Natural gas and the energy transition

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The latest Gas Mark Report from the International Energy Agency (IEA) is another reminder of natural gas’s place at the centre of the energy transition to Net Zero.

The challenge is to ensure decision-makers and civil society see it has such. This is an opportunity for responsible energy firms, investing in the transition and natural gas, to communicate the economic, social value and environmental value they create.

Natural gas has lower emissions than coal and oil, so as we de-carbonise the energy mix, it makes sense to reduce output from coal first, and switch to natural gas as renewables come on stream. Unfortunately, there has been insufficient investment in natural gas production, with the consequence that the use of coal in power generation is rising, not falling. This is because it is by far the cheapest energy source and in times of shortage it comes online first.

The IEA says that natural gas consumption recovered by 4.6% in 2021, more than twice the pace at which it declined the previous year. Its forecast is that natural gas consumption is set to grow further to a record 4,148 bcm by volume in 2022. Prices in Europe and Asia hit a record high at the end of 2021.

Pipeline deliveries from Russia into Europe declined during 2021, but overall global trade in natural gas, pipeline and LNG, grew at a record 9% as high prices encouraged flows into Asia and Europe.

The IEA believes high prices and volatility will continue to be an issue during 2022. It said: “Gas supply adequacy could emerge as a concern for the medium term on a combination of recent LNG project delays, the relatively small number of new LNG final investment decisions (FIDs) in 2020-2021 and a structural decline in upstream spending since the early 2010s.”

There are signs that the policy environment for investment may be loosening. The EU has recently indicated that it will include natural as a sustainable fuel in its taxonomy of environmentally sustainable economic activities and Sen. John Kerry, the US Climate Envoy, has said that natural gas allied with carbon capture and storage should be seen as a “bridge fuel.”

In the UK, the Prime Minister and the chancellor recently endorsed “the continuing transitional need for gas”. Soon the consultation of Climate Compatibility Certificates for new North Sea Projects will be concluded by regulators and this too might increase investment. Policy makers have to weigh energy poverty and energy security in the balance alongside Net Zero.

Putting retail investors’ confidence to good use

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Retail investors are much in focus and Boscobel collaborated with the pollsters, FindOutNow, to understand in detail who they are and what they want.

We uncovered quite a few myths and truths, relevant to policy makers, the investment industry and corporates raising capital or engaging with investors. You can find a link to the full report HERE.

Our estimate is that some 400,000 new investment accounts, bringing £20 billion of new inflows, have been opened in the UK during the pandemic. But this is an acceleration of a trend. According to the Office for National Statistics, the proportion of shares owned by individuals rose to 13.5% in 2018, up from a low of 10.2% in 2008.

The new generation of investors is younger (average age 37 compared to 48 for established investors); more likely to be female (41% compared to 30% of established investors) and more likely to live in a home with a mortgage or in rented accommodation. They are also more likely to have been furloughed.

While it is true they have a higher risk appetite than established investors, they have not been sucked into highly speculative investments to the same extent as their US peers. They are more likely to buy single stocks (35% compared to 28% for established investors), including Tesla and Amazon. But when asked a free text question about their investments, premium bonds are the favourite by a substantial margin.

We asked where they get their investment ideas and new investors are more likely to use social media (9% compared to 4% for established investors) and more likely to listen to friends and family (15% compared to 10% for established investors). However, both categories do follow the ideas of investment platforms and brokers plus specialist financial media.

The big lesson for corporates is that retail investors’ higher risk appetite is an important source of growth capital. According to Primary Bid, retail investors participated in 57 capital raises last year. In her column in the Financial Times, Merryn Somerset-Webb cited the research and made the very good point that retail investors have discovered that they, “have power and can use it to make companies behave as they want them to,” in relation to governance, environmental standards and boardroom pay, as well as business performance.

Interventions by central banks and Governments have helped drive global stocks to record highs, though the FTSE remains a laggard after several years of political uncertainty.

