Wednesday 1 August 2012
The Danger of Equity Ownership
Look at this breaking story around Mouchel today. Now like Connaught, Mouchel is one of these companies that built up in the booms years of high public spending, acquiring contracts to outsource various bits of local government services. In this case it was payroll services and highways maintenance.
Of course, because it was the boom years, the lending Banks - a roll call of all the main UK clearing banks of Barclays, Lloyds and RBS, thought it would be clever to leverage the business 5 times over with debt versus . And this is the ugly result today; equity shareholders to get 1p dividend and the banks to take 80% of the company with management 20%.
No as always in these cases the Bank's PR and the company PR is about 8,000 saved jobs and a continuing business. How management, which has turned a solid dividend paying 200p average shareprice business into this calamity should be awarded 20% of the newco is beyond me (they are all newish people no doubt, claiming clean hands as they do this deal to their benefit). If your a shareholder your really getting nothing - the last people to be paid after everyone else gets their cut. Shareholders are owners of businesses are they?
Mouchel even this year will manage £450 million in revenue and a small loss, probably under £10 million, even last year it managed an £11 million profit?
So why is this business failing at all then? In the main it is finance. £7 million in interest payments and £3.5 million for the costs of refinance for this year and there is your loss.
Also, of course the £100 million of debt lent to Mouchel was at a very low price, now the Banks want to up the interest rates to current market rates as there is notice of default and hey presto, the company can't cope with a potential doubling of finance costs.
So the banks take it over with £60 million of debt at the new rates (note I predict the cost of finance will be the same) - the whole shebang is not really about a company failing (Mouchel is in trouble and may lose 20% of its revenue plus in the recession, its not terminal though) - but about Banks wanting to target any business where they mis-priced their loans in the boom.
It's a story that should never have been written, the company should not have leveraged itself, the banks not been so keen to lend at crazy rates.
Mouchel is not the first and won't be the last company to have this exact tale told during the recession.