AS A multitude of investment bankers milled incongruously among the dahlias
and dramatic water features of this year’s Chelsea Flower Show, there was
one topic of conversation that cropped up with the frequency of daisies. The
future of Cazenove was occasioning almost as much interest as, a year
previously, the shareholder rebellion at GlaxoSmithKline’s annual meeting
that afternoon had done.
The chaps at Cazenove are well practised in extracting the best price for
their clients when selling their stock. The flurry of stories suggesting
that investment banks were falling over each other in their rush to acquire
the broker looked to some to be a fine example of the technique. Such was
the excitement generated by the reports that the firm was forced into making
a statement, confirming that it was indeed considering a number of
approaches.
Not that it wanted to do so, it said. Given a choice, it would prefer to be
pursuing its own plans for a flotation, but there are now outside
shareholders whose interests have to be taken into consideration. Given that
the firm admits that there are no formal discussions taking place, it is
interesting that it felt obliged to make a public statement. Could it be
simply because those discussions, even the informal ones, have stopped that
Caz decided a little gentle pressure might be appropriate to encourage a
resumption?
Lehman Brothers certainly has expressed its interest in buying the firm.
Deutsche Bank has also almost certainly had the odd conversation. But
perhaps the price that Cazenove is said to have in mind was a little on the
high side to encourage them to progress the discussions further.
Cazenove has a superb franchise, acting as broker to about half the companies
in the FTSE 100. Its reputation as a house that holds huge sway with
institutional investors is unrivalled. Yet its attraction to a purchaser
does have limits. Some of the client companies would almost certainly decide
to defect, should Caz become part of a larger bank.
And then there is the question mark over the man who is synonymous with Caz,
David Mayhew. His personal relationships with many clients go back several
decades. At some stage, and perhaps fairly soon, he will do what he has
threatened he wants to do for some time, and retire.
The issue of Mayhew’s continuing role would hover over a flotation as much as
it would a sale. Yet Caz insists that it is now resurrecting the plans for
an IPO that were shelved at the beginning of last year because of the
inhospitable market conditions. There is pressure within the firm for
something to happen. Some members are believed to have borrowed heavily in
order to fund share purchases in advance of that planned float. Now they
would like an opportunity to recoup something on their investment.
The firm, which started in the 1820s, has already moved into a new era,
leaving the olde worlde Tokenhouse Yard premises that had been home for 66
years and moving to modern offices in Moorgate. But its heritage is
important and the Cazenove name would have to be preserved if any buyer were
to get anything like full value from its purchase. As a brand for an
investment manager, as well as a corporate financier, it should carry
enormous clout.
Yet investment management has not been the engine that might have been
expected: funds under management fell from £9 billion to £6.4 billion in the
year to April 2003. But the losses were of institutional clients. Private
clients are still drawn to the firm known as the Queen’s broker. If Caz
loses its independence would it lose its most famous client?
Shell shock will be hard to dispel
SIR PHILIP WATTS may be expecting that his lawyers can prise a farewell of £1
million or more out of Shell but the company should refuse to hand it over
until he hands back the missing oil.
Two restatements of reserves might be embarrassing but four just makes an
organisation look inept. Yesterday’s latest revision from the company
admitted that a staggering 4.47 billion barrels have vanished. Even a Saudi
sheikh would notice if that much oil went missing. For Shell, whose accounts
will now show proven reserves of only 14.35 billion barrels, a loss on this
scale is, as the accountants would put it, significant.
Yesterday’s latest change was not: after all, 120 million barrels are easily
mislaid. Changes in accounting policy, the result of discussions with the US
Securities and Exchange Commission, lay behind the latest revisions.
However, when the new head of Shell’s exploration and production division says
that there are no plans for further revisions of the figures, investors have
little reason to be sanguine. The revelations that have poured out of Shell
have left the City deeply shocked at the scale of the cover-up that had been
conducted. Although the chairman who had been instrumental in it, Sir
Philip, has now departed, along with the former head of exploration, there
is still deep disquiet about the company. If the culture could have enabled
such a state of affairs to persist, then merely changing a couple of faces
is not going to be enough to safeguard investors’ interests.
Until there has been a drastic restructuring of Shell, there will be deep
suspicions that the culture that allowed Sir Philip to dictate what happened
will persist. The fact that the company has said it has no plans to change
the auditors who signed off the accounts which, it now transpires, were so
misleading, is also likely to cause concern. Valuing oil reserves is not a
task easily undertaken by a City accountant but the scale of the
discrepancies that have emerged does raise the issue of whether the auditors
were rigorous enough in their questioning of those responsible for Shell’s
imaginative valuations.
In the longer term, it may transpire that the writedowns now being made are
erring on the conservative side and, actually, Shell is rather better
reserved than it now looks. And since the company only replaced 63 per cent
of its reserves in 2003, the seepage is set to continue, whatever the next
valuations say.
Interest may face more than tweaks
THE Bank of England Monetary Policy Committee is unlikely to emerge from its
next meeting and declare that base rates are suddenly to shoot up to 8.5 per
cent. Yet the weekend headlines will certainly have caused a degree of panic
in some households.
The MPC, with its softly, softly approach to interest rates, has conspicuously
failed to dampen the public’s appetite for debt and lenders have been more
than happy to feed it. The MPC, as was clear from the minutes of its last
meeting, is beginning to feel understandably frustrated by the
imperviousness of borrowers to a succession of quarter-point increases in
the base rate. But it is not about to double the interest rate. Although
such a move would undoubtedly cool the housing market to below freezing
point, it would also precipitate repossessions on an unprecedented scale and
wreck businesses.
The Council of Mortgage Lenders was not advocating such a drastic move, but
merely explaining its calculation of what would be required to take the heat
out of the housing market. Naturally, the lenders that it represents do not
assume any responsibility for the situation, despite the fact that it is
their lending policies that are stoking the fire.
They continue to argue that, because interest rates remain relatively low, the
loans that they are making are at sensible levels of affordability, even if
the multiples to earnings are rising. But, as interest rates rise,
increasing numbers of borrowers will be finding themselves in the danger
zone, almost without noticing it happen.
The CML, by providing the material that produced the shocking headlines, may
have awoken some borrowers to the risks that they are taking. Its prediction
that base rates will hit 5.25 per cent by the end of this year, although not
quite so blood-curdling, does promise a hefty proportional increase in costs
for borrowers. If it is to be fulfilled, the MPC will have to move rather
faster than it has done so far. And it may be persuaded that “tweaking”
rates gently is not enough.
WHEN French investors mounted their coup at Eurotunnel in April, their
leaders said the company should get tough with its banks. Picking a quarrel
with lenders that have also lost money is not smart if you need to borrow
more from them. In February the old Eurotunnel board won a rare licence to
compete on rail freight in France, as a key to getting more traffic to cross
the Channel. Creditor banks have now had their own back, refusing to lend it
any money to finance operations. Moral: if you are starving, don’t bite the
hand that feeds you.
