A sensible review, but not a bid defence
UK companies are feeling the heat from private equity like never before. Now National Grid appears to be mounting a defence against a private equity bid even before an offer has emerged.
The power utility on Thursday unveiled a strategic review comprising the demerger of its mobile masts business – news of which pushed the shares up 7 per cent – and the sale of a non-core Australian business. For good measure, it pledged to return $1.9bn (£1bn) to shareholders over the next five years.
For the record, National Grid said the moves had nothing to do with shoring up defences ahead of any bid. And these are indeed sensible measures in their own right. The businesses to be jettisoned are almost certainly worth more to someone else.
All the same, the review comes amid speculation that National Grid is a prime target for a break-up or private equity approach.
If this really is a defensive move, it probably does not go far enough. Steve Holliday, chief executive designate, could have put more of its assets on the block to sharpen National Grid’s focus on the UK and US power transmission markets. The capital return is also modest. A securitisation of the cash flows that will fund it could have instead generated a big lump sum.
Meanwhile, some analysts say National Grid could gear up more than is currently envisaged.
The irony is that this slightly slimmer National Grid could now be a more attractive target for private equity or foreign bidders, assuming UK regulators would clear such a sensitive deal.
This would be a huge buy-out, but size is no obstacle to private equity now that firms hunt in packs. And management’s choice of a share buy-back as the method to return cash has only underscored its confidence in the attractive valuation of the shares.
So two cheers to National Grid for taking some initiative. Conservatively- managed UK companies should follow its lead. But if Mr Holliday finds himself on the receiving end of the long-mooted bid, he will need a stronger defence than this.
The Reit idea
Slough Estates is among the few traditional UK property companies to have overseas assets, which presents it with a dilemma as it prepares to become a real estate investment trust (Reit) in January.
UK Reits escape corporation tax on domestic rental income but not on overseas income. It is tempting to link this to the company’s decision yesterday to put its glamorous US business up for sale. The unit, with assets in San Diego and San Francisco, could fetch up to £1bn.
Slough could have put the assets into a Reit – but only by going through the rigmarole of an initial public offering in the US.
The withdrawal from the US has been on the cards for some time, says Slough. Nevertheless the move underscores the challenge facing chief executive Ian Coull. Should he focus on Slough’s domestic market, with its associated tax breaks but where asset prices look inflated, or should he continue expanding overseas where yields are high but tax can be a drag?
Some overseas markets offer both decent yields and tax advantages. Slough’s French assets, for example, will be shielded in a French Siic, the equivalent of a Reit. But the other 60 per cent of its mainland European properties do not immediately enjoy similar benefits.
The withdrawal from the US might have investors thinking Slough is planning to retreat to its home turf, depriving the UK property sector of one of its international standard bearers. But Reits or no Reits, there are still decent returns to be found overseas, not least given that interest remains tax deductible.
So there is no reason why the great name of Slough will not command respect in the European property industry for some time to come.
Shareholder activism at underperforming companies is to be encouraged, but not if investors’ demands are plain silly.
Sherborne Investors is demanding four board seats at Spirent, the telecommunications equipment maker – including company chairman and the chairs of the audit and remuneration committees. A shareholder with 15 per cent clearly deserves to have its views heard – Spirent is offering two board seats – but to meet these demands would be to cede effective control of the company to one shareholder without securing a premium for the others.
Meanwhile, Sherborne is generously proposing that fellow shareholder Lexa, with 14 per cent, retains its one existing seat.
Spirent certainly needs to buck up its performance, responsibility for which lies with the board. But Sherborne might have more success in shaking things up if its proposals showed more respect to its fellow suffering shareholders.