by 15% on the day. But it’s interesting to look at the share price trend in the week or so beforehand where it had risen after a long period in the doldrums. Was there a leak, as so often happens in these cases?

This merger would provide a supermarket duopoly in the UK with the merged entity and Tesco both holding about 30% market share. Would that be anti-competitive? In my experience in business undoubtedly so. Neither would be competing on price with the other and they would both end up with a cosy profit maximising strategy. For investors, if the merger is allowed to take place, it should be great news for investors.

But for Sainsbury’s customers like me, it’s going to be very bad news. I hope the Competition and Markets Authority block this deal.

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

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The Departure of Sir Martin Sorrell

At last the highest paid and longest serving FTSE-100 CEO has departed from WPP after 33 years. His total pay last year was £48 million, down from the previous year’s “single figure” of £70 million. Sir Martin was certainly perceived to be a “star” businessman, and the financial performance of WPP pleased shareholders for many years. Despite recent problems the Annual Report of the company claims a Total Shareholder Return of 1,006% over the last twenty years as against a measly 241% for the FTSE-100.

Will the company find a suitable replacement manager who can continue to grow the business? Will the company survive in its current form or be broken up? Those are the questions all the media are pontificating upon.

My thoughts on this subject were crystalized by reading the business management classic “Good to Great” on a recent holiday break. First published in 2001, the author Jim Collins reported on research he had undertaken to determine what separated out simply “good” companies from the “great” ones, i.e. those that really offered investors superior returns rather than average ones. He also looked at what turned good companies into great ones, i.e. the crystalizing factors or turning points. It’s well worth reading by investors for that reason alone, even if some of the companies reported on as “great” have subsequently gone bust (e.g. Circuit City), and amusingly Berkshire Hathaway was only rated as “good” at the time so was not included in the analysis.

Management and the quality of the leadership was one of the key factors identified. It seemed that humble, self-effacing leaders were best. They often attributed the company’s success to luck or the other senior management team members. Star managers with high profiles such as Jack Welch at GEC or Lee Iacocca at Chrysler frequently proved to be shooting stars whose achievements rapidly disappeared after they left. In other words, they did not build great companies where their legacy lived on after their departure.

This is one very applicable quote from the book when you are considering director pay in companies: “We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as the key lever in taking a company from good to great”. In other words, high pay does not generate exceptional performance in managers, and schemes such as LTIPs which allegedly align managers’ interests with shareholders do not help either.

It’s a book well worth reading for tips on how to identify the companies and their CEOs that are likely to generate great returns for investors.

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

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Low Margin Companies, and McColl’s AGM

Should you invest in companies with low profit margins? Phil Oakley of Sharescope wrote a very interesting article a few days ago which questioned whether they are likely to be good investments. This was one complaint about Conviviality which recently went into administration.

As Phil said, high margins suggest that a company has pricing power and limited competition while low profit margins make a company vulnerable to tough trading conditions or a weak economy. The reason for this is simple. If the overhead costs are relatively fixed but revenues fall even by a small amount, or costs rise, then profits can rapidly disappear. In addition if margins are already tight, then when competitors cut prices to retain volume, a company with low margins can find they simply cannot respond without incurring losses. Low profit margins are often linked to low returns on capital which is always something to avoid.

In essence, companies with low profits margins can be living on a knife edge and hence one needs to be careful about investing in them. A margin of 10% or higher is preferable, and a number of companies I am investing in have operating margins of over 50%. But what about retailers? Their operating margins are often very low. For example, Sainsbury’s is at 1.66% according to Stockopedia, Tesco is at 3.2%, ASOS is at 3.79%, Boohoo at 8.43% and Dunelm at 9.43%. The more specialist the retailer, or the higher the value items of sold, the greater the operating margin should typically be.

Carpetright which has just announced a major restructuring and refinancing was at minus 0.15% a year ago so their recent problems are perhaps no surprise. Likewise Conviviality was at 1.62% although they had both wholesale and retail operations. But ignoring all retailers because they report low profit margins is not a strategy I would follow.

