James Moore: Pouring cold water on suitor's advances is right course for Severn Trent
Outlook. Consumer the loser as investors hold whip hand; Astra's buy may not be the remedy it seeks
The Stock Exchange's stalkers are back, it seems, with the interregnum on their activities forced by the financial crisis well and truly over.
First we had Betfair, which nearly caved in when a private equity-led consortium tried to get its hands on the gambling company's books despite having no financing in place for a decidedly questionable and highly conditional proposal. Interestingly, Betfair's shares have held up remarkably well since then.
Now we have Severn Trent, which is attempting to fend off a Canadian-led consortium that is making a big noise about ending its suit just before the Takeover Panel forces it to do just that.
The consortium's advisers are clearly hoping that if they make enough fuss, some of Severn Trent's shareholders will put the thumbscrews on its directors and persuade them to play footsie with the predator, which wants to take the company off the FTSE 100.
There were signs that one or two misguided investors were considering doing that yesterday, which just shows how little the City has learnt from previous mistakes.
The bidders aren't after synergies, or new geographical territories, or a new product that Severn Trent has up its sleeve. They are after the investment.
Severn Trent offers a predictable, and sustainable, long-term income. Its current investors are getting a prospective yield of nearly 4 per cent, and the promise that the dividend will increase at a rate above inflation.
From an investment perspective, it is defensive, predictable, solid and safe, and there's not much like it on the UK stock market, or anywhere else for that matter. Currently, the London Stock Exchange has only one other pure-play water company, plus another that is part of a larger group.
As such, Severn Trent has rarity value to add to its other attractions, which is exactly why the Canadians and their pals want to get their hands on it. Not to mention the value they could extract by employing the sort of creative accounting that some other companies have engaged in to keep their tax bills low. Or non-existent.
All this appears to have gone over the heads of dissident investors, who are reported to be complaining about Severn Trent for not "engaging" with its unwanted suitor. But it's not at all clear what purpose would be served by this. There has been engagement in the past, and the consortium will be well aware of the price that will get things moving. Its members just don't want to pay it, at least if they can help it.
The consortium does, of course, have the option of putting their offer directly to shareholders if they, and their advisers, are convinced of its value. But that's unlikely to happen. It would require it to spend money, to show its cards, and to have the guts to take a risk. The latter is the last thing it wants to be doing. It sees Severn Trent as risk-free. Which is what this is all about, really.
Consumer the loser as investors hold whip hand
What's probably really bothering the consortium is the fun other investors are having with the assets they own.
Take Thames Water, the latest firm that appears to see paying corporation tax as entirely optional. The company – owned by, you've guessed it, a consortium of international investors led by Australia's Macquarie – turns over almost £2bn a year, and makes operating profits of more than £500m. However, it pays next to nothing in corporation tax.
Yesterday, Thames Water claimed it was not evading the levy, it was simply deferring it, because it is investing lots of money in the UK's water infrastructure, and the rules allow it to do this. Another set of rules allows it to increase bills by 6.7 per cent to help fund that investment, but it would probably say that this is an entirely different issue.
The company has been arguing that it pays lots of other taxes, such as business rates, national insurance rates and PAYE, the same specious argument made by many others. Every company pays these, including those that don't treat their corporation tax as a voluntary levy.
Jonson Cox, the chairman of Ofwat, has made noises about the structures deployed by Britain's legion of privately owned water companies, but we've yet to see any concrete action. If Severn Trent's stalker is scared away, it will be because its directors showed they had backbone, as much as any threat to bring an end to the party.
It's a party that needs to end. There are three big stakeholders in the water industry: its customers, who have to buy its products, the state, which regulates and taxes it, and the investors, which own it. The latter are currently dominant because there appears to be little real will on the part of the state to address this situation, leaving the unhappy consumer paddling up a certain creek.
Astra's buy may not be the remedy it seeks
AstraZeneca added another oyster to its growing collection of biotech and drug companies yesterday as it desperately seeks to pep up a pipeline that's running out of patents.
Will the $1bn-plus purchase of Pearl Therapeutics end up being a jewel in its portfolio, or will it result in a nasty case of the side-effects that filter-feeders are inclined to inflict on those that consumer them?
Pearl specialises in a new class of lung treatments that some experts think will dominate the market in future years. The trouble is that Novartis and GlaxoSmithKline are expected to get rival treatments on to the market before Pearl has got its polished. As such, they'll have first mover advantage, which isn't to be sniffed at.
Snorting rather than sniffing is what GSK and Novartis types are probably doing when they look at some of the prices that AstraZeneca has been paying in its desperation, not so much to catch them as simply to stay in the game.
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