The challenge for the investment industry and for policy makers is to ensure that new investors channel their enthusiasm into sustainable long-term portfolios of diversified holdings, as opposed to gambling on fashionable but risky ideas.

 

 

A stunning diplomatic achievement

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The EU and UK agreement could ignite a dramatic economic recovery, as long as we rediscover timeless and useful principles

As somebody who always refused to accept the false “No Deal v 2nd Referendum” narrative which somehow took hold in the last four years, I am personally delighted by the new Trade and Co-Operation Agreement between Britain and the European Union.

It is a stunning diplomatic achievement and of great credit to the negotiators on both sides. This is especially so when you consider their difficult remit, the complexity of the issues and the dispiriting backdrop of the last few years. Boris Johnson and Lord Frost, Britain’s chief negotiator, are right when they say, “it should be a moment for national renewal.”

That said, whether it is or not depends on how things work and evolve in practice – the agreement is governed by some 19 committees – and what we as a country choose to do with our new found, sovereign freedom. I have to confess to being more ambivalent about that point and I am not alone. A recent poll by IPSOS Mori found that only 11% of Brits think the economy will have recovered next year, the lowest of any OECD economy. Thank goodness that we have such a productive and innovative private sector, capable of getting things moving.

In structure, ETCA loosely emulates the Norwegian pillar of the European Economic Agreement: collaborative access to the single market on a zero quota, zero tariff basis as long as we go along, broadly, with the rules, including in relation to the environment, labour relations and state aid. If we don’t and there is a disagreement, there will be an arbitration procedure which may culminate in that area of the agreement being “rebalanced” and tariffs imposed.

The situation is vaguer for financial services. By March 2021, the two sides intend to negotiate a memorandum of understanding for regulatory co-operation in financial services to be accompanied by, “equivalence decisions” with the EU. In the meantime, most City firms have set up branches or subsidiaries in the EU to enable business to flow.

In return for these looser arrangements, including an end to freedom of movement, we have given up certain things. The first is to participate in EU rule-making and the second, the superior protection of the Court of the European Free Trade Association, where judges are nominated exclusively by the EFTA members like Norway and Iceland. The EU-UK tribunal is more ad-hoc, as in a traditional international agreement. The tribunal’s members will be split into three with a third comprising  EU judges or equivalent, some of whom will no doubt be connected to the European Court of Justice; the second third will be from the UK and the final third will be independent.

However, these and other flaws, such as the uncertainty about Gibraltar’s status, are mere details compared to the really big point: we have a comprehensive agreement with the EU which should give us amicable access to each other’s markets and engender a spirit of co-operation and mutuality, while also disembarking us from the runaway train of “ever closer Union” enshrined in the Treaty of Rome. Businesses and individuals are inventive and adaptable. Goodwill, workarounds, technology and good custom and practice should help mitigate or overcome any shortcomings.

The UK Parliament will ratify the deal in the next few days. The EU process will take until mid-February. That might prove to be more difficult as the explicit purpose of the European Parliament is to replace a “Europe of nations” with something new. It is a draft treaty and MEPs and EU member states might demand additional clauses, perhaps in relation to governance, to be re-presented to the British.

Assuming that the ratification process goes according to plan, the resulting certainty over the biggest legal and commercial issue facing the British economy for several decades, should finally enable investors and businesses to put substantial amounts of money to work here. For nearly five years, business investment has been flatlining, even retail investors (many of whom presumably voted for Brexit) have been withdrawing money and investing in global opportunities. The FTSE 100 has been the worst performing global stock index.

The amount of money that may potentially be deployed into the UK is truly gargantuan. According to Bank of America, global fund managers are a record “underweight” of the UK in their portfolios. Vast sums of money have been printed and borrowed by Central Banks and Governments, including by our own. Much of it is sitting in bank accounts, earning pitiful interest or held in cash or near cash of one kind or another by both businesses and households in the UK and elsewhere.

Before we get too carried away, what are the risks to this rosy scenario? Leaving aside the ongoing virus (where we must hope the vaccines work their magic), there are two.

