Fevertree Fall, Trading Times and More on HBOS/Lloyds

Last week when I spoke at the Mello event I talked about my investment winners over the past few years. One of them was Fevertree (FEVR) but I was asked why I no longer held the shares. I gave a brief explanation at the time but there is good exposition of the issues by Phil Oakley in this week’s Investors Chronicle.

Fevertree’s share price peaked at 3200p in May 2019 but it’s now about 1900p. It has declined so much in the last few months that I considered buying it back but it has also perked up in the last few days so it did not reach my target price. Phil’s article is headed “Fevertree may fall further”. This is what he has to say about the business: “The high selling price of its products make for high profit margins. Combine this with an asset-light balance sheet and you have a recipe for an outstanding business with high returns on investment and lots of free cash”. But he is wary of their reliance on sales of tonic and on the UK market.

Will they manage to continue to achieve high growth rates? One concern I have is that every luxury hotel or good restaurant I have visited in the last two years has served Fevertree in my gin and tonic. Growth in the UK must surely be becoming limited. So future growth surely depends on them making a success of the US market. In their interim results in July the company talked about “encouraging momentum in the US” but we have heard nothing more since. Phil Oakley also points out that their competitors have reacted to the success of Fevertree with their own “premium” mixer offerings. Future growth is still well discounted in the current share price in my view so I am not rushing to jump back in until the picture becomes clearer.

Fevertree is a great branding and marketing story but I fear that there are ultimately no barriers to entry in their market. Others can surely copy their business model relatively easily.

Another article in this week’s Investors Chronicle was on changing market trading times. Would shorter hours improve markets is the question they ask? The UK LSE has some of the longest trading hours in the world. It opens at 8.00 am and closes at 4.30 pm but there are opening and closing auctions before and after those times.

RNS announcements are issued starting at 7.00 am so anyone who wishes to be on top of the news has to get up early. Many older private investors like me would prefer a later market start time. Although I tend to make most of my trades in the early morning as I review investments in the evening and make decisions on what to do the next day, it seems much of the market trading volume takes place in the last hour of the trading day. A more concentrated trading day might actually improve liquidity and avoid the volatility one sees in small cap stocks. In summary I am all in favour of a shorter trading day – 10.00 to 4.00 pm would be fine and even a break for lunch as they have in Japan would not be amiss.

Lastly, as a follow up to my previous blog story on the failure of the HBOS/Lloyds legal claim, I would like to point out that the judge made it clear in his judgement that there were significant omissions from the prospectus that was issued at the time.

Specifically he says in his Executive Summary: “But I consider that the Circular should have disclosed the existence of the ELA facility, not in terms such as would excite damaging speculation but in terms which indicated its existence”; and “Likewise, I consider that the board ought to have disclosed the Lloyds Repo. The board assumed that because at the time of its grant it had been treated by the authorities as “ordinary course” business that provided an answer to all subsequent questions. But whether it should be disclosed in the Circular as material to an informed decision was a separate question. The Court must answer that question on an objective basis. The size of the facility, the fact that it was extended in tight markets, the fact that it was linked to the Acquisition and was part of a systemic rescue package showed that this was a special contract which ought to have been disclosed”  (see paragraphs 46/47 of the Executive Summary which can be obtained from here:  https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

There were also possible other omissions from the disclosures which the judge did not consider but the above does provide prima facie evidence of a breach of the Prospectus Rules.  The directors of the company (Sir Victor Blank and others) would certainly have been aware of this funding and hence they might be considered to be negligent.

Investors in Lloyds TSB (I was one of them) were misled by these omissions and the subsequent outcome was financially very damaging to those investors.

I have written to the Financial Conduct Authority (FCA) suggesting that it needs to investigate these matters as a breach of the Prospectus Rules surely is a matter that makes the transgressors liable to sanctions under the Rules and there is no statute of limitation in regard to these matters. I suggest other investors in Lloyds TSB should do likewise and I have suggested ShareSoc should also take up this issue.

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

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Lloyds Shareholders Lose Case

After many months of deliberation, a judge in the High Court has rejected the claims by former Lloyds TSB shareholders over the takeover of HBOS and recapitalisation of the company by the Government. That resulted in major capital losses to Lloyds Banking Group (LLOY) shareholders and suspension of the dividends which many private shareholders relied on for income.

For those not familiar with the case, this stems from the events in 2008/9 when all banks came under severe financial pressure. HBOS was clearly in major difficulties due to imprudent commercial lending although how bad its position really was only became public much later. But there seemed to be only two credible options as nobody was willing to refinance it – nationalisation by the Government or a takeover by another large bank. Lloyds TSB agreed to do the latter with Government financial support. A prospectus was issued and voted upon. The shareholders supported it based on what they were told, but many institutional shareholders held both Lloyds TSB and HBOS so had a vested interest in the deal going through.

Note that this writer had an interest in the case because I held some shares in Lloyds TSB but I was not a claimant in the litigation because I sold most of my shares as soon as I knew the deal was going through this minimising my losses. However I did provide a witness statement to the court via solicitors Harcus Sinclair who represented the shareholders. I did write some articles at the time complaining about the deal and its likely effect on shareholders and met with Sir Victor Blank, then Chairman of Lloyds TSB who defended the actions of the company.

The claim which was against the company and the directors was based on two specific issues: 1) that the directors had recommended the deal when it was not in the interests of Lloyds TSB shareholders which is all they should have considered; and 2) the prospectus did not disclose the financial support in loans received by HBOS from Lloyds, the Bank of England and the US Federal Reserve. Prospectuses should disclose all relevant information under the relevant legislation.

It seems the court judgement was that the directors were not negligent in recommending the acquisition of HBOS and that the failure to disclose the HBOS funding would not have affected the outcome of the vote on the deal. But the judge acknowledged that the failure to disclose the funding was wrong.

Last week I gave a talk on Business Perspective Investing in which I argued that company accounts are not be relied upon. This latest judgement implies that a prospectus is now not be relied upon either. It can be grossly misleading but nobody will be held to account for that.

This is a most disgraceful outcome and I hope that an appeal is made.

The costs of pursuing this legal case are also a disgrace. Lloyds solicitors expected to run up costs of more than £25 million and there were probably similar costs incurred by the other party. There were weeks in court and it was a pretty impressive scene when I attended with at least 6 barristers in wigs and gowns plus about another 10 supporting legal staff. In essence what were in essence quite simple issues became a beanfeast for lawyers and demonstrates much of what is wrong with the English legal system. It’s now ten years since the events on which the litigation was based took place and many claimants have since died. And at the end for all that time and expense, justice was not well served.

If shareholders in such a major and simple case supported by litigation funding cannot obtain justice, what chance do they have in the case of misdeeds by directors in smaller companies? None at all in summary.

Go here if you wish to read the full judgement of the case: https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

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

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