Outlook: More financial alchemy as Yell returns to the stock market

Dick Giordano; Equitable Life
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The Independent Online

Second time lucky? Just over a year ago, I was dining with John Condron, chief executive of the telephone directories business, Yell Group, when news came through that Punch Taverns had been forced to pull its planned stock market flotation because of adverse market conditions. With his own IPO pending, Mr Condron was a somewhat distracted figure for the rest of the evening. A month later and the continued volatility of stock markets had forced Mr Condron to pull the Yell float too. Now he's coming back for a second bite at the cherry.

In the meantime, the stock market has plunged even further and despite the Baghdad bounce, it remains more than 10 per cent lower than it was then. On the other hand, conditions are indisputably calmer and the sponsors are confident that this time they'll get a rather more receptive hearing. A detailed appraisal of Yell and its investment attractions or otherwise will have to await publication of the prospectus, but the promoters may face more of an uphill task than they think. This is because there is a growing backdrop of scepticism about private equity in the publicly listed sector.

Investors in publicly quoted shares have become suspicious about both private equity takeover bids and private equity IPOs. There is a generalised and growing aversion to them. With takeovers, investors have the certain knowledge that private equity is bargain hunting while the stock market is still close to the bottom. Most institutions are no longer forced sellers, in a way that perhaps they still were three months ago, so there is more of a determination to hold on for the upside.

With IPOs, the reverse perspective applies; if private equity is trying to IPO at the bottom of the market, it must be desperate. Perhaps it needs to pay down debt, which cannot as cheaply or as easily be refinanced as originally thought. Rightly or wrongly, investors will also believe that the assets being floated have already been stripped of most of their potential upside through leverage.

Yell may be a case in point. Bought for just £2.1bn from British Telecom two years ago, the venture capitalists are hoping to refloat the company at an enterprise value - that is equity plus debt - of anything up to £3.8bn, thus ensuring a position in the FTSE 100. The sums are complicated by the fact that much of the purchase price would have been satisfied by issuing debt, since substantially paid down from the cash flow of the company.

All in all, the private equity firms may have more than doubled the value of their equity, not bad for just two years, while possibly hundreds of millions of pounds will also have been taken out of the company in refinancing fees. Not for nothing are these firms sometimes called "vulture capitalists". The point is, do you really want to buy the carcass once someone else has eaten all the flesh?

To be fair on Yell's venture capital backers, Apax Partners and Hicks Muse Tate & Furst, BT was essentially a forced seller, so they probably got the business at an undervalue. Since then, it has continued to grow, and the company's profile has been supplemented by bolt on acquisitions. Furthermore, there's plainly an appetite for directories businesses among investors. Yell's Italian equivalent, Seat Pagine Gialle, was recently sold, again to venture capitalists, for £3.9bn after a hotly contested auction.

Even so, there is a palpable air of irritation with private equity among many fund managers. With Yell, they are being asked to repurchase a company which two years ago they owned through BT at a valuation on the equity which is double what it was sold for. I don't know what planet the venture capitalists live on, but have they not noticed that in the meantime the stock market has fallen nearly 40 per cent? This doesn't look right to me, however well they've managed the business in the meantime or whatever powers of alchemy they've applied to it.

Dick Giordano

It's tough at the top and Sir Richard Giordano has been there longer than most, first with BOC and then for the past 10 years with British Gas. Yet it can be even tougher in retirement, as the value of pension pots crumbles. Sir Richard won't have a nice fat final salary pension to support him when he retires in December from what is now called BG. But he will have the next best thing - a £500,000 pay-off from the company simply to thank him for the last decade.

In fairness, BG has quite a lot to thank Sir Richard for. He rescued the reputation of British Gas when it was slipping into the sea and the two demergers he oversaw - first of the gas supply business, Centrica, and then of the gas pipeline business Lattice - unlocked plenty of value for shareholders.

Yet there is another altogether less welcome legacy Sir Richard leaves behind him. Perhaps more than anyone else in British corporate life, he lit the blue touch paper under the powder keg of executive excess. This was not so much with his own pay arrangements at British Gas but with those of his first chief executive at British Gas, Cedric Brown, who was finally hounded out of the job by fat cattery.

A US citizen who had already earned his fortune with BOC, Sir Richard took a typically American attitude towards executive pay and presumed no-one would much care when British Gas scrapped most of its fancy executive bonus schemes in favour of giving its chief executive a large one-off pay rise. How wrong he was.

Cedric was vilified everywhere he went. He even had a pig named after him. The end came shortly after a rowdy annual shareholders meeting at the QE2 Centre in London where, desperate to escape a pursuing Channel 4 camera crew, he accidentally ran into a broom cupboard. Sir Richard was safely in the background looking on. But was that with bemusement or amusement?

His successor at BG will be Sir Robert Wilson who retires as executive chairman of Rio Tinto in October on a £656,000 a year pension and so hardly needs to work. At BG he will be paid £500,000 a year for his non-executive, part-time job. Presumably he won't have to resort to hiding in a broom cupboard, but otherwise things don't seem to have changed very much since the days of Cedric the Pig.

Equitable Life

Sir Howard Davies, now in his final three months as chairman of the Financial Services Authority, will regard yesterday's report into the prudential regulation of Equitable Life by the Parliamentary Ombudsman as sweet justice after all the criticism the FSA has taken over the life company's collapse. It was never, frankly, realistic to blame the FSA for the genesis of the debacle, for as the FSA has already remarked, the die was cast well before it came into existence. However, it may have been reasonable to hold the FSA accountable for not having acted sooner. Allowing Equitable to remain open caused countless new policyholders to lose out too.

In the event, the Ombudsman, Ann Abraham, finds no evidence at all that the FSA failed in its regulatory responsibilities, this largely on the ground the FSA itself cites, which is that to have closed the business down while there was still the possibility of selling it to someone else might have hugely damaged the interests of existing policyholders.

Furthermore, in reaching her conclusion, the Ombudsman observes that there is a mismatch between public expectations of prudential regulation and what the regulator can reasonably be expected to deliver. Sir Howard could make the system 100 per cent bullet proof if that's what people really wanted, but the costs of doing so would be unacceptably high. The collapse of Equitable highlighted some serious faults in the regulatory system, but the case for compensation has yet to be made.

jeremy.warner@independent.co.uk

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