COMMENT : The mutual insurers can no longer go it alone
`For Clerical's 625,000 with-profits policyholders, the bonus and prospect of enhanced investment performance probably make this deal an acceptable one'
Tuesday 26 March 1996
Their immediate benefit is only pounds 111m, paid out in the form of special bonuses, plus an allocation of pounds 160m to increase the ultimate value of their policies. The rest of the money goes into the long term with-profits fund and to provide a core of shareholders' capital. Are not the present generation of policyholders being sold out for too small a price?
Don't be ridiculous, insists Robert Walther, Clerical Medical's chief executive. True, the with-profits fund could have been closed and progressively run down, leaving all the pounds 800m for eventual distribution among policy holders, but the tax and other implications are horrendous. The proposals as put have been checked out by independent advisers and all are agreed that this is a deal in the best interests of policyholders.
The argument in favour of the deal lies largely in the greater investment freedom added capital lends to the fund. This in turn will enhance investment performance and hence the eventual return on policies, explains Mr Walther. Unit costs will also be greatly reduced as a result of the higher levels of business that are expected to flow from the Halifax link up.
Halifax is not investing in Clerical Medical out of altruism alone, however. It expects and will get a very hansome return on its investment. This is money which otherwise would have been available to policy holders. The arguement thus comes down to a quite finely balanced one of whether the anticipated higher investment returns that spring from the deal outweigh the dividend that must now be paid to Halifax.
But let's give Mr Walther the benefit of the doubt. All his working life, he has served the interests of policyholders and he's unlikely to be selling them down the river now. in favour of his own aggrandisement.
Like a host of other life mutuals, Clerical Medical occupies an increasingly uncomfortable middle ground - squeezed from all sides, by bancassurers and big building societies with more powerful distribution and resources, by the well-publicised troubles in the pensions and life insurance business, and the rising costs of compliance with tougher regulation and keeping up with IT developments.
Most of these problems can be reduced to one word: capital. Clerical Medical, like countless other offices which will probably go the same way, does not have enough and faces no obvious way of generating it. The Halifax, a giant in its own right, has coffers full of the stuff. And so do the other big banks and insurers which lost out this time round, but are still keen to expand in the life sector: Abbey National, NatWest Group and Sun Alliance, to name but a few. Clerical Medical plugs a big gap in Halifax's network, the IFA market, and brings it known-brand insurance products. Clerical is convinced it has extracted more than a good price for its independence.
On the other hand, it should not stretch the Halifax team's skills to make this deal revenue-enhancing from the word go. For Clerical's 625,000 with-profits policy holders, the bonus and prospect of enhanced investment performance in the years to come, probably make this deal an acceptable one.
Bernard Arnault should simply be patient
What does Bernard Arnault, chairman of France's LVMH, really want out of his 21 per cent shareholding in Guinness? Plainly he is unhappy with the present situation, which has seen Guinness's share price underperform the rest of the stock market very substantially over the last five years, a process which has been enhanced in M. Arnault's case by the rapid appreciation of the French franc - he gets far fewer francs for his pounds than he used to.
Furthermore, having nearly pounds 2bn passively locked up in Guinness at a time when his Louis Vuitton luxury goods business is generating such spectacular returns does not look like a very effective use of capital.
But is he prepared to rock the boat in his desire for greater shareholder value? The answer is probably not, despite the recent flurry of speculation along these lines. The last thing that M. Arnault wants is a proxy fight with the rest of the Guinness board, which is still largely opposed to any thought of demerging or selling the group's original and other beer interests.
M. Arnault is a very private businessman who shuns the limelight. The "cascade" structure he uses to control his business empire may be common enough in France, but among Anglo-Saxon investors it is thought highly controversial. If M. Arnault were openly to push for demerger, it would (probably rightly) be seen as an attempt to gain control of Guinness's branded liquor business via the backdoor. So he is not going to go public on such a solution.
But if the demerger proposal were to be put forward by others, he would vote for it like a shot. M. Arnault is not interested in beer, which he sees as a commodity drink quite out of sync with his other interests. It is in any case a peculiarly un-French drink. For choice, M Arnault would like to realise his investment in Guinness's beer interests, and reinvest it back in France, while keeping intact the rest.
For the time being, however, Anthony Greener, the Guinness chairman, won't budge. Eventually, however, Mr Greener has to do something more than buy his own shares to get his stock price out of the doldrums. M. Arnault doesn't need to engage in Napoleonic bravado to get his way. All he has to do is wait.
Securicor shareholders finally surrender
Its operating companies might be high tech and fashionable enough, but in other respects Securicor has remained a Georgian relic of a company - three classes of shares plus all its main operating companies in a completely different quoted group. Most large companies abandoned two-tier structures long ago, either embarrassed into it by the City or forced into it by rebel shareholders.
The controlling shareholders in this case are the trustees of the Erskine family who founded the company in 1923. The war may have been over long ago for everyone else, but this family has continued to hold out.Strangely, the eventual price of surrender is not a high one. The family gets more shares in return for surrendering its powerful voting block, but not as many as you might think.
Never mind though. So pleased was the City that all classes of share went up, leaving the family substantially richer. Having unlocked some value with this capital restructuring, the one remaining buried treasure is the Cellnet stake. Securicor can only realistically sell to BT, a deal which the DTI will not sanction. Yet.
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