McColl’s Retail Group whose AGM I attended yesterday are a convenience store operator. Their average “basket” size is only £5.62. Their operating margin is only 2.1%. Well at least it’s better than Sainsbury’s and I suspect it’s been low for many years – indeed when I first purchased the shares 2 years ago it was only 2.5%. But if you look at the more conventional valuation metrics it does not look so bad. Prospective p/e of 11.9, dividend yield of 4.7% and like many retailers it generates a lot of cash as it sells its merchandise before it has to pay its suppliers – at least that’s true until they go bust.

They are therefore companies that you need to keep a close eye on to see that margins are not falling, and that revenue on a like-for-like basis is not declining. That’s particularly so when we have a bad patch of weather affecting footfall as we had recently, or where they are vulnerable to erosion from internet retailers. Are McColl’s in that regard? Probably not because 60% of their customers live within 400 meters of their local shop and they provide both fresh/chilled food and services such as a post office. The company is looking to “engage” even more with their customers who typically visit very frequently.

It was a useful AGM with a number of good questions from the audience (less than 10 shareholders attending at the company’s head office in Essex). One question related to the success of the acquisition of 290 stores from the Co-Op which have now been fully integrated but the CEO rejected a suggestion the stores were below targets and said the deal “met the business case”.

However one problem the company has faced in the last year is the collapse of supplier Palmer and Harvey. The business was closed by the administrator almost immediately so McColl’s had to make alternative arrangements very rapidly. This resulted in analysts forecasts of profits being reduced from £54m to £50m according to the CFO. In future they will be reliant to a large extent on Morrisons who they have done a deal with to retail products under the Safeway name. It seems to me that these two companies might become so closely linked that sooner or later it might make sense for Morrisons to acquire the business. Morrisons sold off their own convenience store chain in 2015 which was losing money and not easy to scale up.

One shareholder complained about the remuneration arrangements – a typical complex scheme including LTIPs. He said “why do people need a bonus to do their job?”. The Chairman said there is competition for talent. I also discussed this with the CFO after the formal meeting closed and suggested there were better solutions to incentivise staff.

I also talked to the Company Secretary about the problems with voting via Link Asset Services (see previous blog post on that topic).

One unusual aspect of this AGM was the issuance of the Minutes of the last AGM and request for shareholders to approve. Companies normally do minute their AGMs but don’t publish them.

The votes were taken on a poll with the results only announced later in the day. About 13% of votes were against the Remuneration Policy, against the Chairman and Rem. Comm. Chair Georgina Harvey and over 18% against share allotment and pre-emption resolutions. Plus 13% against company share purchases and the change of notice of General Meetings. These are unusually high figures and the board has committed to look into the reasons why and report back. Note that Klarus Capital hold over 11% of the company having bought the stake held by former Chairman James Lancaster.

My conclusions about this company: The management seem to be making the right decisions but they do need to improve the profit margin and return on capital. However it seems one reason for the deal with Morrison’s was to obtain “improved commercial terms” so that suggests they recognize this. Moving into growing segments such as “food-on-the go” and out of declining ones such as newspapers and tobacco should help as will store refurbishments and the addition of a few more stores.

The share price of McColls has been picking up recently from a low point. But like a lot of my holdings it seems to be somewhat volatile of late. Is that as a result of the holiday period with lower trading volumes, a tax year end effect, or investors being nervous about war in Syria? Will it be war or no war? Investors never like binary bets. Perhaps Donald Trump should get on the hot-line to Russia and negotiate an alternative scenario. After all he has written a book called “The Art of the Deal” so he should know how to finesse a face saving way out of the problem.

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

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Conviviality Fire Sale

Conviviality (CVR) has now gone into administration, and the ordinary shares are probably worthless (they were suspended some days ago and are likely to remain so). The administrators have already sold the major parts of the business in “pre-pack” administration deals. That’s where arrangements are made to dispose of assets in advance of the appointment of administrators by the prospective administrators before they have in fact been appointed. Is that legal you may ask? Yes it is because of a past legal case however perverse the result might be.

