Mutiny stirs at P&O

Big investors are no longer happy with Lord Sterling at the helm. Will he have to walk the plank?
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The Independent Online
IT HAS been a nightmarish month for Lord Sterling. The P&O chairman was splashed all over the tabloids after he was caught travelling first- class without a ticket on the 17.54 from Waterloo to his home town of Haslemere. According to his enemies in the Labour Party and the national press, he then compounded the error by using the old-boy network to escape a penalty.

It was all very embarrassing for the self-made millionaire, a man who enjoyed the unofficial title of "Mrs Thatcher's favourite businessman" in the 1980s and spent much of his spare time then as special adviser to a string of secretaries of state - from Lord Young to the late Nicholas Ridley. Not since the Zeebrugge disaster - when a ferry belonging to a newly acquired P&O subsidiary sank - has he faced such public hostility.

But it was a completely unrelated article last week in the Investors Chronicle, the City's trade magazine, which is likely to cause him much more permanent discomfort. Eight prominent institutional investors - the pension fund managers and insurance companies that control vast tracts of British industry - were polled on their views about long-serving bosses. Lord Sterling, 60, came out as one they would most like to see booted out. Four said he should go now. Four others were undecided. Not one came out in support of him.

Lord Sterling rebutted the attack with typical robustness. "One can get irritated with people who do not have a single share in their company and could not run a tea-shop," he said. "It will give me enormous pleasure to prove these faceless fund managers wrong."

For all the bravado, however, he looks vulnerable. The fund managers polled are not to be trifled with. They were the Prudential, Standard Life, Schroder, Legal & General, Gartmore, Hermes (formerly Postel), Scottish Equitable and Invesco - in other words, the City's biggest and most influential battalions.

When such organisations decide a company director is past his sell-by date, then sooner or later, by foul means or fair, he ends up walking the plank, although invariably with generous compensation.

The affair has all the makings of a ding-dong drama. Lord Sterling will be no pushover. He has allies galore in the P&O boardroom and elsewhere in the City.

The strength of feeling among shareholders seems to have taken the company by surprise. Duncan McGowan of Panmure Gordon, P&O's lead brokers, said: "I was very surprised. What's difficult to ascertain is who was spoken to and at what level."

John Steele, one of P&O's three non-executive directors, said he was amazed. "I've heard no complaints from institutional investors at all."

Lord Sterling and his managing director, Sir Bruce Mac-Phail, were an almost perfect management duo, he said. "They complement each other beautifully." But he added: "Non-executives are responsible to the shareholders. If there was a serious shareholder revolt, I and the other non-execs would have to take it seriously."

It may not be a full-blooded revolt yet, but there is no getting away from the fact that shareholders are deeply frustrated by P&O in general and Lord Sterling in particular. According to one large investor: "We are fed up with Lord Sterling. One wonders what he has actually achieved in terms of shareholder return."

Another commented: "You might ask what does Jeffrey Sterling do these days? Has he still got the energy? He is looking vulnerable at the moment."

There has been vague disappointment with P&O for many years. The shares have sharply under-performed the stock market. There has been no increase in the dividend for five years. Borrowings continue to rise, and there is little evidence yet that pounds 4bn of investment over five years is yielding a decent return.

One transport analyst commented: "The major role of management is to allocate capital effectively. Sterling has thrown capital at container shipping, cruise shipping, ferries and property, and made a very poor return on that capital. He'd have been better off putting the money in the building society. It's not as if they're at the bottom of the shipping cycle. World trade is booming. If they don't make money now, when will they make it?"

The final straw for some investors came last month with disappointing interim figures. The dollar weakness smashed earnings in the container shipping division. The ferries business was hit by the Channel tunnel. And the Bovis housebuilding and construction arm remained in the doldrums. Analysts are now forecasting a fall in pre-tax profits to pounds 320m from last year's pounds 341m.

The City's normal response to a company it considers poorly managed is to sell the shares. But for the largest shareholders that is not an option. Any attempt to exit would send the share price lurching south. And anyway, P&O, with a stock market value of pounds 2.9bn, is one of the FT-SE 100 - managers with index- tracking funds have no choice but to hold the shares.

As yet, there is no orchestrated move to oust Lord Sterling. But many of the biggest institutions would be pleased if he stepped down. Any attempt to oust him against his will promises to be long-winded and difficult. The normal route is a quiet word with the non-executive directors. But there are doubts whether Lord Sterling's non-execs have the metal to rock the boat.

Mr Steele, a former civil servant who runs a transport consultancy out of Brussels, has done paid work for Lord Sterling in the P&O chairman's role as president of the European Community Shipowners' Associations.

The two other non-execs are Lord Hambro and Sir Peter Cazalet. Lord Hambro's merchant bank Hambros has been a paid adviser to P&O for many years. Moreover, investors are unimpressed by his track record as a non-executive director of Taylor Woodrow, where he has sat on the board for33 years. Sir Peter, chairman of the engineering company APV, is a member of an eminent City family but looks unlikely to rock the boat. "Sterling would make mincemeat of him," was one institutional investor's view. Lord Hambro declined to speak to the Inde-pendent on Sunday.

Another traditional channel for shareholder discontent is the company broker, in this case is Panmure Gordon. But Panmure has enormous loyalty to Lord Sterling personally. It has served his companies for 25 years, since long before he joined P&O's board.

