Offer that enraged BZW: Competitive strike forced creator of scrip dividend to slash margin

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The Independent Online
SIMON DE ZOETE, chairman of equities at Barclays de Zoete Wedd, was pretty pleased with his team when they came up with a plan to enable companies with large overseas earnings to pay dividends up to 50 per cent higher if investors took them in the form of shares instead of cash, writes William Kay.

It was the sort of idea that makes a merchant bank look smart and innovative, grabs the right sort of headlines and helps to recruit more customers.

However Mr de Zoete, chipped from one of the City's older stockbroking families, was less than amused when Brian Keelan of Swiss Bank Corporation calmly pinched the idea - and undercut BZW into the bargain.

Enhanced scrip dividends, as they are known, arise because companies normally have to give a chunk of advance corporation tax to the Inland Revenue when they pay cash dividends. This is offset against the company's eventual corporation tax bill for the year.

International companies have the problem that they do not pay much UK corporation tax so build up millions of pounds of ACT that they cannot offset. But there is no ACT on dividends paid in the form of shares, or scrip.

This has been realised for many years. BZW's cleverness lay in seeing that multinationals could afford to pay a much higher dividend in scrip than in cash - and BZW could then offer to buy the extra shares, giving shareholders cash and making a turn for itself. The taxman legitimately loses, and everyone else gains.

Among the BZW clients that agreed to go along with this last year was BAT Industries, the tobacco and insurance giant. Its chairman, Sir Patrick Sheehy, sits on SBC's international advisory board.

BAT's cash dividend was worth 22.6p a share, but investors could alternatively take 33.9p in new shares - and BZW would buy those shares for 32.2p, taking a profit of 1.7p for itself. Three weeks later, Swiss Bank offered 33.22p. Furious as Mr de Zoete was, he had no choice but to fall in line. But it seems he did not let matters rest there.

Mr Keelan claimed: 'Over the enhanced scrip dividends BZW threatened us and said 'you will never work for Barclays again'. They threatened to sue for breach of copyright, for Christ's sake] And they complained to the Stock Exchange and the Securities and Investments Board. There was also an internal witch hunt at BZW to find out where we were apparently getting our information from. What a load of nonsense] Simon de Zoete was bad-mouthing us all over the City.'

Mr de Zoete declined to answer these allegations in person. A BZW spokesman commented: 'We see no reason why we need to respond to SBC's grumbling. We invented and developed the enhanced scrip dividend. We acted as sponsor to ESDs for 18 companies last year. As far as we are aware, SBC only sponsored one - North West Water. We think these facts speak for themselves.' SBC is a member of the Stock Exchange. It was not censured over the BAT squabble, but the Stock Exchange did issue guidance which amounted to a rap on the knuckles.

It declared: 'A member firm shall not make a competing offer for the shares unless it has first obtained the company's consent and announced the terms of the new offer publicly no less than five business days prior to the closing to the first acceptance period.' A Stock Exchange spokeswoman said: 'Obviously ESDs were a new market initiative, so we were learning as we went along. When Swiss Bank came in, it did raise new issues. So on 3 June last year, we issued a notice giving guidelines on what to do. Someone came up with a new way of doing it, so we had to give guidance.'

Mr Keelan's view is that, far from being criticised, SBC inspired the tightening-up. He insisted: 'We brought in new Stock Exchange rules to stop the abuse by BZW.'

However, BAT was understandably delighted with the Swiss intervention. Their spokesman said: 'We do a number of number of treasury transactions and corporate finance issues with SBC, and they organise investor presentations in Switzerland for us. We have a pretty good relationship with them. They are very competitive, and we regard them quite highly. Unfair tactics? That is not apparent to us.'

And, just in case BZW imagines it has seen off the SBC threat, Mr Keelan warned: 'We have plans for an enhanced scrip dividend Mk II, which we shall bring out this summer.'