It’s interesting to look at the deals done by the Conviviality administrators:

  1. Retail chains Bargain Booze and Wine Rack have been sold to Bestway for £7 million.
  2. The wholesale division comprising the former businesses of Mathew Clark and Bibendum has been sold to C&C (owners of Magners Cider) for £1, although it seems the new owners have taken on some of the debts owed.

Matthew Clark was bought by C&C for £200 million three years ago and Bibendum was bought for £60 million in 2016. You can see why I call this a “fire sale” when the administrator seems to have lined up buyers in just a few days and disposed of these businesses at a value that seems to be a great bargain for the buyers.

One of the problems with administrations is that often the administrators have an objective to sell the business absolutely as soon as possible. This is to protect their own financial interests it frequently appears to me as much as it is to protect the jobs of employees and maintain a business as a “going concern”. Administrators can only get paid out of the cash that is present in the business or can be collected. That’s why nobody wanted to take on the administration of Carillion and it went straight into liquidation.

Administrators have an obligation to market a business for sale but can that be done adequately and the best price obtained when the deal has clearly been done in just a few days? That obviously does not allow any time for the normal due diligence on a substantial deal so the buyers won’t have paid anywhere near the normal market price for the assets.

In summary, the buyers of the assets get a great deal, the jobs get preserved (at least to some extent), the bankers to the company often get their loans back and the administrators get well paid while minimising their risks. But the previous owners of the business (the ordinary shareholders) get left with nothing. Is that equitable?

In effect the current legal structure, and particularly the pre-pack arrangements, enable the rapid dismantling of a business when it might have been recoverable if the company had been able to have more time to refinance the business and stave off its creditors for just a few weeks.

This is why I argue that the current UK insolvency regime needs reform. It destroys companies in short order when ordinary shareholders have often invested in the company to grow the business in the past. In the case of Conviviality it only listed on AIM in 2013 and did subsequent placings to finance its expansion.

The reason for the invention of “administration” in the insolvency regime was to enable a more measured wind-up, disposal or restructuring of a business rather than a liquidation. But insolvency practitioners (i.e. administrators) seem to have changed it into a short-cut to wind-up. Reform is surely needed.

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

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Moneysupermarket and Private Eye

Fame at last. This week Private Eye published a letter of mine on the subject of Moneysupermarket.com Plc. This was in response to a somewhat inaccurate article on companies ditching their advertising agents. This is what the letter said:

“Sir, Contrary to your article on companies ditching their advertising agencies in EYE 1466, where it is stated that Moneysupermarket.com lost money last year, the truth is that they actually made profits of £78.1 million.

However, as an investor in the company, I applaud the action of the new CEO in firing their advertising agency. I always thought good advertising was about promoting the merits of the product or service you were offering. But Moneysupermarket’s recent campaigns, such as a prancing “twerking businessman with a giant arse” as you put it, was nothing of the kind. Perhaps the new(ish) CEO (he has been there a year) took a similar view. Particularly when the financial results for last year were indeed disappointing, albeit revenues and profits were up 4% – but that’s not much more than inflation.”

Private Eye often publish some revealing articles on financial matters and this latest edition contains one such by “Slicker”. It covers the “existential crisis in corporate governance” which he says has increased since the financial crisis of 2008 with no top bankers, auditors, lawyers or regulators in court. The article covers many of the scandals that have come to light in that period, and this is a particularly pertinent comment therein: “Non-executive directors, who supposedly oversee the executive directors, have too often become an over-rewarded mafia of mediocrity, exhibiting all the signs of Stockholm Syndrome, their captors being the domineering CEOs to whim they never say no”.

He suggests some remedies which include “a corporate vicarious liability law” as in the USA, a Sarbanes-Oxley style law, and the banning of LTIPs. All well argued and it’s certainly worth reading.

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

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