David Prosser's Outlook: A sad end to 250 years of Equitable Life
Sports Direct cashes in on Nike; Emap's U-turn for shareholders
Saturday 22 December 2007
Had things turned out differently, staff at Equitable Life might just now be beginning to think about how best to celebrate the insurance company's 250th anniversary in 2012. Founded in 1762, Equitable is one of the UK's oldest companies and until the scandal that brought it to the verge of collapse in 2000, it was also one of the most widely respected. Since then, however, it has faced exceptionally difficult times and chairman Vanni Treves' announcement yesterday that Equitable will be auctioned off next year means the company will close its doors once and for all just four years short of its 250th birthday.
This may be a sad ending for Equitable, but the final chapter in its history has actually been much happier than it might have been largely thanks to the efforts of Mr Treves, who was parachuted in as the company hit rock bottom in early 2001. His biggest achievement was to get backing from policyholders for a compromise deal that curtailed many of the payouts they received, but saved the insurer from outright insolvency.
Since then, Equitable has slowly managed to move towards more stable ground. Last year's sale of the non-profit pension annuity book to Canada Life was only possible after several years of careful financial management. The same applies to the deal Equitable is now close to completing with Prudential, which is to take over its with-profits annuity business.
Still, a sale of Equitable's final sizeable asset, its with-profits investment fund, is the best hope that ongoing policyholders have of any significant uplift to their future benefits. As an independent insurer running a closed fund, Equitable does not have the fin-ancial muscle to invest in assets likely to produce improved returns. A rival manager, such as one of the specialists in closed-end funds, might do better.
The auction of Equitable will, however, be a timely reminder of just how badly the insurance company's policyholders have been let down by financial watchdogs, which failed to spot the black hole lurking in the insurer's accounts, failed to protect policyholders when the scandal broke, and then failed to bring to book the executives responsible for the scandal.
There's certainly an interesting comparison to make with Northern Rock. Equitable's problems were in one sense very similar to the crisis that hit the mortgage bank this year. It was suddenly confronted by vast numbers of customers who wanted to withdraw their cash at the worst possible time for the insurer. Unlike at Northern Rock, however, the Government was not prepared to get involved, let alone consider a bail-out.
There may yet be a fascinating and controversial footnote to the Equitable affair. Ann Abraham, the Parliamentary Ombudsman, has spent much of the past three years investigating whether those hit by Equitable's collapse were victims of government maladministration. When Ms Abraham eventually publishes her findings a verdict is not expected before next April she may rule that policyholders were failed by regulators to such an extent that the Government should compensate them.
Such a verdict would be sure to meet with a hostile reception from ministers, who fear a compensation bill that could run into billions of pounds. For Equitable policyholders, on the other hand, Ms Abraham is their last hope for a victory in their seven-year fight for justice.
Sports Direct cashes in on Nike
Sports Direct owner Mike Ashley may have some well-documented rough edges, but he's nobody's fool. Having amassed a stake of almost 30 per cent in the England kit maker Umbro in October, Sports Direct was in a strong position to block Nike's agreed bid for the company if it had been so minded.
Yesterday, however, Mr Ashley backed the bid and said he had already sold Nike two-thirds of Sports Direct's Umbro shares, at the agreed offer price of a little over 193p, booking a handsome profit.
In fact, it would have been daft to do anything else. Sports Direct may be struggling to get shoppers through the doors of its stores right now, but the gains made on its Umbro stake will swell the coffers of the retailer (or at least help reduce its debt).
Mr Ashley's purchase of Umbro shares was part investment, but the stake was also meant to give him some additional negotiating power with the kit maker, from which Sports Direct is contractually obliged to buy a certain number of replica shirts. Right now, Sports Direct isn't particularly keen on that contract, given the lack of demand for England kit, but the retailer is retaining a 10 per cent stake in Umbro, enough to maintain its bargaining power.
As for the future, Nike has offered Umbro customers some basic assurances about the way they will be treated once it wins control of the company. In any case, Sports Direct can keep its 10 per cent stake for as long as it sees fit, as an additional lever.
The bigger question about this takeover story is why Nike launched its bid for Umbro when it did before the England team had secured qualification for next year's European Championships. The subsequent failure to qualify has hit Umbro hard, as it confirmed again yesterday with a profits waring. There must, therefore, be a major suspicion that Nike is over-paying for the company.
Given that Umbro stock was trading below 110p in late September, even before it became apparent that Steve McClaren's maestros were going to come up short, the company's shareholders have had something of a result. Mr Ashley, for one, is sitting very pretty.
Emap's U-turn for shareholders
What lies behind Emap's swift change of heart over whether or not to sell its business-to-business publishing unit? Two weeks ago, chairman Alun Cathcart, who has spent all year conducting a strategic review of the media company, said that while he was happy to sell Emap's consumer units for what bidders had offered, no one had proposed a sufficiently high price for the b2b operation. He therefore promised to keep it.
Yesterday, however, it emerged that Emap has, after all, decided to offload the b2b unit, to a consortium consisting of Guardian Media Group and Apax, the private equity group, one of the original bidders. The price is understood to be higher than the offer Emap said no to a fortnight ago, but still short of the 1.3bn that Mr Cathcart had originally hoped to secure.
What's happened here is a good old-fashioned shareholder revolt. Mr Cathcart may well have been quite right to take the view that it would be short-sighted to flog off Emap's b2b operations for less than they were really worth. And it is a tough time to sell any sizeable business the global credit crisis has squeezed the funds that bidders have available to them. Holding on for a while might produce a better price in the future.
Emap shareholders, however, including some major institutions, were expecting a sale of the business and have let Mr Cathcart and his colleagues know how unimpressed they were with the decision to keep the unit. Emap shares dived more than 10 per cent in the immediate aftermath of the announcement earlier this month and have remained stuck there ever since.
Fortunately for all concerned, however, it turns out GMG and Apax were prepared to come back to the negotiating table with a better offer a proposal Emap was quick to seize on, despite its misgivings about the real value of its b2b assets. Investors got what they wanted and the announcement of a deal sent Emap shares soaring back yesterday.
Mr Cathcart and his colleagues clearly felt that they could not say no a second time. Accepting the offer may prove to have been the wrong move, but it's what the market wanted.
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