There ought to be a listing rule which prevents managements from bidding to take their own companies private. The latest example of the genre is Graham Kirkham, chairman of DFS Furniture, who yesterday made an indicative offer of £445m for the company he first floated in November 1993. Every time these public to private offers happen, the management's position immediately becomes riddled with conflict of interest and therefore quite untenable. Who's Lord Kirkham now working for: the shareholders or himself? Anyone reading his statement yesterday would not have been left in any doubt. Abandon all hope, Lord Kirkham told his shareholders. The future's grim, so your best bet is to accept my offer.
From putting the best possible gloss on the company's prospects, Lord Kirkham has swung full circle to paint it as absolutely dire. Had he said the company was only a couple of sandwiches short of the bankruptcy courts, he could scarcely have been more negative about the outlook. "Over the last two years the market has become much more competitive.... I do not believe this is temporary, but represents a structural change ... conditions in our market will become ever more demanding".
Goodness me, what a whinger he must be. Lord Kirkham is, of course, right about the market becoming more competitive. Suddenly everyone's moving into home furnishings, and quite a few of the newcomers, from M&S to Argos, Next and MFI, are driving straight on to DFS's lawn as a specialist in upholstered furniture. Even so, there is nothing unique about the structural changes going on in furniture retailing. All industries are becoming much more competitive. The art of good management is to meet that challenge head on, change, adapt and find new markets and fashions to expand into. What Lord Kirkham is preaching in an effort to persuade his shareholders to sell is a strategy of despair.
No shareholder can surely take him seriously. Lord Kirkham and his family today own less than 10 per cent of the company, having taken more than £400m out of the business in the 10 years since it was floated. He has no sitting tenancy rights, nor by the look of it is the business going to suffer if he is forced to up sticks and retire to the golf course. His 415p-a-share offer is an insult to fair value, and shareholders should politely tell him to go take a hike.
There is absolutely nothing wrong with DFS's competitive position which decent management couldn't fix. Lord Kirkham says the company would be better able to deal with all the new competition as a private company, free from the need to continue to deliver consistent growth in sales, earnings, and dividends. Poppycock. Like most private equity bids, Lord Kirkham's offer is a highly leveraged transaction, consisting of £150m of family equity with the balance of the funding provided in debt by Nomura. What other way is there of servicing and paying down all that debt other than through growth of sales, earnings and dividends?
Shareholders deserve more than Lord Kirkham's negative carping and, by the look of the share price yesterday, which by the close stood at a 28p premium to the value of his bid, they are determined to get it.
Who would be a cross-Channel ferry operator? That old sea dog Lord Sterling of Plaistow has axed the Boulogne route, cut capacity on Dover-Calais and persuaded the authorities to let him merge with his direct competitor Stena, and yet the view from the poop deck of the good ship P&O looks as grim as ever.
For a business which turns over £1bn a year, margins were always painfully thin even in the good old days before the arrival of the Channel Tunnel, but now they have turned to losses of £40m and further surgery is on the way. One ship has been dropped from the short-sea crossing altogether, and on others the restaurants no longer open at nights.
P&O blames the dismal performance of its ferry business on everything from the warm weather to the dastardly French interfering with the booze cruisers by slapping a 40 per cent tax on tobacco. Even Sars gets an honourable mention.
But the main reason for P&O's sea sickness is competition from the tunnel and the low-cost airlines, which forces the ferries to slash prices to the bone in the low season or risk losing custom. Even so, the company lost a further one million passengers last year.
The ferries make up for it in the high-season by gouging their customers for all they are worth, as anyone who books a crossing to France in the school holidays soon discovers. But this is not enough to compensate for the huge fixed overheads, which sink the economics of the industry below the water-line the rest of the time.
The cross-Channel financial pain is not confined to the ferries. Eurotunnel too is now in such dire straits financially that it has been forced to go cap in hand to the UK and French governments seeking a bail-out. Lord Sterling's first instinct would normally be to complain loud and long. But the effect of driving the tunnel into the arms of its bankers would only be to allow Eurotunnel to cut its shuttle fares even further, increasing the distress felt by the ferry operators.
It is not quite sink or swim time and Lord Sterling insists that he neither plans to demerge, sell or close down the ferries. But losses on this scale cannot be tolerated indefinitely. Fortunately, the upturn in world trade means that P&O's container ports business is booming again, but it's not much of a consolation for those still working the ferries.
TO STRIP stamp, or not to strip stamp? That's one of the questions facing the Chancellor as he puts the finishing touches to this year's Budget. The Treasury reckons to lose £600m a year in revenue from the smuggling of spirits alone. Add in tobacco, and the numbers get much bigger still. One solution to the problem, the Treasury thinks, is to force the industry to strip stamp every bottle of spirits on which the duty has been paid, in the way some Continental countries do. A strip stamp is a coded paper seal that goes over the bottle cap. Bottles that are not correctly strip stamped then become immediately suspect, enabling Customs and Excise and trading standards officers to crack down on any retailer that sells them.
In the pre-Budget report last December, the Chancellor said he would introduce strip stamping by 2006 unless the industry could come up with a viable alternative by this year's Budget. Hold on, said the industry. That's an outrageously short notice period and, anyway, wouldn't it be better if Customs and Excise simply did its job and stamped out the smugglers? Well, the Budget is nearly upon us, and despite offers by the industry to co-operate fully with Customs in detailing all distributors to which duty-free spirits are shipped, an alternative has yet to be agreed.
One hi-tech solution would be the use of authenticators, a small, handheld spectrometer which is already used by the industry to address the problem of counterfeit, branded spirits. By adding a trace element to the spirit, the authenticator could immediately tell whether it was duty paid or not. Promoters argue the authenticator is likely to be a much more effective tool than strip stamping, which hardened smugglers would soon find a way of replicating. The draw back is that it would be relatively expensive, and that the cost of it would be loaded on to Customs and Excise. By contrast, the cost of strip stamping would be born by the industry.
So if strip stamping is now unavoidable, what can the industry expect by way of compensation? Rien, would be the Chancellor's usual response. However, there's just a chance Mr Brown might again be persuaded to freeze the duty on spirits. He did last year, and he is a Scot. For the Scotch whisky industry, it would seem a reasonable trade. I'm not so sure about the Chancellor's end of the bargain, for it is not at all certain strip stamping will work.Reuse content