Jeremy Warner's Outlook: Public/private dilemma as Kirkham raises bid

Sir Alastair Morton
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The Independent Online

Lord Kirkham, the chairman of DFS Furniture, has increased his bid for the company he created a third time, yet it is still not clear whether he's gone far enough to secure the prize. The 10p-a-share increase he announced at teatime yesterday, taking the total value of his offer to £507m, was short of the 17p - the value of last year's dividend - some shareholders say would have made the difference. Others take the view that even 17p would have been insufficient, so what's the good of 10p?

Lord Kirkham, the chairman of DFS Furniture, has increased his bid for the company he created a third time, yet it is still not clear whether he's gone far enough to secure the prize. The 10p-a-share increase he announced at teatime yesterday, taking the total value of his offer to £507m, was short of the 17p - the value of last year's dividend - some shareholders say would have made the difference. Others take the view that even 17p would have been insufficient, so what's the good of 10p?

"He's already reconciled himself to losing," said one seasoned City observer. "This is just going through the motions." Well, possibly, but though he may indeed still fail I'm not sure he yet accepts it. Lord Kirkham needed to pay more to be sure of success, but he's right up against the buffers of what he can afford, and what his backers, Nomura and its clients, are prepared to finance. At this price, DFS is no longer a bargain for him. He's having to find the extra 10p a share from his own pocket.

On the other hand, even at the higher price, the bid is still quite plainly a bankable proposition, which leads investors immediately to the conclusion that they would be selling for an undervalue if they accepted. The problem they've got is that Lord Kirkham threatens to walk if he fails. Lord Kirkham's implied threat is: "Sell me my company or I won't work for you any longer". This is shabby behaviour in the extreme, but there is nothing illegal about it. You cannot force someone who has already made their fortune to carry on working for you.

DFS's non-executive directors say this was a major factor in persuading them to recommend the bid. If they reject him, then shareholders are not only turning down a price that may not recur for some time, but they also risk unsettling and destabilising a perfectly good company. Once the company's founder and guiding force has gone, what do they have left? Lord Kirkham's bid highlights a growing dilemma for shareholders in publicly listed companies. Greater shareholder activism and the proliferation of politically correct corporate governance codes is causing company bosses to question the benefits of a stock market quotation. Why live your life in the goldfish bowl of public disclosure and fat cat vilification, when the anonymity and potentially much greater financial rewards of private equity are there for the taking?

In recent years, Lord Kirkham has found himself enviously eyeing the liberation from public accountability achieved by Philip Green and other private equity players. The last thing investors want to do is drive all their leading wealth creators into private equity, yet get the balance of corporate governance wrong and that's likely to be the end result.

The same problem has been raised in different form in the row over Tony Pidgley's long-term bonus plan at Berkeley Homes. Under the terms of the scheme, Mr Pidgley would receive free shares equal to 15 per cent of the company's equity should he succeed in plans to return £1.4bn of capital to shareholders. Quite apart from the fact that this is plainly too much, the scheme infringes one of the basic principles of incentive plans, which is to encourage management to outperform targets. As it stands, the scheme is a bit like saying "I've buried the family silver in your garden, but you are going to have to pay me 15 per cent of it for me to tell you where".

So far, the board of Berkeley has rigidly refused to compromise, and it is not hard to see why. Like Lord Kirkham, Mr Pidgley dreamt of taking his housebuilding company private. He eventually persuaded Guy Hands, formerly head of Nomura's private equity division, to back him in this endeavour.

The board turned him down, for he couldn't get close to an acceptable price. Yet he was determined to extract something for his pains. What's now proposed is Tony Pidgley's pound of flesh. These are the rewards of private equity, but delivered through the publicly quoted arena. If shareholders mutiny, they risk losing not just the £1.4bn repayment of capital, but Mr Pidgley himself, widely acknowledged as the most visionary chief executive of the housebuilding sector.

Shareholders will find some way of registering a protest vote, but given the risks, they are unlikely to turn him down flat. Nor, I suspect, will they succeed through their protest vote in deterring others from following Mr Pidgley's lead. We can expect plenty more such stand-offs between shareholders and their managers in the months and years ahead.

Sir Alastair Morton

News of Sir Alastair Morton's sudden and untimely death at the relatively young age of 66 will come as a terrible shock to all who knew him. A South African by origin, Sir Alastair was one of the most outstanding industrialists of his generation. Reared in the hothouse of Lord Kearton's Industrial Reorganisation Corporation, he went on to become chief executive of British National Oil Corporation, one of the first privatisations under Margaret Thatcher, and then Guinness Peat. But it is for his near 10-year stint at the helm of Eurotunnel that he will chiefly be remembered.

Sir Alastair could be a bullying and abrasive character - which frankly did his career enhancement prospects few favours - and his relationship with the press was often a belligerent one. But he was also disarmingly honest and brutally direct. He would frequently phone or write to berate journalists over the idiocy of what they had written, but I nonetheless always had fond memories of him and held his abilities as a manager and negotiator in high regard. When he left BNOC, he advanced the following explanation: "On the record, we had a difference of opinion over strategy. Off the record, he [the chairman] was just a total bastard."

Lunching with Sir Alastair shortly after becoming Business Editor of The Independent, I consulted him on what to do about poor morale in my department. He leaned forward, his trade mark half-moon spectacles at the end of his nose and said: "I always find that a little bit of head-count reduction concentrates minds wonderfully - say 10-20 per cent. Fire the old guard and bring in the new." I'm not sure that following his advice did anything for morale, but it certainly helped correct the overhead problem we were suffering from.

On another occasion, during one of Eurotunnel's many refinancings, I was summoned in to see Sir Alastair after describing prospectus forecasts of Eurotunnel's likely costs and traffic as hopelessly optimistic. "I know you support the Channel Tunnel project as much as I do," he fumed, "and yet you write this crap." But you are misleading investors, I protested. "That's not the point," he answered. "The judgement of history won't care two hoots about a few missed forecasts. The important thing is to raise the money and get the Channel Tunnel built. If we have to exaggerate a little to do so, then so be it." It was the sort of statement which in today's highly regulated investment climate would very likely have put him behind bars.

The Channel Tunnel is a lasting monument to Sir Alastair's life and determination. Without him, it might never have been completed. He bullied, he cajoled, he was economical with the truth, and he eventually ended up alienating large parts of the world's banking, investment and construction communities, but he got the job done, and he did so, moreover, without a penny's worth of government subsidy to help him on his way. In the process, he ensured that no other infrastructure project of such magnitude could ever be privately financed in its entirety again, but then it was little short of miraculous that this one was in the first place.

Sir Alastair's last big job, as chairman of the Strategic Rail Authority, was for him not a happy experience. Though he was a big advocate of the public private partnership approach to rail investment, he hated the politics of his position, and he came to despise many of his masters in Government. Sir Alastair was always his own man. He couldn't abide the role of puppet. Even now, one half expects Sir Alastair's tall and vaguely daunting form to come bouncing through the door ready for a fight and a stand-up row. It's hard to believe he's gone.

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