Outlook: ScottishPower's dividend cut doesn't stack up

Interbrew stupidity
Click to follow

Ian Russell, chief executive of ScottishPower, claims to be taking "tough but necessary" action in slashing the energy utility's dividend. As they watched the share price plummet yesterday, shareholders would be forgiven for thinking that another piece of tough but necessary action might be to axe Mr Russell as well, for it is hard to see the justification for this latest act of dividend "rebasing", other than that everyone else is doing it, so hey, why not ScottishPower too.

ScottishPower is the second-highest yielding stock in the FTSE 100, which happens to be the primary reason for holding shares in the company. After the dog of an acquisition PacifiCorp has proved to be, it's hard to think of any other reason for buying them. There was little if any warning of the cut and, indeed, most investors had taken the company's previously stated aim of raising dividends by 5 per cent a year until March 2003 to mean that the dividend was safe into the indefinite future.

That was before Schroders Salomon Smith Barney came along with its wizard wheeze of a plan for helping Vivendi buy Southern Water off ScottishPower. Southern Water belongs to a different generation of corporate empire building when ScottishPower thought the thing to do was to become a multi-utility, taking in electricity, water, gas and anything else you could sell on a meter. When Mr Russell became chief executive, he determined to concentrate only on electricity and he has been trying to sell Southern Water ever since.

The first efforts failed, so Mr Russell settled on a refinancing instead, releasing £1.7bn of cash. No mention of the need for a dividend cut then. Imagine Mr Russell's delight when out of the blue up pops SSSB with an apparently snag-free way of taking Southern Water off his hands for £2.05bn altogether. The price is the same as the company's regulated asset value, the transaction has been constructed in a way that involves little if any regulatory risk to ScottishPower, and Mr Russell will be rid of Southern altogether.

Only one drawback. By getting rid of Southern Water, Scottish Power also gets rid of a big chunk of reliable earnings. Hence the need for the dividend cut. Shareholders might reasonably think they would have been better off with the original refinancing. Mr Russell insists that the dividend has to be cut so as to give a better level of cover going forward.

What's more, the company needs more cover because once shorn of water, it must rely on a more risky, shock prone earnings stream from electricity. It seems like a circular argument and none of it convinces. The only reason the company's earnings have become so prone to shocks is because of ScottishPower's disastrous acquisition of PacifiCorp on the West Coast of America, which is produced more shocks than the San Andreas Fault.

Mr Russell says he needs the dividend cut to enable him to invest more in electricity generation and distribution projects going forward. On the evidence of PacifiCorp it doesn't look like a great use for the money.

Interbrew stupidity

Regular readers of this column will know what a poor opinion we have of Interbrew and its management. As if to prove our case, the Belgium brewer has taken on the massed ranks of the British press, including The Independent, in a characteristically ill-judged legal bid to force disclosure of documents that explored a possible takeover bid by Interbrew for South African Breweries.

The attempt has already cost a lot of money and all Interbrew is certain to achieve is further alienation of an already hostile British media. Interbrew is an arrogant organisation with a well chronicled history of market abuse in Belgium, where it is a dominant supplier of beer. Its pursuit of these documents is typically inept and narrow minded, and it would be well advised to give up the chase before it does itself any further damage.

The documents in question were the normal sort of guff that investment bankers produce when a client asks for preparatory work to be undertaken on a takeover – relative market shares, possible synergies, method of bid execution, regulatory risk and the like – and caused great embarrassment to Interbrew when they were anonymously sent to the press. Copies of confidential corporate briefings are invariably "marked" in an encrypted way so that if they do leak, the source can be traced. Ergo, Interbrew wants the copies back.

Our position is a somewhat curious one in that we were not included in the initial round robin of the documents, but took steps to obtain copies after it became apparent they were circulating in the City. We thus know where we got our documents from but not who the initial source was. The reason we are resisting handing over the documents is the obvious one that our source, and possibly the initial source as well, would become known to Interbrew. The newspaper might as a consequence become viewed as an unreliable repository for leaked information. Defence of the anonymity of sources is a vital part of the free flow of information to the press, and therefore freedom of the press in general.

We should, however, be careful not to get too pompous about it all. It wasn't as if we were revealing some great wrong doing in publishing the information in these documents. Indeed Interbrew argues that the purpose of the initial source was that of share price manipulation, making the leak positively harmful to the public interest.

Well perhaps, but newspapers are filled with trivia and tittle tattle, and the fact that Interbrew was actively considering a bid for SAB was real information that deserved a public airing. The Independent, moreover, reported accurately that some of the documents being circulated appeared to be concoctions and openly speculated that the purpose of the leak might have been share price manipulation.

In its judgment yesterday, the Court of Appeal said: "There is no public interest in the dissemination of a falsehood", but actually, our story was as much about the phenomenon of the leak as its substance. It was a good story, pure and simple, the more so because of the embarrassment the leak caused Interbrew. If the principle of anonymity isn't defended to the last in instances like these it will also get breached in more important cases where real public interest whistle blowing is involved.

That Interbrew refuses to understand the importance of these principles or the damage it does to itself as a consumer products company by attacking them is strongly indicative of its arrogance as an organisation. Even the Financial Services Authority, watching nervously from the sidelines, hasn't yet been stupid enough to test its armoury of powers to compel disclosure on this particular case, even though it is conducting its own market abuse investigation into the affair.

That may be because the FSA is happy to allow Interbrew to do its dirty work and take the flak. It would be ill advised to rely on such an ally. If past such cases are anything to go by, neither of them seem likely to get the documents they seek, even if when all legal channels are exhausted the courts are still behind them. They are wasting their time, money and reputation in trying.