Even the institutions themselves are hamstrung. For example, Schroder, the biggest shareholder in P&O with a 4.8 per cent stake, manages a chunk of P&O's pension fund. Any public complaints about Lord Sterling, and it would inevitably face the sack. Are shareholders justified in calling for Lord Sterling's head?

To understand P&O and his role there, you have to

go back to the company's origins in 1822, when a London shipbroker, Brodie McGhie Willcox, and a former Royal Navy clerk, Arthur Anderson, formed a partnership to operate ships to the Iberian peninsula. The early years were spent running guns during the Portuguese and Spanish civil wars. The quartered P&O flag incorporates the royal colours of Portugal and Spain.

The expansion of international mail services in the mid-19th century was the source of the company's great fortune. It started carrying the mails from Falmouth to Vigo, Oporto, Lisbon, Cadiz, and Gibraltar. Later came services to Egypt and places east, and in 1840 the Peninsular and Oriental Steam Navigation Company was incorporated by Royal Charter.

Over the next century, P&O was to become an Imperial institution. It shipped out soldiers and civil servants to India. It ferried generations of hopeful emigrants to Australia. It contributed troop ships in both world wars. It shipped cargoes across the globe.

Then in the 1960s and 1970s came two innovations that were to lead to a terrible decline: the jet airliner and the container ship. P&O was slow to adjust to either, and by the 1980s it was an anachronism. Nigel Broackes of Trafalgar House launched a hostile bid, and it was Jeffrey Sterling, a property developer, who was appointed chairman of the P&O board to fend him off.

The son of an east London Jewish businessman, he had earned himself a reputation as a consummate dealmaker in property. In 1974, he had rescued Town & City Properties, reversing it into his own Sterling Guarantee Trust.

To foil Trafalgar, he executed some nifty footwork. He rushed out the P&O results, which were both earlier and better than expected. Trafs retired hurt. Two years later, he injected Sterling Guarantee Trust into P&O, catapulting it into the property premier league. The company's assets include the London exhibition centres at Earl's Court and Olympia, and the Arndale shopping centre in Manchester. Total property assets are valued at pounds 1.4bn.

The P&O fleet is even more impressive, comprising 225 vessels from tugs to ferries to cruise ships to tankers, bulk carriers and container ships.

In share price terms, Lord Sterling's rule is not as impressive. From 1983, when he was appointed chairman, P&O has merely tracked the overall stock market, and almost all the good performance came in the first two years. Since 1985, when SGT was injected into the business, the shares have underperformed by 50 per cent. The past 18 months in particular have been dismal, the shares plunging from a high of 741p to as low as 462p. They stand now at 495p.

Things are getting worse. Ranked by total shareholder return - share price increase plus dividends - P & O has consistently been in the bottom 25 per cent of the FT-SE 100. Over five years, 15 out of 100 companies performed worse than P&O; over three years 25 were worse; over two years 13 were worse; but over just the last year only two companies were worse - Redland with a return of minus 32 per cent and Inchcape with minus 36 per cent. "That is why we're starting to get jumpy," said one institutional investor.

Critics are unhappy about P&O on at least four fronts. First, there is the vagueness of the group strategy. P&O has 11 divisions that span the globe. Some investors would like to see that slimmed down and the company concentrate on areas where it has a clear advantage. "It needs more focus," said one.

Secondly, there is the enormous capital expenditure programme. P&O has spent pounds 4bn in the past five years, but the return on capital has been feeble. The spending spree shows no sign of abating: three more luxury cruise liners are scheduled to go down the slipway in the next two years.

Thirdly, there is poor communications with the City. His tendency to regale City analysts with tales of the Cabinet ministers he dines with rather than the nitty-gritty of the business does not go down well.

The fourth concern, unfairly or unfairly, is about the ability of Lord Sterling to continue to pull his weight. "The hunger seems to have gone," said one institutional shareholder. "He seems a bit too much in love with the trappings of power, said another: "There is an air of the court of King Jeffrey about it."

Finally, a number of one-off embarrassments have contributed to the perception of management incompetence. More than 400 passengers on the Oriana, the pounds 200m flagship of the cruise fleet launched earlier this year, are threatening to sue, claiming their September cruise turned into a nightmare. The ship ran into a hurricane and vibrated horribly whenever she reached high speed. Three months earlier, the Star Princess ran aground off Alaska, wiping pounds 2m from the bottom line.

Lord Sterling declines to respond personally to these criticisms. However, his friends defend his record. "Without Lord Sterling, P&O simply would not exist today," said one colleague. He points to Lord Sterling's deal- making nous in entering and exiting the right industries at the right time. He wisely got out of secondary banking and oil trading and expanded the cruise business. In 1988, cruises made operating profits of pounds 4.5m - a 4.7 per cent return on capital. By last year, they were making more than pounds 100m and 15.1 per cent.

Ultimately, however, investors want to see the fruits of his labours come through in a rising share price. There is no sign of that at present. Indeed, two imminent events - new fares from Eurotunnel and a report from the International Maritime Organisation on roll-on/roll-off ferries - could further weaken sentiment.

Lord Sterling will no doubt weather a few more squalls. But unless there is a substantial lift in the shares over the next nine months, the pressure for him to walk the plank can only grow.( Table omitted )