Outlook: Rice up against City vested interests
Tuesday 03 November 1998
Small shareholders are being whipped into a frenzy of nationalistic opposition; don't let the Americans take this company away from you, they are being told. The shift of domicile has been elevated into such a point of high principle, on both sides of the argument, that Mr Rice might be forced to view a 'no' vote as one of no confidence and therefore feel obliged to resign.
On both scores this would be a shame, for although the issue certainly makes for a good table thumper, it is not obvious why Mr Rice's plans should be rebuffed. Rather the reverse. If they fail, this will be a victory not for shareholder rights, but for vested City interest. And it will be at the expense of Lucas Varity's long-term prospects.
But first the case against. Essentially it rests on the belief that once Lucas Varity becomes a fully constituted American company, the interests of its British shareholders, and particularly those of its 17,500 private investors, will be ignored. The press will lose interest, the City will lose interest, and with no voice to represent them, the remaining British contingent won't get a look in.
Mr Rice will trample all over them. British shareholders have already had to fight a relentless rear guard action to prevent Mr Rice replacing dividends with the American habit of share buybacks. That will become an inevitability once Lucas Varity turns American.
In truth, Mr Rice has shown scant regard for these interests over the years. From the moment that Lucas and Varity came together as a supposed merger of equals, it was apparent that this was essentially an American takeover. Mr Rice, who lives in the US and runs the company from there, pays lip service to the investor relations requirements of a FTSE 100 company, but not much more. Had he done so, he might now be getting a more sympathetic hearing. It might be said that by accepting what Mr Rice proposes, shareholders are only bowing to what is already a reality.
This isn't a good reason for giving in to what Mr Rice now wants to do, of course. Nor is the fact that since the merger, the Brits have sold down their interest in the company from around 60 per cent at the start to little more than 40 per cent today. British investors have hardly shown great support for the company. On the other hand, it is those that remain, not those that have deserted, that should be dictating the agenda. So what will the switch do for them?
The case in favour lies in the greater value Lucas Varity can be expected to attract once its shares are in the S&P 500. Judged by the rating given to Lucas Varity's US sector peers, the shares might trade on anything up to a 30 per cent premium to their present value. Even as a bid premium, most shareholders would not find this easy to turn down. Furthermore, if the plans are rejected, some US shareholders will sell and the price will become more depressed still.
This is a phenomenon that cuts both ways. Many British institutional shareholders are hamstrung by irrational, outdated and restrictive rules which may oblige them to dispose of their shares if Lucas Varity ceases to be a British or a FTSE 100 company. That's certainly what some of them claim, and hence their opposition.
On the other hand, small shareholders suffer from no such handicap and it would seem very much in their interests to vote these proposals through. As a whole, the British investment community seems not to care a fig about Lucas Varity and similar companies. Like BTR, another beleaguered but world-class engineering company, Lucas Varity is only in the FTSE 100, because of its size. In an index otherwise dominated by low-risk financials and utilities, Lucas Varity sticks out like a sore thumb, both because of its business, engineering, and its valuation, which relative to the rest of the index is low in the extreme. And yet these British institutions still want to call the shots, have Mr Rice dance to their tune, be informed, wined and dined and generally wooed by their company.
In these circumstances it is no wonder that Mr Rice should want to shift his primary listing to an investment community still prepared to back entrepreneurialism and business ambition, regardless of the sector it is practiced in. The cost of capital is lower for business in the US and therefore share prices are higher.
Quite how serious a disadvantage Lucas Varity suffers as a consequence is unclear, but it is obviously the case that if companies are to survive and prosper, they must be competitive across all costs including capital. The City's established power brokers talk in shocked and patriotic terms about how the rules will force them to sell out of Lucas Varity if it switches domicile, but is not this more the hollow protests of vested interest than anything else? Nearly all pension funds own overseas assets. There seems no good reason why these institutions should have to sell their Lucas Varity shares. Why don't they just reallocate them?
America is the land of the small investor, more so than any other, for in the end the needs of the private investor are not so very different from those of any other. What small investors want is for their investment to grow. Perhaps, regrettably, the chances of that happening seem to be rather better in the US than they are here.
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