The first is our old friend inflation, dormant since the 1980s. It stands to reason that when large parts of the economy are subject to legal restrictions and are idled, turning on the money geyser will cause a surge in prices. Unless the Government can move fast to get Covid under control, to open up the economy and also to create the appropriate structures for money to be invested by the private sector into new assets and opportunities (such as infrastructure and flotations of companies on the London Stock Exchange) the great flood of money will be wasted in pointless speculation in, say, house prices and consumption.

The consequent inflation could only be arrested by a sudden rise in interest rates, turning the Brexit boom to bust.

The second risk is something more subtle: the need for a process of economic and institutional reform which restores orderly, reasonable law and decision-making and efficiency to the British state. The worry is that, despite all the rhetoric about “global Britain” and trade secretary Liz Truss signing free trade deals at a heroic pace, the Conservative Party has apparently lost the moderate, practical, business-minded, Scottish Enlightenment mindset of Pitt, Peel, Thatcher and Blair and instead embraced a sort of madcap nationalist and socialist thinking, which I (ironically) call “NatSoc economics”.  Let us hope this is temporary.

If our future is really to be found not in the stars, but in ourselves, we must, as a country, start by rediscovering established commercial principles.

 

 

We all fall down, then get up again

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Helpful lessons from the plague of 1665.

Sometimes history can take us out of ourselves and put the present in perspective.

It is hard not to be very worried about where Britain is headed as a country after arguably 20 years of catastrophic mistakes by a succession of administrations, including this one led by Boris Johnson.

But rather than dwell on that obvious and gloomy point, which I am sure most sensible people (and investors) are coming to share, let us swivel our gaze back 350 years to the parish records of London for inspiration.

There we can find data which demonstrates that terrible things pass, life changes and an orderly democratic society is usually self-correcting.

Thomas Cromwell, that effective man of business for Henry VIII, introduced compulsory birth, deaths and marriage registers for every parish in 1538. Lord Burleigh tightened the rules in 1597, appointing Diocesan registrars to inspect the accuracy of the books, and in 1653 in an Act Touching Marriages and the Registering thereof; and also touching Births and Burials, Oliver Cromwell put the system on a statutory footing, overseen by Magistrates.

From this accurate data (reproduced by the Wellcome Trust), here is what we learn of the progress of the Plague of 1665-6. It began in May, it peaked over the summer, there was a second (but much lower) peak, but by the following February it was deemed safe enough for the court to return to Westminster.

 

The progress of the disease is gruesomely narrated by Samuel Pepys, in his diary. Interestingly, periwigs were deemed to be a source of transmission and wig manufacturers’ sales collapsed.

What are the lessons we are hesitantly to deduce from this evidence?

First, that even the most deadly viruses work their way through populations and at some point, everybody who is likely to get infected and, sadly, to die, will have done so.

Second, accurate detailed, local data – of which there was almost none at the press conference by the medical and scientific advisers this week (coincidentally timed to overshadow the online Labour conference) – is imperative to monitoring progress.

Third, orderly democratic law-making is a vital institutional underpinning of any successful society. That, currently, is suspended in Britain and needs to be restored.

Finally, the 1665 plague together with losses in a silly war with the Dutch, provided the backdrop to the fall of Charles II’s Lord Chancellor, the Earl of Clarendon. He did not get it himself but became seriously ill with gout and was deemed to be an increasingly incompetent liability. In 1667, he was impeached for breaching Habeus Corpus by sending prisoners out of the country to Jersey without trial, in violation of long-established law. In his prime, Clarendon had been brilliant and helped orchestrate the Restoration, but by the end it was King Charles II himself who signed his banishment.

Common sense is back in fashion

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Common sense. Suddenly, there is apparently a lot of it about. People should, “use their common sense,” suggests the Prime Minister, before publishing 50 pages of rules and advice on easing the lockdown which sometimes lack that quality, especially in relation to schools and travel.

Perhaps Boris Johnson is simply reflecting back at the public what they have already decided for themselves. At least, that is what a Surrey plumber told a reporter on Channel 4 news: “I don’t think it is complicated. Just be sensible. What do you want? A handbook telling you what to do?”

