First Group plans derailed by shareholder activists

May 25, 2013

First GroupThe First Group transport company has run into difficulties compounded by the loss of a Government contract after a battle with Richard Branson, and board room resignations influenced by shareholder activists

LWD subscribers were alerted to a leadership story at First Group the bus and rail transport outfit last year [Oct 2012] . The post noted that

Richard Branson called foul when his company Virgin Trains lost the franchise recently for the West Coast Main Line services from Scotland to London. His reaction was justified when the Department of Transport was forced to admit there had been flaws in the bidding process.

Virgin Trains has run the West Coast Main Line since 1997. When it recently lost its bid to renew the contract to rival operator FirstGroup, it claimed the evaluation was flawed, called for a review, and started court proceedings over the government’s decision.

On 3rd October 2012, Government ministers announced that there were “significant technical flaws” in the way the risks for each bid were calculated, justified the legal case that Branson had brought against the decision.

The fun fighter

Richard Branson, for all his business is fun image is not a stranger to fighting his case through the courts. His success contributed to problems building up for First Group.

Difficulties pile up for First Group

This week [May 2013] First Group is shown to have encountered further difficulties after the hole in its financial plans resulting from the loss of the contract. The Guardian reports

FirstGroup, the train and bus operator, has turned to shareholders for £615m, scrapped a final dividend and parted company with its chairman in an effort to reduce its debts and avoid a credit rating downgrade.

The shares fell 30% after the cash call was announced alongside a sharp fall in full-year profits at the company which employs 120,000 people. It is struggling with almost £2bn of debt largely as a result of its acquisition of the US bus company Laidlaw in 2007. The company came under further pressure last year when the government announced in August that it had won a lucrative contract to run the west coast main line rail franchise between London and Scotland, only to scrap the decision in October citing flaws in the bidding process.

Shareholder activists

Other reports suggest that shareholders have played an important part in “encouraging ” the company to take major actions to deal with its problems.

FirstGroup’s problems finally caught up with it [on Monday 13th May 2013] . Its CEO, Tim O’Toole, had repeatedly denied that FirstGroup needed to raise capital. But, with the credit rating agencies threatening to downgrade the company’s debt to junk, it launched a humiliating three-for-two rights issue to raise £615m. It was priced at a 62 per cent discount to the prevailing share price. Shareholders were also introduced to a “new progressive dividend policy”, otherwise known as no final dividend this year and a slashed pay out from next. The shares fell 68.2 to 155.6p.
For this, someone had to pay the price. And, after 27 years at the wheel, it was Chairman Martin Gilbert, ushered off the clattering train by shareholders keen to make a clean break with the past. It was either him or O’Toole – and at least the American-born former London Underground boss had the excuse of only having been at the controls since April 2011.

A similar shareholder spring-cleaning is underway at J P Morgan.


J P Morgan is always willing to help

March 17, 2008

zinn-and-his-peoples-history.jpg

During the American civil war, John Pierpont Morgan helpfully arranged a deal to buy U.S. rifles and sell them back to the federal government at a whacking personal profit. One hundred and fifty years later the firm founded by J P Morgan has arranged a monster deal acquiring Bear Stearns, aided by Federal money

Several weeks on, J.P. Morgan increases its initial offering for troubled Bear Stearns by 500% to 10$ a share.

I make no claims to being an expert in high finance (or even low finance). I rely on excellent sources of information and insight, but from time to time I find myself out there more as an outsider looking for unexpected parallels between contemporary business life and historical accounts.

It is in such a spirit that I offer an observation on this week’s monumental financial news. The historical aspect as told by Zinn [and summarised in wikipedia] in his quietly revolutionary account is that during the Civil war Morgan

was approached to finance the purchase of antiquated rifles being sold by the army for $3.50 each. Morgan’s partner re-machined them and sold the rifles back to the army for $22 each. The military knew it was buying back its own guns, so the so-called ‘scandal’ turned out to be more about government inefficiency than any chicanery by Morgan (who never even saw the guns and acted only as a lender). Morgan himself, like many wealthy persons, including future Democratic president Grover Cleveland, avoided military service by paying $300 for a substitute.

Back to the present day deal

If B-S had flopped, the entire banking system would have gone into meltdown. B-S credit assets had increasingly been seen as less credible and thus less credit-worthy.
Hence the fire-sale.

Rather than have them declare bankruptcy, the Fed engineered a plan to have JP Morgan “buy” Bear Stearns for $2 per share. A price of $2 per share means the market was too optimistic in the last 14 months when Bear’s stock fell from $169.33 in January 2007 to $30 per share as of Friday’s [March 14th 2008] close.

The Fed smoothed the way for the take-over by cutting its interest rates, and offering other guarantees for inter-bank lending. This is believed to be calming the process of what is becoming known as deleveraging in the globalised financial services industry.

I am reminded of the arms-length fashion in which European governments involve in institutions in the national interest. Specifically, the role of the German Federal States in the matter of Volkswagen effectively protects the company from foreign (i.e. non-German) take-over. EADS is not a state-owned institution, but is thoroughly dependent on wishes of the French and German governments. So much so that it affects the increasingly difficult working relationship between Sarcozy and Merkel.

The bigger picture: Canute reversed?

One financial commentator quoted in the Wall Street Journal suggested we are seeing a case of Canute in reverse. The Fed appears to be acting not by erecting flood defences against an advancing tide, but trying to put up barricades against a retreating one.

In a bear market, as asset prices fall, leverage is reduced. This causes lenders to ask for more collateral on existing loans, and borrowers to sell assets so as to reduce the need for such loans, and for additional collateral … The credit crisis is unfolding as we expected, but more slowly than anticipated, because of the actions taken by central banks (mainly the Fed) and the U.S. government to allay its effects. The wholesale socialization of credit has meant that government and central bank measures account for 70% of new credit since last summer…total credit losses of $1.4 trillion will cause a contraction in world GDP of 2.5 percentage points, or half the current rate of global growth. So the global economy will become a gray, dull world of semi-recession and sticky inflation that will last a long time. Without major policy blunders, however, it won’t be a 1930s-style depression.

Leadership Lessons for the Quick-sands

It is probably of minor significance that Bear Stearns has not shown signs of effective leadership of late. The departure of James Cayne had been seen as finding a scapegoat rather than solving a problem:

Cayne has been pilloried since in news reports as a chief executive more interested in golf outings and bridge tournaments than one working diligently to get his firm out of its problems.

tTaking the wider financial picture, the Canute image may be a suitable and chastening one for those crying for stronger leadership. By someone. By anyone.

Come on Hillary, Barack, John, what might you do differently?

An honest answer might be. ‘A bit here and there.’ Avoid foolish claims of a New Deal or any other relatively quick fix to rescue the world from the global financial quick-sands.

There is a case for transformational change efforts financially and politically. But when in a hole, the sensible course of action is stop digging. In quick-sands, wrongly applied energy just makes things worse.