Category Archives: Takeover

This week’s media picks: infrastructure, Bangladesh safety, fracking, climate change, bioscience

FT (23/4/14): Leading article: Time to invest in Britain’s future

As the Prime Minister, David Cameron, and Chancellor, George Osborne, welcomed £36 billion investment in infrastructure projects, the Financial Times, remained to be impressed. In a leader, it said that one of the biggest and most persistent questions facing the UK economy is the worryingly low level of investment in infrastructure. Despite fine words, the government’s record is decidedly mixed, and the new set of initiatives may not match the scale needed to raise infrastructure spending to the level required. The FT outlines three areas of weakness in policy: 1) Spending is not high enough, and is persistently less than many of our competitors; 2) Given low interest rates, the government should borrow more to finance big projects; and 3) the government needs to establish a more stable and clearer framework for private sector investment.

Fibre2Fashion (24/4/14) Bangladesh Safety Accord on course, says UNI official

A year after the tragic collapse of the Rana Plaza factory building in Bangladesh, a demonstration of corporate social responsibility in action, rather than just words, is making progress towards improving the safety, prospects and lives of the country’s garment workers. Despite the many barriers to progress imposed by the political, social and commercial cultures of Bangladesh, the Accord on Fire and Building Safety in Bangladesh can be proud of its progress when it marks its own one year anniversary next month.

An official from, UNI Global, one of the two global union bodies that negotiated the Bangladesh Accord, Alke Boessiger, said: “The inspection program is in full operation. There is a strong team of more than more than 100 technical experts and engineers in Bangladesh who are conducting 45 inspections per week, with the aim to inspect 1500 factories by October.  More than 280 factories have been inspected for fire and electrical issues and 240 for structural safety.  Every inspection has revealed critical issues which must be repaired as a condition of doing business with signatory brands in the future. These issues include, for example, the absence of fire doors to separate the work area from the fire exit.  Brands are responsible to ensure that sufficient financial resources are available for the renovations and improvements.”

FT (24/4/14): Shale gas a multi-billion-pound opportunity for UK business

A report by EY, commissioned by the UKOOG, the shale-gas trade body, said that fracking shale gas could potentially generate 64,000 jobs in the oil and gas supply chain. It said that over the next 15 years, the UK would need to invest £17 billion on specialised fracking equipment and skills. This won’t mollify fracking’s opponents, but does at least show that the industry is seeking to make a positive, factually-based case for its development.

The Guardian (25/4/14): Kingfisher CEO warns on underestimating impact of climate change on business

In an opinion piece, Kingfisher plc CEO, Ian Cheshire urged business to sign a communiqué aimed at policymakers gathering in Paris next year for the UN Climate Change Conference. He warned that resource scarcity, energy price increases and extreme weather are real and growing threats to the long-term viability of business. That’s why hesigned the Trillion Tonne Communique, drawn up by the Prince of Wales’ Corporate Leaders Group, and is encouraging other business leaders to do so too. Adverse climate events are increasing costs for business, Kingfisher’s alone, were tens of millions of pounds, and as business doesn’t have a seat at the table, it needs more of them to sign the Trillion Tonne Communique to ensure that its voice is heard. 103 businesses world wide have signed so far, but it will require quite a few more to overcome the political resistance that clearly exists in some quarters.

FT (25/4/14): UK medical science drive shaken by US takeover fears

News that AstraZeneca was approached by Pfizer about a £60 billion takeover, has called into question the UK’s ambition to remain a leading global player in life sciences. AstraZeneca and GlaxoSmithKline are the only large companies with research and development operations in the UK. Oxford University’s Professor John Bell said: “If we were to lose one of them it would be a real blow to our capabilities. It’s a sector that is crucial to our future economic success. The news prompted Andrew Miller MP, Chairman of the House of Commons science committee to call for tougher standards to protect strategic UK assets, such as considering the national interest when looking at takeovers. Steve Bates, chief executive of the UK Bioindustry Association, pointed to successful smaller biotech companies, but said: “It is important to have whales in the ecosystems around which minnows can flourish.”

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Cadbury’s Law is a fruit and nut case

“There’s no difference between any of them” is, we’re often told, how electors view the political parties. But ever since the days of “Butskellism” there have been more similarities than differences between the parties.

And while there is not a revolutionary gulf between the 2010 election Labour manifesto and Conservative manifesto, there are some clear differences. One significant difference for business interests is on takeovers.

Labour holds that many takeovers are good for neither predator nor prey and that the system needs reform. By contrast the word “takeover” doesn’t even appear in the Conservative manifesto.

Labour is playing to the gallery, substantially orchestrated by the Unite trade union’s anger over Kraft’s hostile takeover of Cadbury. Labour wants to introduce a higher threshold of support among shareholders to agree a takeover; increasing it from a half to two thirds. It also says that the case for limiting the right to vote to those on the register before a bid “should be examined”.

Speaking for the Conservatives, Shadow Business Secretary, Ken Clarke dismissed these proposals as “populist nonsense” and vowed to adopt a “hands off” approach to business.

Labour is clearly throwing a sop to unions, leftwingers and little Englanders, upset about losing control of a British-owned chocolate manufacturer. But it is short on specifics and clearly wants to avoid joining France in regarding the British equivalent of yoghurt makers as a strategic interest of the national economy.

