Pension and liabilities have been dirty words in the world of mergers and acquisitions for years. They have scuppered several deals, including the tilt at J Sainsbury by CVC, the private equity group, and Permira’s approach for WH Smith.
But things are changing and corporate financiers are starting to look at pension funds in a different light. The reason is an innovative deal, announced this week, in which Pension Corporation launched a £400m bid for Telent, the telecoms equipment maker and rump of the former GEC conglomerate that became Marconi.
Telent’s main attraction – in fact its main asset – is one of the UK’s largest pension schemes, with £2.5bn in liabilities.
PC is the brainchild of Edmund Truell, founder of the private equity group Duke Street Capital. Its business model is simple: to gain control of corporate pension funds and make money by running them more efficiently.
Mr Truell is not the only person active in the field of pension buy-outs. Several companies have sprung up in recent years including Paternoster, set up by Mark Wood, former head of Prudential’s UK life assurance business. Most have focused on pensions insurance, transferring the risk associated with a defined benefit pension scheme to an insurance company regulated by the Financial Services Authority.
But there have been few deals, mainly because the sponsoring companies and pension insurers have failed to agree on price.
Mr Truell has got round this problem by acquiring entire companies just to get at the pension fund. He has done this with two companies already: Threshers and the old Thorn television rental group. He stripped out the pension funds and sold the underlying business to a private equity buyer.
This model made previously unimaginable takeover bids possible. And, unsurprisingly, City traders and analysts have been trying to identify which companies could be vulnerable.
Mr Truell’s next targets are easy to identify: Aga Foodservice, the oven and fridge manufacturer; and convenience food group Uniq. On Friday, he declared a raised holding of 16 per cent in Aga, and he owns 9.6 per cent of Uniq.
Citigroup this week urged its clients to buy Aga shares, citing a possible bid from PC.
“Aga is a prime candidate, with the third largest ratio of pension obligations to market value in the FTSE 350 but with a fund surplus equivalent to 15 per cent of its market value,” analyst Mark Fielding says. The most likely scenario, he adds, is for PC to launch a bid once Aga has completed the disposal of its industrial Foodservice business, put up for sale this year.
Other companies with large pension obligations and a fund that is in or close to surplus are Northern Foods, Royal & Sun Alliance, Babcock International, Dairy Crest, First Group and Rank. They could all be vulnerable to bids, traders say.
Rank, at least, appears to have recognised the danger. The
casino and bingo hall operator recently appointed Mercer to examine options for its £700m pension scheme.
Of course, there are weaknesses in Mr Truell’s approach. He needs to find buyers for the operating businesses of the companies he acquires. With debt markets still recovering from August’s turmoil, approaching private equity buyers, as he did with Threshers and Thorn, might prove more difficult.
That should not matter with Telent. There are several potential trade buyers for its telecoms business, including BT, Alcatel and Dimension Data. But for other companies it could be a problem.
Mr Truell also needs the backing of pension fund trustees, who actually run the schemes, and the approval of the pensions regulator.
But there seems little doubt that if his move on Telent is successful, plenty of other financiers will be only too keen to emulate the Truell idea.