For those of us who have believed all along that, with the right regulatory, institutional and fiscal framework, society has a bias towards behaving and growing responsibly, this is to be welcomed. The penny may at last have dropped in Westminster.

By coincidence, an American academic called Robert Curry has just published a book called Reclaiming Common Sense. He argues that common sense is the acceptance of certain, “self-evident truths,” which enable us to acquire knowledge and skills and make moral judgements on the basis of experience. He regrets what he sees as an assault by intellectuals and bureaucrats on this tried and tested philosophy.

Too many political types have also jettisoned common sense in recent years, to replace it with endless polling and intrigue. Policies which, based on experience, actually work do not always feature in their calculations. This partly explains recent Prime Ministers repeatedly ending in failure, despite gaining office with strong mandates.

The Founding Fathers

Common sense realism was the creed of the American Founding Fathers, who had picked it up from the philosophers of the Scottish Enlightenment. Curry quotes Thomas Reid, who wrote in An Inquiry Into The Human Mind And The Principles of Common Sense of, “certain principles which the constitution of our nature leads us to believe, and which we are under a necessity to take for granted in the common concerns of life, without being able to give a reason for them, they are what we call the principles of common sense.”

Reid had a profound influence on Thomas Paine, whose bestselling book Common Sense sparked an urgent questioning of the hierarchical status quo that British rule had inflicted on the American states. His words helped fuel the drive to independence.

Jane Austen

Interestingly, Curry claims Reid also influenced the novels of Jane Austen. In Sense and Sensibility the two Dashwood sisters embody the twin themes of the book. Marianne falls deeply in love with a bounder called Willoughby. Elinor remarks of Marianne, that “in a few years she will settle her opinions on the basis of observation and common sense.”

Marianne’s opinions are, “all romantic” and Elinor asserts the importance of prudence, fortitude, justice and temperance, echoing the common sense virtues of, “piety, patriotism, friendship, parental affection, and private virtue,” advocated by Reid. Jane Austen’s novels also demonstrate that she understood the related virtues of thrift and industry, but that is another story.

Method and moderation

To these we must also add scientific method, in other words, proceeding not just on the basis of observation of the evidence, but also learning by testing hypotheses and admitting our mistakes. This is how engineers, doctors, craftsmen and good tradespeople advance. Moderation also has its place, as does its cousin, irony. Humour, I read somewhere, is common sense on speed. The failure to realise this is where ideologues, and many voluble advocates of common sense themselves, have fallen down.

Ironically, Thomas Paine, the self-confessed apostle of common sense, ended up having a furious pamphlet war with Edmund Burke, wrongly championing the French Revolution well after it descended into extremism and violence, as Burke had warned. Paine ended up in prison in France. That is the thing with common sense. A wise person recommends its benefits lightly, rather than asserting volubly that they alone have it, while everybody else is unfortunately born with one screw loose.

 

 

Maple syrup: a 10 point guide to Boris Johnson’s Canada-style EU free trade proposal

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I popped along yesterday morning to the splendid Painted Hall in Greenwich (above) – itself a painterly encomium to institutional innovation and commerce – to hear the Prime Minister’s bombastic and entertaining enthusiasm for free trade and a Canada-style free trade deal with the EU.

The Cabinet in attendance rose as one to give a stirring standing ovation to their Leader, but the media, not so much. What followed was a load of dreary questions which demonstrated that the press knows almost nothing about the so-called CETA (Comprehensive Economic and Trade Agreement) with the EU. As I expect they are not alone, and also I believe I was the first person to raise the potential of CETA publicly in an article in The Times in 2016, please see my very humble and brief attempt to address this deficit:

1. Purpose

The purpose of CETA is to encourage foreign investment, to remove all tariffs on industrial goods and to progressively liberalise trade in agriculture and services. The agreement summary says: “Overall, the tariffs for 98.6% of all Canadian tariff lines and 98.7% of all EU tariff lines will ultimately be fully eliminated. This will happen at entry for 98.2% of the Canadian tariff lines and for 97.7% of the EU tariff lines. All other products identified for liberalisation will have their tariffs brought to zero within 3, 5 or 7 years.”

