Nov 29, 2008

Business - Black Monday to Black Friday;Tale of Two Flops

Andrew Hill

Royal Bank of Scotland’s share issue has to go down as the biggest flop in the history of modern British equity capital raising, as measured by investor take-up. That investors subscribed for as much as 0.24 per cent of the offer is a miracle, given the stock was trading below the issue price. It makes the 8.29 per cent take-up of HBOS’s catastrophically over-extended rights issue during the summer look a triumph. Even the October 1987 BP share issue, which straddled Black Monday, did better.

Whatever the government hoped, the RBS issue always looked destined to end in taxpayers’ hands. The unpopularity of this summer’s capital raising by the banks set the tone. After RBS attracted 95 per cent subscription to its £12.2bn rights issue, launched in April, the much smaller Cattles was the only financial company to achieve more than a 30 per cent take-up of new shares from its investors.

The latest RBS offer was so unorthodox that it doesn’t bear comparison. But the BP parallel is interesting. In 1987, the Bank of England stepped in overnight to set a floor for the partly-paid shares in BP. If markets had continued to buckle after Black Monday and confidence had disintegrated, the Bank could have ended up holding stock in the oil company. The plan was based in large part on the Bank’s ability to restore confidence. It worked – only a tiny sliver of BP ended in the Bank’s hands – but only just, and partly because the Kuwait Investment Office accumulated a large stake in the oil company, to the embarrassment of the government of the day.

BP was already on a steady course out of public ownership. Black Monday was a sudden shock, which interrupted an aggressive promotion of BP shares to institutions and the public. Once the Bank offered to be the buyer of last resort, the KIO and the pent-up demand created before the slide in world markets helped sustain the price. The RBS offer, on the other hand, came at the end of wearying months of bad news, with investors already exhausted by cash calls from RBS itself and competitors.

While the immediate outcome of the BP debacle was messy, it looks in retrospect like a milestone in the creation of a genuine private-sector champion. With some urging the government to “nationalise” RBS fully, few would bet on such a positive outcome from this Black Friday.

Shortcut to Tate modern

In these straitened times, a man with a reputation for recommending government cost-cuts must be in demand, so Sir Peter Gershon’s appointment as chairman-elect of Tate & Lyle is the icing on the sugar and sweetener group’s cake.

Tate has made big strides to reshape itself recently. Last month, the group signalled it would now focus on raising its return on assets following a long and expensive programme of capital investment. A few tips from Sir Peter about how to achieve those higher returns can’t go amiss, but the hard work is done.

The prospect of a change of chairman is bound to raise questions, though, about whether Iain Ferguson, chief executive, will then come under pressure to step down. That debate looks out of date. The threat to Mr Ferguson was at its highest in autumn last year, after a string of profit warnings. But while the finance director left, Mr Ferguson weathered the crisis. Credit must also go to Sir David Lees, the group’s veteran chairman, who helped keep shareholders sweet.

Sir Peter’s record as chairman at Premier Farnell shows he does not hang around if he believes the wrong person is in the executive suite. He joined the board there in June 2004, took over as chairman in March of the following year and within three months the chief executive had gone. But the electrical components company’s share price had plummeted in the year leading up to that rupture. Tate, by contrast, has again started to outperform the market, helped by its commitment to rising dividends at a time when many are freezing or cutting their pay-outs.

Mr Ferguson’s tenure will not be eternal. Having modernised Tate’s strategy, he will probably be the first to suggest an orderly transition once the new chairman has settled in. But, assuming he can hold Tate steady through the downturn, he should be able to set his own timetable.

Suitably generous

So much for speculation about Sir Philip Green’s plans for Moss Bros. After barely a fortnight, he has flipped his stake in the men’s wear chain to Simon Berwin. For a £1.05m profit, negligible by Sir Philip’s standards, the entrepreneur seems to have done a good deed to Mr Berwin and, potentially, to Moss Bros itself. With discount wars ravaging the high street and vultures squabbling over the carcases of Woolworths and MFI, such an outbreak of seasonal goodwill looks rather touching.