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The sale of Smiths Group’s aerospace division to General Electric was a get-out-of-jail card for Keith Butler-Wheelhouse, the company’s chief executive, and for its shareholders. The business was sold for a higher-than-expected price and £2.1bn was returned to investors. The announcement of the sale in January and the simultaneous heralding of a Smiths-GE joint venture in detection and security helped push the company’s shares up 11 per cent on the day.
But since the beginning of last month, the stock price has slipped about 15 per cent, closing on Wednesday, after a disappointing trading statement, only a few pence above the level it reached on the eve of the GE deal. The return of capital and, more significantly, the weakness of the dollar have taken their toll. For the year ending July 31, Smiths expects the headline operating profit for the continuing business to be roughly the same as the preceding 12 months, after exchange rates have knocked 6 per cent off reported sales and profits.
But that is not all. The disposal of aerospace, a division that commanded a disproportionate amount of analysts’ attention, has encouraged a focus on the rest of the company. Sluggish resolution of operational and capacity problems in the medical devices division is one worry.
Some in the City also fret about the delay in the formation of the detection joint venture. A shareholder vote has now been pushed off from the third to the fourth quarter. This should not be a cause for concern, although the precise detail will still require scrutiny to ensure the venture is correctly balanced, but it might hold back further restructuring.
Some more aggressive investors believe disposal of the medical operation would pep up the multiple of the rest of the group, by focusing it on the higher-growth, higher-tech areas of detection and speciality engineering. But whether Smiths becomes a double-barrelled company may depend on its double-barrelled chief executive. Mr Butler-Wheelhouse’s tenure at Smiths is as enduring as his tan: he was meant to retire in 2006, but was given a further two years, until March 2008. That was further extended to July next year to allow the new joint venture to bed down. Break-up artistes would like to see him go sooner. There was no suggestion on Wednesday that the delay in sealing the detection deal would prolong the chief executive’s time at the top – but it is hardly likely to accelerate his departure.
Car insurance policyholders don’t like the feeling that they are subsidising the fender-benders and write-offs of careless drivers. Pity the Pension Protection Fund, then, which collects a premium annually from pension schemes, most of which probably feel they will never use the fund and that their contribution is helping to bail out scheme sponsors that should have handled their affairs better.
The risk-based nature of the pension protection levy helps reduce employers’ feeling that the well-behaved may be subsidising the miscreants. The PPF is now, sensibly, proposing to soften the impact of its annual bill by making it more predictable, and tailoring it better to individual schemes.
The proposal to set the 2008-11 levy for three years is a good one. Greater volatility in the levy was inevitable as the system was put in place, but now the PPF has access to more of its own data on risk, it should be able to make a more accurate judgment of what companies should pay and stick to it more closely over a longer period.
Similarly, a better-calibrated credit-scoring system should improve the accuracy of the PPF’s risk assessment. In particular, the PPF reckons the current system may be looking too much at short-term risks and not enough at the long-term possibility that a big scheme may at some point go under.
There is a danger that in trying to measure risk more accurately, the PPF will lean too far towards scheme sponsors’ interests in reducing their own levy. But the fact that the fund’s consultation extends to academia and the insurance industry (including the new breed of pensions insurers) will help reduce that threat. And if a revised system ensures that the UK pensions industry’s safe drivers don’t pay the price for boy-racers’ recklessness, so much the better.
Vodafone is still engaged
Another bout of speculation about the future of Vodafone’s 45 per cent stake in Verizon Wireless is out of the way. No spin-off – dissident investors’ proposals were crushed at last month’s Vodafone annual meeting. No eye-popping takeover of Verizon itself – a scenario considered but rejected by the UK company. No sale of part of the 45 per cent holding to the Americans. Wednesday’s non-exercise of Vodafone’s put option allows long-term investors, speculators, rebels and executives to holiday in peace. For now.
Verizon says it will “focus on continuing to manage and grow” Verizon Wireless. Vodafone says it is “a market-leading business with strong growth prospects”. So much for the professions of mutual respect and fellow feeling. In fact, nothing has changed. The partners’ views of what should be done with the minority stake remain at odds. This isn’t over.
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