2. Financial services

You will hear from some quarters that CETA “doesn’t cover financial services”. This is rubbish. They have a whole section, Chapter 13. This essentially sets up an equivalence and/or mutual recognition regime. It says that “each Party shall permit a crossborder financial service supplier of the other Party, on request or notification to the relevant regulator, where required, to supply a financial service”.

3. Other services

The agreement supports the opening up of services such as maritime, telecoms and postal services, which are subject to a “negative listing process”, ie they have to be actively excluded. Presumably, this means very little change from now.

4. Professional qualifications

The agreement creates a process of mutual recognition for doctors, architects etc. Though I have noticed, for instance a renewed French hostility to British ski-instructors, partly because French ski instructors have a very rigorous qualification programme. One suspects a handful of professions might face a little more discrimination than now.

5. Regulatory co-operation

You will hear from some Brexiteers that “we won’t be rule takers from Brussels”. They are, to a degree, set to be disappointed. The CETA agreement specifically encourages regulatory convergence and compatibility via a Regulatory Co-operation Forum. When the Prime Minister says “no alignment”, what I assume he is talking about is not being automatically forced to adopt EU rules. In reality, most of our rules, especially in goods, will be the same or similar, but we will have more wiggle room than members of the EU. I have to be honest, I myself find this “rule-taking” rhetoric very boring and largely irrelevant.

6. State aid rules and competition policy

State aid is hardly mentioned in the agreement and is effectively covered by the duties of non-discrimination towards investors. Perhaps the Government would have greater freedom to bail out defunct airlines and steelmakers. However, competition policy is covered in Chapter 17. While this is a relatively brief section, the general duties to “recognise undistorted competition” and “to proscribe anti-competitive business conduct”, suggest no meaningful change to legislation in that area.

7. Lots and lots and lots of Committees

The agreement is governed by a Joint Committee, co-chaired by the Minister for Trade and the EU’s trade commissioner. They have the power to interpret the agreement and also to create new rules and processes. In turn, the Joint Committee appoints numerous other committees covering everything from financial services to copyright protection, which in turn make the rules and processes within the agreement.

8. Tribunals

If there is a disagreement, including one brought by a private sector entity, there are tribunals to settle the dispute. The Investor State Dispute Settlement (ISDS) tribunal is made up of five judges from each side and five from third party countries, who convene in specialist committees. Their job is to protect investor interests and this has proved highly controversial in left-wing circles. It is the reason that the implementation of CETA got held up and it is a continued source of grievance mentioned by French ­Gilets Jaunes protestors and NGOs.

Other tribunals may also be set up by the Joint Committee.

If the passage of CETA is anything to go by, expect there to be a row about the tribunals, including from the EU-side.

9. Ratification/agreement

The CETA agreement affects both nation state and European Union issues. It is consequently what is known as a “mixed agreement”, meaning it has to be ratified by both the EU itself and the 26 nation state members. There is provision for it to be implemented provisionally, but one risk is a small nation, such as the Republic of Ireland, blocking things up.

Another point to have in mind is that the CETA agreement is 1600 pages long and took six years to agree. In theory, the parties need do no more than find and replace the word “Canada” with the words “United Kingdom”. But I bet they don’t.

10. No Deal

What happens if no text has been agreed by December 31st? Will Britain tumble into an Australian-style relationship with the EU? Personally, I doubt it. Both sides have already committed to heads of terms via the Political Declaration. Every time No Deal comes up, both sides back down. Far more likely is a series of sector-based deals, with roll-overs for areas which are still to be agreed. In the meantime, there will be much posturing and tub-thumping from both sides.

Conclusion

In the end, trade and commerce are private sector phenomena, arising from fundamental human concepts such as consumer demand, mutual interest and comparative advantage. The role of Governments and regulators is to create the framework to enable this to happen and to enforce standards. But in the modern era, governed as it is by the General Agreement on Tariff and Trade, even if states cannot reach full agreement it will not mean everything grinds to a halt. Firms and individuals will adapt.

