Margareta Pagano: Time for a credit squeeze on big takeover bids
Lend to small businesses, not predators on the prowl
Sunday 25 July 2010
If the Chancellor, George Osborne, and the Business Secretary, Vince Cable, really want to get the banks lending more to small businesses then maybe they should consider making it tougher for bankers to lend to big ones, particularly for takeover bids.
Take the example last week of Bart Becht, the boss of Reckitt Benckiser, and his £2.45bn bid to stock up on condoms and footcare products by paying a whacking premium for SSL International.
This is a great deal for both sides. Shareholders in SSL get a fabulous prize for their investment at 28 times earnings, while it should also prove value-enhancing for Reckitt's investors in the long-term as SSL's products get the benefit of an even bigger distribution network.
No, the bigger question is why HSBC is using its balance sheet for such funding, and whether this is the best use of its lending facilities at a time when credit is so tight and so many businesses are complaining they can't get access to bank loans. And it's not as if Reckitt needed the £1.25bn loan facility – it throws off cash with as much ease as its Air Wick products let out their anti-odour fragrances. So the household products group could have funded the acquisition itself through cash-flow and maybe a rights issue, really making its capital sweat.
So if Osborne and Cable want to ease credit, and prevent firms from gearing up too much, they should look at whether limiting the amount of debt a predator can raise to fund a bid would be a sensible alternative. Many of the bankers and brokers I've talked to about this like the idea of some sort of limit on what proportion of takeover funding should be debt; around 25 per cent of the total purchase price seemed to be the consensus.
Such a restriction should certainly be considered as part of the City's review into how the machinery of takeovers can be made tougher following Kraft's successful bid for Cadbury, which caused such an outcry. It also fits with what Cable told me in a recent interview that the real issue to be investigated is not whether a predator is foreign, that misses the point, but whether takeovers are value-enhancing. As he said, in most cases they are not – and it's going to be fascinating to see how much support Standard Life gets for its brave stand against a bid for Tompkins. Making firms fund their acquisitions with more of their own capital would be one way of ensuring that shareholders really understand the financing and the possible dilution.
Apparently the Takeover Panel has been flooded with submissions, ahead of Tuesday's deadline, from interested parties with their ideas for what should be changed in the code. The panel's code committee will now deliberate and come up with its own recommendations to be published in the autumn. From what I gather, the mood music from, among others, the CBI and the TUC, which supports restricting shareholders, who buy after a bid has been announced, from voting on the outcome. If this were adopted, life would be tough for the hedge funds and arbitrageurs who only come out of the woods in force after a bid. And Cadbury would not have been gobbled up by Kraft if such a rule had been in force: lots to chew on.
Forgemasters must gamble staff money to plug £80m funding gap
The latest tittle-tattle that the coalition scrapped the £80m loan to Sheffield Forgemasters after pressure from a Sheffield tycoon – who paid for a few flights for David Cameron and bunged a few thousand pounds to the Tories – is a red herring.
But there's a more interesting story behind the steelmaker and the loan that has been puzzling me. If Forgemasters is such a successful engineering group, making sophisticated forgings for the civil nuclear industry, then why hasn't it been able to fund the £140m press – which it needs to build more sophisticated nuclear power station components – by itself? Why does it need the Government to underwrite its expansion?
Industry insiders say Forgemasters, which was saved from bankruptcy by management only five years ago, is worth about £120m (managers own 70 per cent and the 800 employees the rest). To help fund the new press, it could borrow £60m without gearing up too much. But this left an £80m gap and more borrowing would have stretched its finances too far.
The alternative was to bring in new investors with fresh capital. Sensibly, the steelmaker has talked to private equity players but turned down their offers to invest, mainly because the directors didn't want to dilute their equity or give up control.
Understandable, as it's their baby, having mortgaged their homes to rescue the firm in the first place. Instead, along came a "soft" government loan to bridge the gap, giving a holiday on interest payments and favourable rates. Obviously they grabbed it. Who wouldn't?
But should the taxpayer pay for this? Tricky, but you can see why the Government turned it down. Forgemasters is a victim of its own success; staff have taken a big gamble with their own capital, but they may have to gamble again. That's what the firm's founders would have done more than 200 years ago.
Go down in style: As double dip looms, it's shop till we drop
If there is a double-dip recession looming, no one has told the luxury goods market or the wealthy Asians who are shopping until they drop, with the weak euro an extra boost. Following on from Burberry last week, Hermès International, the French headscarf to handbag maker, reported a 20 per cent increase in sales during the first half, while champagne maker Laurent Perrier said sales were up by 17 per cent in the first quarter. LVMH is due to give its first-half trading update this week, with forecasts for another rosy performance for the Louis Vuitton to Moët & Chandon group. With sales and profits so strong, analysts predict more takeovers – another reason Burberry's shares shot up again last week to a high of 872p.
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