By his own high standards, Sir Philip Green has been relatively quiet of late. Rather than making headlines with spectacular acquisitions, he’s been getting on with reshaping his Arcadia and BHS business, and equipping the brands (Arcadia owns Topman, Topshop, Dorothy Perkins, Wallis, Evans, Burton and Miss Selfridge) for a very different retail landscape.
Figures from his group yesterday show it was hit by the unseasonably warm autumn, same as its rivals. Profits fell to £143.1m in the year to the end of August from £148.1m. Sales at stores open for longer than a year rose 1.6 per cent, taking the total to £2.7bn. But since 30 August, like-for-like sales fell 1.2 per cent as the mild weather took hold.
But these flat results only tell part of the story. Sir Philip is streamlining the operation, focusing on fewer, bigger Arcadia stores, trying out food in BHS, and a smart online service (internet sales were up 13.4 per cent).
He’s closed a net 64 branches in the past year. He may have shut doors but he’s opened others – capital expenditure was £105m (up from £87m previously).
He’s unveiling giant, sexy shops in major cities and out-of-town centres in the UK and overseas. His reasoning is simple: destination shopping is the future of fashion retailing; dull, small shops in boring high streets have little to offer; and for those who can’t make the trip to the big city or shopping mall, there is always online.
That, while running a tight ship. He’s amassing cash again, and may make a purchase shortly. But he’s also determined to remain cautious – there’s a general election coming and he doesn’t know what that will bring.
Because his business is privately owned he’s able to do as he pleases. His competitors, who answer to shareholders and obsess about six-month and quarterly targets, and do not have his flexibility or speed, must look on with envy.
£20bn insurance mergers? We’ve been here before
So, another new dawn for the UK insurance sector? Imagine creating a giant insurer, with a market value of about £20bn and leading positions in the life and general (that’s home and motor, to you and me) insurance industry.
That is a neat way of explaining the proposed tie-up of Aviva with Friends Life that leaked on Friday. Except we have been there before – no less than 14 years ago, at the turn of the millennium, when Norwich Union and CGU merged to create a giant UK insurer, with a market value of, er, just under £20bn. In February 2000, Norwich Union and CGU (created by the merger of General Accident and Commercial Union) announced a marriage to form Aviva. The rationale for the deal was one of size.
Here is an extract from a Q&A in This is Money on 23 February 2000. Is this the best deal either company could have done? “The advantage of this deal is size. CGNU would be the fifth largest insurer in Europe and would command 12 per cent of all life assurance premiums in the UK and 19 per cent of all UK general insurance policies. While life assurance is a growth area, general insurance is riskier: companies don’t make as much money out of it as life because it’s a higher-cost business to administer and the profit margins are lower. So this is why the deal works for CGU, which is more of a general insurer than a life insurer. By joining with Norwich Union, CGU re-invents itself as a life assurer.”
The combined market cap of the merged companies in 2000 was circa £19bn. In 2014, Aviva announces it wants to acquire Friends Life; and once again, the driving force is big is best: “The board of Aviva believes that the combination would create the leading insurance and savings business in the UK with 16 million customers, who stand to benefit from being part of a stronger and more diversified group with a wider product range. In line with Aviva’s true customer composite strategy, Friends Life’s 5 million customers will benefit from Aviva’s product offer in general insurance, health, and asset management, as well as life insurance.”
If the deal goes through, the market cap of the new Aviva will be… £20-21bn. That comes after 14 years and the issue of another £5.9bn of equity (to buy Friends Life), plus various write-offs in recent years amounting to another several billion, just to stand still.
The principal reason for this loss of value has been poor strategic focus and an awful record of integrating acquisitions successfully.
For example, in the 2000s, Aviva blew another £2bn on buying AmerUS, a US insurer, which was written-off last year, and businesses in Australia, that also led to large write-downs. Aviva also piled into Europe, which has, of course, performed very poorly.
Meanwhile, the UK life insurance sector, says the ABI, saw net outflows of £220bn from 2008 to 2012, because of the ageing population, and the decline in attractiveness of life and pensions products in an era of very low interest rates. The individual annuities market has collapsed, hit by the double whammy of low interest rates and the Chancellor’s decision to end compulsory annuitisation.
Corporate pensions and general insurance (home, car etc) are low profit businesses (almost all the profit in general insurance is made from investing the premiums, which is difficult in this environment; almost nothing is made from the actual underwriting). In addition, the UK life sector faces increasing pressure, both on capital from the new Solvency II regulations, and from an avowedly aggressive consumerist watchdog, the FCA.
In that context – and given the stated strategy of Aviva’s chief executive Mark Wilson, of trimming down and focusing on growth markets, such as Asia – this is a pretty poor deal; further diluting shareholders so that he can give them back the cash in the form of higher dividends.
Why is he doing it? Because targeting growth markets, especially in Asia, is not doable if you do not already have a strong starting position, and he’s desperate to do a deal in order to bulk up.
By contrast, Prudential’s market cap in 2000 was also about £19bn. Today it is £39bn. Why? Because the Pru realised that the UK life market was in structural decline and decided not to grow its UK business much, while focusing on Asia, and making a success of its US acquisition, Jackson National Life, which is now very profitable.
Ironically, the acquisition Pru did try to make – buying the Asian business of bust US group AIG – increasingly looks like the one that got away as it is now worth about twice what Pru wanted to pay. Ironically, Wilson was in charge of AIA at the time, so he should know better.
Lesson: in a long-term business like insurance it is better to find a good long-term strategy and stick to it. Smoke and mirrors deals like this lead you back to where you began, with a lot of shareholder value destroyed along the way.
The only winner, of course, is that canny financial engineer Clive Cowdery, who seems to pick up a couple of hundred million every time this wheel spins, which is no doubt consolation if you are a poor pensioner trying to survive on an Aviva or Friends Life annuity.Reuse content