April 13, 2012 11:17 pm

Paying the dire price of inflated ambition

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Ambition has come with a big price for two once-proud British names.

Cable & Wireless Worldwide, the demerged UK business of the 160-year-old telecoms group, was worth roughly the same as it was seven years ago until predators began circling last month. That has pushed up the share price but means the company faces being swallowed up by either Vodafone, its once tiny rival, or Tata Group of India, a country where C&W laid cables more than a century ago.

Premier Foods, which assembled Britain’s biggest larder through a steady diet of acquisitions, last month promised lenders it would empty the shelves further to pay down more than £1bn of debt. Those borrowings had helped fund a shopping spree that has reduced its equity value from more than £2bn in 2007 to less than £400m today.

Their respective rises and falls took different routes but have in common over-ambitious (some say overbearing) chief executives, fee-hungry bankers and a predilection for overpaying.

Premier Foods’ acquisitions of Campbell’s UK and Irish businesses and RHM, owner of Hovis bread, were “a flawed proposition” from the outset, says Clive Black, analyst at Shore Capital, who has downgraded the stock 11 times.

He describes the acquisitions as “the worst kind of deal” and blames gullible management and fee-hungry investment bankers – with the cleverer set being on the vendors’ sides rather than Premier Foods’.

Robert Schofield, then-chief executive, spent more than £2bn (including debts) beefing up what was originally a clutch of private label products valued at £527m when it listed in 2004.

“Profits have been sliding ever since they stuck these businesses together,” says Charlie Mills, analyst at Credit Suisse, the house broker.

Totting up earnings before interest and tax for the various parts at the time they were acquired, allowing for subsequent disposals and wrapping in £113m of annual synergies, he calculates Premier would be making earnings before interest and taxes in excess of £400m.

“And yet now they have just reported £170m,” he said. “It’s a classic death by a thousand cuts. The first priority is to stabilise the business”.

Few executives from that era remain at Premier Foods, now run by Mike Clarke, but those close to the deals at the time deny they were flawed.

Instead, they say, Premier Foods suffered from a confluence of external events unforeseen at the time the deals were hatched: input inflation, faltering consumer confidence, the end of ready money – in short, the end of favourable economic and debt cycles.

Premier Foods’ maiden set of results showed hubris. Robert Schofield, then chief executive and architect of the acquisition strategy, lauded “a year of unprecedented change for Premier”.

Hindsight shows that the seeds of its demise were already evident: warnings about “exceptional” cost inflation, implementation of a new bread strategy; and a revised set of banking covenants.

Trading profit in the bread business virtually halved on a pro-forma basis in the first year under Premier Foods’ ownership to £35m.

The shredding of profits has continued: last year, trading profit was one-tenth the pro-forma 2007 level at £3.4m and less than one-twentieth of the 2006 number.

For its part, Cable & Wireless failed even to realise synergies – it runs three networks separately – and paid too much for acquisitions.

The period after the dotcom bust led to John Pluthero, who joined in 2005 with the acquisition of telecoms group Energis, famously describing his new employer as an “underperforming business in a crappy industry”. Cable & Wireless paid £594m for Energis, and followed up with the £329m acquisition of Thus in 2008. Goodwill of £426m from these acquisitions was written down at the interim stage in November 2011.

The equity value of Cable & Wireless Worldwide had dropped to close to £525m before the takeover speculation of recent weeks. This is equivalent to the equity value of the company’s UK assets in 2005 ahead of the acquisitions of Energis and Thus, according to analysis by Espirito Santo.

“Despite all of the acquisitions, additional investment and restructuring, management created little incremental value for C&W Worldwide shareholders between 2006 and 2012,” says Nick Brown, analyst at Espirito.

A City fund manager says Cable & Wireless Group was the worst stock he ever bought. To him, the most irritating thing was management arrogance, typified by a bonus plan that rewarded Mr Pluthero with more than £10m.

Salvation may yet be around the corner, with Vodafone and Tata reportedly being willing to pay more than £1bn for what is a company still at the beginning of a turnround strategy.

For investors in Premier Foods, the lesson is more salutary: you can pay for your cake and have it all gobbled up too.

This article has been amended since original publication to reflect the fact that John Pluthero joined Cable & Wireless in 2005 after it bought Energis, the company he had been working for.

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