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The Confederation of British Industry is barking up the wrong tree when it howls about the “eye-watering” cost of Labour’s nationalisation plans, which it puts at almost £200bn. Of all the arguments against nationalisation – and there are many strong ones – the claimed upfront cost is the weakest.
The CBI skips over the fact that the companies on Labour’s list generate profits and cash. Viewed through a pure mergers and acquisitions lens, one could even regard a £200bn takeover as cashflow-enhancing for the state since the CBI itself puts the additional interest costs at £2bn, a sum that might be covered comfortably by the newly acquired companies. Severn Trent and United Utilities made post-tax profits between them of almost £700m last year, and they are only two of 10 major water companies.
The CBI would be better advised to aim its fire in other directions – the fairness and legality of paying less than market price, the effect on foreign investment, and so on.
For example: why should postal workers at Royal Mail, who were gifted a few shares during privatisation at 330p, be expected to sell their stakes to the state at less than market value (currently 213p) if their employer is judged to have “asset-stripped” the company by flogging a few unwanted depots? How could that be fair?
If employee shareholders would be protected, as Labour has sometimes hinted, why not ordinary savers via their pension funds? Not every part-owner of a utility is a sovereign wealth fund.
As for legality, how does Labour expect to survive inevitable challenges? Companies are already issuing bonds with “nationalisation event” clauses that demand instant repayment at face value. How would the shadow chancellor, John McDonnell, aiming to force through purchase at prices set by parliament, cope with stiffer tactics such as corporate redomiciles?
Nor has Labour, assuming it could overcome such legal challenges, been tested on how it would hope to attract capital for new infrastructure projects. Last week’s big idea was state-backed expansion of offshore windfarms, with private investors invited to take a 49% slice. Such a pitch for new funds would surely be tricky if the government also claims the right to take 100% control one day at a price of parliament’s choosing.
One can understand, of course, why the CBI prefers to focus on a large and seemingly frightening upfront figure. But it is the wrong point. Stick to details such as fairness on purchase price and unintended consequences. On those scores, Labour still has much to explain.
Sophos adds to the shrinking feeling
Farewell Sophos, another UK company being swept up by private equity’s buying spree. The purchaser of the Oxfordshire-based cybersecurity firm is Thoma Bravo, a US west coast fund, which will pay $3.95bn (£3.1bn) in cash. The weakness of sterling – or, more precisely, the weak state of the UK stock market for second-tier firms – may have played a role in putting Sophos on the radar.
However, unlike the sale of the defence company Cobham to a different US fund, it is hard to mount an argument that Sophos’s directors should have fought harder for independence. For starters, the company’s two founders still have a combined 16.3% stake, so probably have a decent idea of what it is worth, even if they stepped down several years ago. What’s more, a 40% takeover premium versus the average share price in the last six months looks reasonable.
Nor should one get too hung up on Sophos’s Britishness. Only about a 10th of its revenues are generated here. The good news is that Thoma Bravo, a software specialist, intends to keep Sophos’s headquarters in the town of Abingdon, which is about all one can expect in terms of assurances.
There is still, though, a sense of unfulfilled potential. Yes, those Sophos investors who bought at float at 225p in 2015 have done well as the firm departs at about 583p. But it cannot be good over the long term for ordinary shareholders – those without access to private equity’s party – that the number of quality companies on the London market is shrinking. Takeovers have always happened. The worry is that new listings have almost dried up.
Dunkerton deserves a Superdry run
It always looked a little odd that Julian Dunkerton, having made a stunning against-the-odds return to Superdry, would want to let somebody else be chief executive. So it has proved: his contract has been extended until April 2021.
It is also the right decision. Dunkerton clearly has precise ideas about how Superdry should be run, and fell out with the only chief executive who he entrusted with putting them into action. Let him do the job himself.
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