I am shining a harsh light into the murky world of corporate behaviour. Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees?
-Vince Cable, Secretary of State for Business, Innovation and Skills, 2010
But first… as the FT reported on Tuesday, TCI, the indomitable hedge fund run by Chris Hohn, was revealed to have become Royal Mail’s biggest private shareholder. TCI holds just under 6 per cent of shares in RMG, or, once you exclude the state’s residual holding, 12 per cent of the free float.
Naturally, this has raised hackles. A glance across the newspaper headlines on Wednesday morning – and indeed, TCI’s track record – reveals why. QED
(By way of an aside: Hohn was originally referred to as a “locust” by Werner Seifert, quondam head of Deutsche Boerse who in no way had an axe to grind after TCI booted him out. His book is available in all
heavily discounted second hand good book outlets)
Mr Hohn will certainly pull few punches when it comes to calling for a rapid restructuring at Royal Mail if none is forthcoming. Naturally, with a workforce that has already voted for industrial action, and a brand that is quite literally known in every household in the land, there is plenty of potential for fireworks here. (Although, by way of counterpoint to the usual examples of TCI’s belligerence with formerly or partly-national corporates, readers may wish to look into the case of Australian rail operator QR National.)
But the real story right now is – or should be – nothing to do with a putative boardroom bunfight.
It should be about how the governments’ City strategy is in tatters.
A great deal has been made by Mr Cable – and the Kay review he commissioned – of ending short-termism in the City.
This was put into action in the case of Royal Mail, with any investors the Department of Business didn’t like the smell of – hedge funds – being left out in the cold.
Where hedge funds did receive an allocation, they were hedge funds with the most conservative of reputations (Lansdowne Partners is a long-term value-oriented investor. It is also run by a bloke who was the Chancellor’s best man).
This, of course, is an odd way to conduct a privatisation. As our colleague Jonathan Guthrie eloquently advises the chancellor in today’s Lombard:
…that’s the problem with the stock market, Mr Osborne. It is unpredictable. Floating a company is like opening your house as a hotel. People you might not invite to dinner check in. Then they hang around complaining about the service and the management’s taste in furnishings.
TCI, for its part, applied for
a whole presidential suite of rooms £200m of shares and was allocated just £1m. Many other hedge funds were similarly shunned.
All very well, except that…
- Firstly, on an outcomes basis, whether you view the political decision to skew the shareholder register as right or wrong, it has failed. Hedge funds are, patently, now investors in RMG anyway. Lots of them. Not just TCI.
- Secondly, and worse, it is a failed strategy that has cost the taxpayer incredibly dearly.
If a hedge fund like TCI was willing to spend over 400p a share on Royal Mail, and was excluded, then surely the IPO price – 330p – could have been higher if they had not been shut out. This matters because, so far, Mr Cable – and others in government – have explained away the huge spike in RMG shares post-float as “froth”.
This looks even worse when you consider that the offer price for Royal Mail was supposedly kept low at 330p because some of the key big long-only fund managers – those the BIS was desperate to have on board, and who it has lauded for three years as The Right Kinds Of Investor – warned they would pull out if it went higher.
By excluding those investors willing to take the biggest risks, and move quickest, the government was always going to be ensuring that it sold RMG cheaply. Massively cheaply… almost Gordon Brown sells gold cheap, cheaply.
There is, of course, another layer of irony.
Who is it that have been selling to hedge funds in recent days, flipping their IPO allocations for quick, ruthless profits with no regard as to the fundamentals of RMG’s business, but a keen eye for their own returns? Yes! “Long term” long-only investors, of course!
It turns out the real world is quite a complicated place.
(And we haven’t even mentioned CIFF)
The questions get harder for Vince Cable – Nils Pratley, Guardian