No one is seriously proposing the “Cadbury’s Law” that the unions were looking for. Nevertheless, Labour is more likely to place some restrictions on takeovers, even if they turnout to be a lot weaker than its supporters hope for and that business fears. A two-thirds rule would enable at least some inefficient managements to use minority coalitions of shareholders to protect themselves from proper scrutiny, and dismissal. But it is not in the interests of businesses or the UK economy to enable blocking minorities to protect weak, inefficient or incompetent management.

Earlier this year, the Takeover Panel announced a consultation on the Takeover Code to look at how shareholders decide on the merits of takeovers. Labour’s manifesto partly pre-empts this consultation and should the Conservatives win the election, it may never see the light of day. But the political difficulties that come with some takeovers cannot be wished away.

Most business takeovers run their course without much discussion beyond the City pages of newspapers, but there will be some that run the risk of public controversy and a minority Conservative Government or one with only a small majority could come under political pressure to protect, so-called, vital British interests.

Under such circumstances, whether a takeover bid is accepted or resisted, all parties involved will need to explain proactively to all stakeholders, the case for or against a bid. Whoever forms the next Government will not thank the combatants in takeover battles for dragging them into political controversy. If that happens, they may yet find the Takeover Panel stepping into the ring to call time out.

Mournville

At first glance, it may seem that Cadbury and BAA have little in common. One is a long-established and much-loved chocolate manufacturer with a philanthropic heritage and the other is an airports company held in low regard by local residents, passengers, journalists and politicians. Bear with me, as they have more in common than you might think.

Both have recently gone through high-profile takeover battles with foreign bidders. BAA conceded to Gruppo Ferrovial in 2006, when the world’s biggest (British) airports company passed into Spanish hands. BAA’s board secured a very good deal for its shareholders and Ferrovial had to stump up a considerable premium to BAA’s regulated asset value, which has caused it headaches ever since.

Similarly, Cadbury’s board has tossed in the towel and conceded to US food giant Kraft. But the Cadbury board has recommended acceptance of a share price of £8.40 – a significant discount to its long-term share price, according to analysts and commentators. This is quite enough to turn a quick buck for the speculative US hedge funds who nipped in recently and mopped up a quarter of its shares. And UK pension funds and long-term investors will make a return, but not as much as they could have done had the company been valued closer to the £10 a share that analysts say it is worth. Its a bit of a steal for Kraft.

So far, so different. But here come the parallels – and the warning to Cadbury and its putative owner.

Both BAA’s new owners and Kraft had to borrow heavily to fund their bids. Ferrovial’s first act as owners was to load that debt onto their new acquisitions. Anyone who has the misfortune to support Manchester United understands that this saddles the company with high interest payments which have to be funded from somewhere, and if it isn’t from higher revenues, then it’s going to be from lower costs or by offloading some of the assets (or, more happily for the rest of us, by upsetting the natural order of things and keeping Man U off the top of the Premiership table).

Even before the UK’s competition authorities declared BAA’s London airports monopoly to be against the public interest and required break-up, economics had already forced BAA’s new owner to sell the recently-acquired Budapest Airport, flog its duty free business and to begin selling off its US interests. Gatwick was also sold in December 2009 in a process begun many months before the Competition Commission bared its teeth and made its sale compulsory. These sales were needed in a large part to finance the repayments of the £12 billion of debt with which Ferrovial has saddled BAA, which until this point had been cash rich and debt light.

Cadbury can expect the same medicine from a Kraft acquisition. Kraft is reportedly borrowing £7 billion to help finance the £11.5 billion deal, and this debt will be loaded onto Cadbury, not onto Kraft. So unless Kraft’s marketing genius can produce astonishing sales figures, there will be rationalisation, cost cutting and asset sales.

And Kraft has more leeway to cut and rationalise than Ferrovial did with BAA. Cadbury’s chocolate can be made anywhere that the recipe and ingredients can be shipped, so its manufacturing can be moved abroad, while BAA’s passengers flying to London can’t be diverted to Central Europe or to the parent company’s home market. Employees at Cadbury are in a much less secure position than BAA’s employees were after takeover, since for the most part, BAA’s jobs were not exportable.

And the impacts go beyond the financial. Before its takeover, BAA was consistently the most admired (privatised) transport company in Britain, having worked assiduously at tackling the environmental and social impacts of its operations. Of course a minority of local residents bore the brunt of the impact of the flying habits of the rest of us, and were naturally unenthusiastic about their concrete neighbour, but BAA was generally regarded as being at the forefront of sustainable development and social engagement, was largely liked by its national stakeholders and envied by its competitors abroad. Not any more. Since Ferrovial took the helm BAA has become the aviation equivalent of Railtrack – derided, disliked and dismissed – though to be fair, this can’t all be laid at the door of the new owners: the security chaos that swiftly followed the takeover was not of their making.

And what does this mean for Cadbury? Loss of independence, of Britishness, will mean a loss of natural empathy and support among decision-makers and customers (I’ve not knowingly bought a Rowntree’s product since it was taken over by Nestle in 1988). The loss of jobs through inevitable rationalisation and cost-cutting means union (and public) hostility and reputational damage. And the sale of, discontinuing or messing around with brands will further damage customer loyalty. All are problems for the new owner.

The global market economy means that takeovers like Cadbury and BAA will continue to happen, and major national companies will lose their independence to aggressive foreign buyers. But caveat emptor – there will be consequences for the buyer as well as the bought. It won’t necessarily be a Picnic and there may be thorns among the Roses.