Activist’s presence alone will have impact
Nelson Peltz’s purchase of a 3 per cent stake in Cadbury Schweppes has almost certainly made a takeover less likely. But the sweet-toothed activist’s raid on the confectionery and beverage company has still opened Pandora’s chocolate box.
As JPMorgan pointed out on Monday, Cadbury’s shares, even before yesterday’s 10 per cent rise, were trading above the level at which leveraged buy-out artists would get a decent return on their investment. Judging from events at HJ Heinz over the past year, Cadbury is more likely to face a steady increase in pressure for a more aggressive strategy, coupled with an attempt by Mr Peltz to win seats on the board.
At the US foodmaker, the activist built a 5 per cent stake – enough to push the shares up 10 per cent without his having to move a muscle. Mr Peltz eventually proposed efficiency improvements, the sale of non-core businesses, increased marketing of the ketchup brand and more buy-backs to tone up the balance sheet, winning directorships for himself and an associate.
Cadbury looks a little different. Share price performance has been choppy over the past year, partly due to mishaps and mis-steps in the UK, but stronger over the period since Todd Stitzer’s appointment as chief executive in 2003 than Heinz was in the two years before Mr Peltz’s intervention. Some believe that splitting the global confectionery and the drinks business (part of which, Snapple, Mr Nelson knows well, as he sold it to Cadbury seven years ago) could realise hidden value. But again, it is difficult to see a break-up earning investors more than the current share price.
That leaves the boardroom. Getting an election organised would be easier under UK rules, provided Mr Peltz could rally another 7 per cent of shares for an extraordinary meeting. At Heinz, the shares have risen by a quarter since his appearance, governance has improved and strategy is tighter. Tempting. But Mr Peltz should be able to give Mr Stitzer a decent kick along the path to growth without shareholders having to elect him to the board.
Frank Bascombe, the realtor-narrator of Independence Day, Richard Ford’s Pulitzer Prize-winning novel, describes falling property values as “an odorless, colorless mist settling through the still air where all breathe it in”. Does the plight of New Century Financial, the US subprime lender on the verge of bankruptcy, suggest those noxious fumes are going to drift across the Atlantic to the UK?
In one respect, they are already here, imported by HSBC, which has warned it could take between two and three years to solve the problems caused by its own exposure to the US subprime market.
The message from UK banks about their home market is more reassuring. The loans are less risky, the ratio of the loan to the property’s value being rarely as high as in the US, where it often reaches 100 per cent; the subprime market is differently defined (it includes the more secure “near-prime” category); and, critically, British house prices are still rising, so householders stretched on other fronts can raise money against the value of their property.
Far from fleeing dodgy borrowers, many UK retail banks are still running towards them, as are investment banks, attracted by the opportunity to securitise such loans. Don’t fret too much, was the message from Lehman Brothers yesterday; it would take a combination of at least two out of three adverse factors – lower property price appreciation, more “flexible” loans and higher interest rates – to shake the UK asset-backed securities market.
Lehman still sounded cautious about credit quality over the coming year. And well it should. According to Robert Shiller, bearish US economist and author of Irrational Exuberance, these are precisely the circumstances in which loan officers, “calculating their own personal career advantage in bringing in more business today”, can fall prone to “over-speculation”. Circumstances may be different in the UK, but it would do no harm for British lenders and investors to inhale a small draft of the miasma of fear hanging over the US.
Festival of conflicts
Did Alliance Unichem and Boots ever really merge, or were the companies and their advisers just slammed together under a new logo? The bid for Alliance Boots seems to provoke such questions daily.
Merrill Lynch has now stepped down as broker to the target to work for Stefano Pessina, whose relationship with the US bank dated back to before the Boots deal. OK, so Mr Pessina asked the Alliance Boots’ board’s permission and Merrill only switched sides when it was granted. But it will be another nail in the coffin of City broking if from now on corporate clients have to ask banks to state in advance which of the company, its directors and its major shareholders they will select as their client, when push comes to shove.
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