Private Investor: That Viridian takeover? I really hate it
Saturday 14 October 2006
The news came a little too late last week for me to digest it fully, but I have now come to a considered verdict on the takeover of Viridian by a private equity group. I hate it.
For me - and I would hope for other long-term shareholders in the business that was once named Northern Ireland Electricity plc - it means surrendering yet another nice little earning asset in our portfolios to the ravages of the private equity gangs.
A more spectacular example was the takeover of BAA by a consortium led by the Spanish construction group Ferrovial. There again, we shareholders were offered what seemed like a decent premium to give up our company.
It sounds OK, collecting money like that, where you don't even have to pay any dealing charges, but to me it raises a question. If the private equity companies, venture capitalists, hedge funds and the rest think they can make some extra returns from those assets, why can't the existing managements, drawing on the resources of one of the great capital markets of the world, do the same?
I don't wish to sound ungrateful. Viridian shares were privatised in 1993 at 220p each. Last week's offer was pitched at 1,325p for each share. You shouldn't complain about a return like that, should you? It represents some £1.62bn of funds from Arcapita, a Bahrain-based group formerly called First Islamic Bank (funny how both predator and victim changed their company names to something meaningless and silly).
Even for more recent investors - and I have been buying into Viridian in the last year as well - the bid represents a very useful 23 per cent premium to the closing share price before the announcement, and a 37 per cent premium to the average price for the six months prior to that.
So why did these Bahrainis venture so far away - to the Giant's Causeway, indeed - to make a little money? Asim Zafar has the answers. He is a director of Arcapita, and he explained to us that the group was attracted by the stable cashflow of Viridian and by the potential for growth as the energy market in Ireland and Northern Ireland is opened up to competition.
I would add to this the prospect of a considerable peace dividend in the province too, as it catches up with the very high recent growth rates of its neighbours in the south. No matter what the politicians do now about the peace process, it seems very unlikely that things are going to go back to where they were during the grimmest years of the Troubles. It might be stalemate in Ulster at the moment, and a bit unstable, but it's still peace (provided you're not unlucky enough to get kneecapped for selling dope in the wrong neighbourhood. However, I'm straying from my own neighbourhood here, so I'll leave it there).
Anyway, you see my point about how the Arabs (and investment tiddlers like me) can spot why Viridian is a good long-term investment, but the existing management and the bigger shareholders seemingly blanch at the prospect of generating returns that would see the shares move up to 1,325p each of their own accord.
Maybe it's just the private investment groups going and paying too much for these assets (Anglian Water was another that fell this week), but they can't all be wrong all the time. It's clearly the case that the large institutional investors and the band of small punters who still bother with investing directly or indirectly in equities just haven't got the power to keep the stock market and company share prices at realistic levels.
They haven't got the money, that is, because no one trusts anything but bricks and mortar these days. The markets, in other words, are cheap, and the people who can spot this are private funds that have huge walls of money behind them.
None of this is the counsel of despair, however; far from it. There are at least two things one can do in these circumstances. First, identify the few remaining assets - usually utilities - which haven't been bought, and pile in there. Second, start getting into the few venture-capital vehicles that are available to the public, of which the most notable is 3i. Once known as Investors In Industry, it was privately owned by the UK clearing banks, who sold their stakes to the public in 1987.
3i has just reported an encouraging set of results. Buy now, before it too goes private again.
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