Outlook: There's a dividend hole in your bucket, dear Mr Roberts

Standard rebuff; Debenhams delay
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The Independent Online

It's never been cheaper to borrow from the bank which is why the North-west's water supplier United Utilities is tapping its shareholders for £1bn to help keep Blackpool beach clean for shellfish and stag parties (it's very popular with both apparently). Moreover, UU has guaranteed that the flood of new shares it is issuing will not affect the dividend yield which will remain at a thumping 8.3 per cent.

When the cost of servicing debt is about three-quarters that of maintaining an over-generous dividend, why would any company willingly issue more shares?

UU's thinking, as outlined by its chief executive John Roberts, goes something like this. The North-west is one of the most capital hungry parts of the country when it comes to keeping beaches, rivers and drinking water clean. It has a long coastline, a lot of heavy industry and an ageing infrastructure.

Over the course of the current five-year regulatory period running to 2005, UU will spend £3bn on its water business alone - a quarter of the industry's total investment - even though its catchment area only covers 13 per cent of the population. In the meantime, it is spending a further £500m on its electricity business.

In the next five-year period the bill will be at least the same again and probably higher as European directives kick in covering everything from lead in drinking water to the quality of life of the humble shellfish. Then there will be the cost of re-wiring Britain to link a new generation of wind farms and other renewable energy sources into the electricity grid.

So far Mr Roberts has been able to dig into UU's piggy bank to meet the costs of its environmental programmes. But now its indebtedness has started to creep up and if it were not to tap shareholders, gearing levels would begin to nudge uncomfortably above 60 per cent.

If the worst time to buy an umbrella is when it is raining, then the worst time to tap the capital markets is when an industry is beset by the kind of uncertainty that a regulatory review produces.

Think, therefore, of the rights issue as a pre-emptive strike. UU will not need the money for another two years (and, indeed, half of it will not come in until June, 2005). But having the money now increases its flexibility and should improve its credit profile so that when UU does need to raise new debt it should be able to get it on better terms.

The water regulator Philip Fletcher is also a lot more comfortable with companies that maintain a nice plump cushion of equity to help them weather the unexpected, so Mr Roberts ought to be the teacher's pet when the next price review takes place in 2005.

The hole in Mr Roberts' bucket is UU's dividend policy, which has enabled cash to flow out of the business at a prodigious rate.

The dividend already costs UU £265m a year, leaving it with only just enough net profit to cover the payout. Even after being re-based to take into account the deeply discounted price of the rights issue, the cost of the dividend will still rise to almost £350m.

To the extent that the proceeds of the rights will be used to support UU's overly generous dividend, it will be bribing shareholders with their own money.

The level of the discount means that shareholders will have little choice but to take up their rights. But the worry is that unless UU gets a very sympathetic hearing from the regulator, its shareholders will have to keep filling up the bucket to ensure the the dividend tap stays open. Conversely, UU could be left with the even more unpopular option of slashing the payout.

In that sense, Mr Roberts is taking a big gamble on what sort of regulatory settlement he gets from Mr Fletcher and risk-taking is not something which dull old utilities are supposed to be about.

Standard rebuff

Democracy and mutuality have never made comfortable bedfellows and Standard Life has just demonstrated that fact again in spades. The latest attempt to force a conversion vote at Europe' s biggest mutually owned insurer has been repelled on a technicality. David Stonebanks, the latest carpetbagger to try storming the gates of Standard's grand Edinburgh headquarters, mustered the signatures of 2,317 like-minded policyholders, 1,420 of whom also managed to complete the form correctly.

The bar has been raised since the last serious campaign to carpet bag Standard three years ago. Then, Fred Woollard only had to gather 50 signatures. Now, 1,000 members have to sign the form, all of whom have to have been policyholders for at least three years.

Alas, Mr Stonebanks has still not jumped high enough. Standard, being so advised by independent legal counsel, regrets to inform him that none of the resolutions in his request are valid. It hasn't bothered to explain to him, or anyone else for that matter, why this is the case and because of the lax rules governing corporate accountability among mutuals, it has no need to do so.

What Standard can tell us, however, is that its own "snapshot" (ie opinion poll) shows that demutualisation is supported by only 21 per cent of its 2.6 million policyholders. When Standard fought off Mr Woollard, the exercise cost members £11m. This time around, Standard is pleased to announce it has settled the matter for a fraction of the price, with only the cost of a QC's opinion to worry about.

There is something unsufferably smug about a life office which has been cutting bonuses as enthusiastically as its quoted counterparts, telling policyholders that it knows what is best for them. What is even more depressing is that Standard promised its narrow survival in 2000 would act as a wake-up call to improve transparency and accountability.

Unfortunately, there is precious little sign of this, even though Standard is under different management and now has a chairman in Sir Brian Stewart who has spent his life in the public spotlight. Rather bizarrely, Sir Brian yesterday urged Mr Stonebanks to stop disrupting the business by campaigning for demutualisation "against the clear wishes of the membership". Wasn't that for a vote to determine?

Huff and puff as much as he wants, the issue will not go away and next time it may be fronted by a more credible candidate. In the meantime, policyholders have next week's bonus cut to look forward to as they remind themselves that the board of Standard knows best.

Debenhams delay

These private equity boys sure like their bread buttered on both sides. It is now two and a half months since Permira confirmed its bid approach to Debenhams, with the backing of the management, and still shareholders await a formal offer. They may get one today but, then again, that is what Debenhams was promising on Friday.

What has held the process up? The price, 425p a share, has not budged since Permira was flushed out in May. It has had access to the books to undertake due diligence, paid for by Debenhams itself. For good measure there is a break-fee in the agreement with Permira so that Debenhams has to cough up £6m if Permira's bid is not recommended and £8.5m if it is trumped by someone else. To cap it all, it now emerges that Debenhams is paying the costs of the rival private equity bidder, a consortium of CVC and Texas Pacific, to the tune of £5m.

The venture capitalists argue that, presuming the takeover goes through, then all these costs will ultimately be borne by the successful bidder. But the price is so underwhelmingly that this cannot be taken for granted, in which case shareholders will have forked out £11m with nothing to show for it. No wonder so many managers are deserting publicly quoted companies for the world of private equity when life is such a one-way bet.