Outlook: When it comes to the law of the jungle, Sir Martin's a master

Threadneedle; Convertible bonds
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The Independent Online

Sir Martin Sorrell, chief executive of WPP, generally gets what he's after once he sets his heart on something, even if it means overpaying, as happened with the media buying agency Tempus. Yet even the remorseless Sir Martin knew he had an uphill struggle with Cordiant Communications, which, as with most of his targets, would much prefer to be taken over by someone else.

In this case, that's the least of WPP's problems. Cordiant is such a busted flush that it's beyond the stage of being able to chose its partner. Without WPP and the alternative suitor of Publicis, WPP's French rival in the global advertising market, Cordiant would in all likelihood be heading for the insolvency courts, such was the degree of its debt-fuelled overexpansion as the advertising boom reached its zenith (no pun intended). What makes this a curiosity as a bid battle is that it is one conducted among lenders and bondholders, rather than shareholders.

With both bids, shareholders end up with a pittance, much to the fury of Active Value, which has built up a big stake in Cordiant in the hope of extracting a value-enhancing deal for equity holders. Bad move, for when push comes to shove, the whip hand always lies with secured creditors, and chief among these is a US private equity and hedge fund group called Cerberus, which has irrevocably pledged its controlling position in Cordiant's senior debt to Publicis. It's all a bit fishy, because as part of a linked transaction, Publicis has agreed to sell Cerberus some of Cordiant's assets, including possibly the financial PR company Financial Dynamics.

Cerberus thus has an interest in agreeing the Publicis terms that goes beyond that of other debt holders in merely securing the best possible payback of capital. Indeed, other secured creditors, including HSBC and Royal Bank of Scotland, seem to have been largely supine in allowing Cerberus to dictate the terms and personality of the rescue.

As is his wont, Sir Martin was fighting like an alley cat right up to the wire last night. It's in his interest to maintain hostilities for as long as possible, for even if he fails, Cordiant's business is in the meantime going to hell in a handcart. The longer the uncertainty persists, the more destabilising it becomes, the more Cordiant clients will drop into Sir Martin's lap. It's a jungle out there and Sir Martin has a PHD in the law of it.


Whether American Express has secured a good deal in buying Threadneedle Asset Management for £340m is impossible to know without access to confidential details of the transaction. At less than 0.8 per cent of the value of the company's £44bn of funds, the purchase price would look a bargain if this were an entirely retail business. In fact the bulk of the funds under management belong to the seller, Zurich Financial Services, and here the tariff is unlikely to be high.

Zurich is a distress seller and has therefore agreed that Threadneedle will continue to manage its funds for longer than is usual in such transactions - eight years rather than five. That will have improved the price for Zurich somewhat. The other variable is the performance targets, which Zurich describes as "standard", but presumably were the minimum it could justify to its policyholders. The less stringent the performance targets, the greater the price that American Express would have been prepared to pay. For the capital starved Zurich, the pressure was to get as high a price as possible.

American Express's interest in buying Threadneedle is one of the worst kept secrets in the City. Seemingly everyone knew about it, yet it remains something of a puzzle. At a time when everyone in the industry is trying to reduce cost, creating enormous pressure for consolidation into fewer players, this is essentially a "platform" purchase, a new business for American Express that will expand its range of financial services. There's no overlap with Amex and, to the relief of staff, there are therefore no direct cost cutting benefits to be derived from crunching two similar businesses together.

It will be interesting to see how many other life assurers follow Zurich's lead in demerging or selling their asset management arms. Rumours abound that both Aviva and Axa are thinking of doing the same. Formal separation allows the life company to focus on what it is meant to be good at - selling and administration - while making someone else accountable for investment performance.

In the outside world, fund management fees tend to be set according to the value of the funds under management, which with the bear market has put considerable pressure on costs. In-house investment teams have to some extent been sheltered from this, but when the parent life company too is under pressure to cut costs, the in-house operation cannot expect to escape reality indefinitely. There are other pressures too. Many life companies help defray their investment management costs through soft commission, where the broker provides services such as research in return for commission. Regulators have given notice that such practices will eventually be banned.

What to do about the investment management function is just one of a legion of challenges facing life assurers after one of the worst bear markets in living memory. Lack of capital has caused life offices to close their doors to new business in growing numbers. Three years ago, the top 10 UK life companies accounted for just 55 per cent of new business. Today the equivalent figure is 70 per cent.

The market is expected further to consolidate after the abolition of the polarisation rule, which has enabled poor value providers to continue to operate by paying particularly high sales commissions to independent financial advisers. Combined with the trend towards price capping across all product lines, deregulation will be the final straw for many smaller life companies. In theory, the policyholder's lot should be improved by this great flood of change. We'll see.

Convertible bonds

JP Morgan Securities was feeling pretty pleased with itself yesterday after successfully raising £257m in debt markets for what until a few months back was regarded as a complete basket case of a company - Cable & Wireless. What's more, it did so on a coupon of just 4 per cent. Existing bonds in C&W trade as junk with a yield of nearly 10 per cent.

The secret ingredient is that there is an equity kicker. The new bonds are convertible into stock at 145p a share. This is a 50 per cent premium to the present share price, which, for a stock that's already recovered a long way, might seem quite a stretch.

Lots of convertibles have been issued in the US to repair balance sheets damaged by the downturn, but they remain comparatively uncommon in Europe. We may see more of them in the months ahead. In the stock market, C&W shares shed 6 per cent of their value on news of the issue. This was not so much because of the 7.5 per cent dilution that would be involved if the bonds convert. Indeed, the prospect of such a trigger point being reached ought to force the price up.

Rather it was to do with concern over why C&W should need to raise more money given the £1bn plus of net cash it already has slopping around its balance sheet. The answer seems to be the added financial flexibility it gives the board, rather than the likelihood of running out of money again any time soon.

Richard Lapthorne, the new chairman, has amassed an impressive management team around him in the six months he's been there, and by exiting the US business, he's applying a cautious, safety-first strategy to the company before risking any more of the shareholders' money. Even so, C&W remains something of a roll of the dice play. But for its cash mountain, it would already be bust. Its survival remains more a matter of faith than certainty. Mr Lapthorne will take heart from the fact that there appears to have been no shortage of it in bond markets yesterday.