GEORGE ROSE, BAE’s finance director, is overshadowed by the two big personalities on the company’s board, chief executive Mike Turner and chairman Dick Olver. But he has pulled off a stroke that should earn him the thanks of shareholders and employees, and serve as a model for other companies. I am talking about BAE’s neat solution to its pension problems.
Like a lot of other British companies, BAE has in recent years woken up to the alarming scale of the deficit in its defined-benefit schemes — the occupational schemes that guarantee staff a certain level of benefits when they retire. In the company’s main scheme, the deficit was a cool £2.4 billion and rising.
Three years ago BAE and its staff agreed to stick a finger in the dyke by increasing contributions into the scheme from both sides. BAE would raise its payments from 12.5% to 18.5% of payroll, and staff from 4.5% to 9.3%. This was a start, but more was needed. In its results last week, Rose showed off the form the extra contributions would take.
First there will be £110m in cash. Then there will be £240m in property. The company is not saying exactly what assets will go in, although it won’t be any sensitive defence facilities, but rather office blocks in Edinburgh or spare land near motorway junctions that has development potential.
BAE has more than £1 billion of property on its balance sheet, and was already worried that the market was not ascribing much value to it when taking a view on its shares. Having examined a sale and leaseback, the directors decided that gifting it to the pension fund was much more tax advantageous — there is no stamp duty on gifts.
Next comes a letter of credit for £500m, which is in effect a guarantee to the pensions regulator that the extra contributions from both sides will eventually make good the rest of the deficit. And, finally, there are concessions from employees, with reduced early-retirement benefits, final salaries being averaged over an employee’s last three years with the company rather than the final year, and a system for trading off further benefits if people live longer than currently assumed.
All in all, it’s a pretty neat deal. It won’t work for all companies, but it will undoubtedly provide some ideas to the board of British Airways, currently struggling with an ever deepening pensions hole.
Brewer’s bait
SOME interesting chatter at Scottish & Newcastle, the £4.6 billion brewer that reported a strong set of results last week. Since Tony Froggatt was drafted in as chief executive nearly three years ago, he has put the house in order, making sense of the portfolio and bringing in outside marketing muscle to focus on the customer. It has been a quiet revolution and one that is starting to reward investors.
However, S&N’s big problem is still its high exposure to western markets, where beer drinking is in long-term decline. It may have a growing presence in Russia and is breaking into India, but the emerging-market exposure is eclipsed by France and Britain.
However, Froggatt and his team are to give a clear signal that they can still get growth out of mature markets through innovation and premium pricing. They are signing up to a new remuneration package that will reward improvements to the top line.
The incentive scheme is no longer based purely on achieving economic profit, which typically rewards cost cutting. Instead it will include an element of rewarding sales growth (net of duty). It is first being introduced at group level, but will soon be applied across all divisions.
You just have to look at the senior external appointments that Froggatt has made to know that he means to hit performance targets. They include Gary Guthrie, the former Kodak marketer who joined two years ago as group marketing director.
S&N may still be a bid target, but as the adjoining share-price chart shows, Froggatt is ensuring that any bidder will have to pay top dollar. The share price closed the week at 513p, just shy of a three-year high of 522p.
Trouble in the air
THE Civil Aviation Authority’s intervention in the BAA bid battle was hailed by some as the equivalent of a poison-pill defence for the operator of Heathrow, Gatwick and Stansted. I don’t think so. There was nothing in it that will have frightened Spain’s Ferrovial, the likely bidder.
Nor should there have been. For those familiar with the system of regulation that girds BAA, it was a simple restatement of some of the facts of life. The CAA will be keeping an eye on BAA’s owners — whoever they are — to make sure they ensure “cost-effective” financing of new investment. And both BAA’s regulators, the CAA and the Competition Commission, will also be watching that the owner does not infringe the public interest in their stewardship of such vital national assets.
If the CAA statement was a warning shot across Ferrovial’s bows, it was also one for BAA. If either party gets too aggressive in leveraging up the business — in Ferrovial’s case to justify a big bid price, in BAA’s the need to generate returns to shareholders to defend the attack — they should be prepared to pay the price.
It may, of course, turn out to be a hollow threat. The CAA is not expected to issue its next statement on BAA’s five-yearly price reviews until September, by which time the fate of the airports group will be known. There is, of course, the unquantifiable prospect of an emotional retaliation against a Spanish bid, although it is difficult to see politicians in Britain becoming as exercised as their American counterparts have become over the Dubai purchase of P&O.
Either way, it is likely to be a tough and expensive battle.
Just the job
HAS it not occurred to robbers that their time would be better spent swatting up on derivatives and other opaque financial instruments? There was much amazement last week at the £50m cash robbery, yet it came in the same week that Bob Diamond, the head of Barclays investment bank, was paid a £15m bonus and the entire Barclays bonus pool was well in excess of £50m.
Diamond and his boys don’t have to launder the cash or face years in a high-security jail. When the robbers are eventually caught, they will have plenty of time to regret. Those who have enjoyed this year’s City bonus boom won’t have any regrets at all.
Happy reading.