There are thousands of small, detailed items to be sorted in our future relationship with the EU. But it will prove to be a dynamic process and unless something specifically affects your industry, then the best advice may be to ignore most of the negativity in the media and elsewhere and to get on with the business of a flourishing life.

 

 

 

The Establishment is having an optimism reshuffle

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All change at the BBC, the FT and the Sunday Times

For me, there have been two notable cultural trends of the last three years in the West. First, a howling negativity emanating from what one might describe as the bourgeois intelligentsia; and second, the traditional Establishment being stuck like rabbits in the headlights, panicking and not knowing what to do.

One can blame this on Brexit and the election of Donald Trump or Greta Thunberg. But it goes much deeper than individuals and traces its roots to the financial crisis, the rise of social media and too many highly indebted people at university, to name a few.

Is all this suddenly changing?

Pessimism is so 2019

Daniel Hannan, the retiring Conservative MEP and Telegraph columnist, quoted the historian Lord Macaulay the other day at his leaving-do. “On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?” Pessimism is not new, but progress is the way to bet.

I was struck also by an interview on the BBC Radio 4 Today programme this morning with Professor Sophie Scott, director of the Institute of Cognitive Neuroscience at University College London and Professor Julia Lohmann, a Finnish academic who also runs a design practice called the Department of Seaweed, which develops emissions and toxin absorbing seaweed products.

Professor Scott reminded us all that humankind are social primates, and “People change more frequently if you engage them in a positive way. Our social interactions matter.” You can listen here, at 2hr 55 mins (just after a piece on the perils of Coronavirus) LINK

Adam Smith

This should not be a surprise to followers of Adam Smith, whose Theory of Moral Sentiments is built upon exactly that insight. Man is essentially a collaborative animal and “we shudder and tremble” at what “our brother feels upon the rack”. Negativity and hysteria are usually overdone and unhelpful, if not psychologically damaging, and certainly harm relationships and the ability to co-operate.

Democratic societies, which are necessarily discursive, do not usually run off cliffs. Occasionally, one has a calamitous 1914 cliff-running situation, but even those just serve to reinforce social dynamics of positive behaviour and spontaneous organisation. Usually, in a dynamic society, if we see a threat or challenge we collectively organise to do something about it, after first making a mess and fuss over things.

All change

Which leads us to my next observation. After three years of stasis, the Establishment is having a major reshuffle. In the space of a few days we have a new editor of the Financial Times, a new editor of the Sunday Times, a search for a new BBC director general and for the CEO of Sainsbury’s and for a director at the Office of Budget Responsibility, and a new interim head of the Financial Conduct Authority. Expect this to gain further momentum with the imminent Cabinet reshuffle and a new Labour leader.

What will be the collective ethos of these new leaders? Will they wag their fingers disapprovingly at us and teach us we are all doomed due to the climate emergency and a plague from China? Or embrace a more optimistic, practical style and philosophy? Optimism v Pessimism currently is a great dividing line in society but empirical observation suggests that, in the long term, sensible people should be cautiously optimistic.

 

 

Cobham shows UK M&A is open for business. Mostly.

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How open or protectionist is the new Government going to be towards foreign takeovers of UK companies? We received a hint before Christmas when, at 10pm on 20th December, the Secretary of State for business, Andrea Leadsom, cleared the takeover of the aerospace group Cobham by US private equity house Advent, subject to certain conditions.

The answer, apparently, is that the UK market will be open like the arrival gates at Heathrow. Open, as long as you go through the process, which might occasionally be more complicated and time consuming than expected.

The signs are that the Government will not tighten the rules further, as Theresa May intended. The rules were already tightened last year, when the threshold for an intervention on grounds of national security, media plurality, and financial stability was lowered from £70m to £1m turnover, and the definition of national security widened to include more dual use, civilian technology.

The Cobham approval received very little media coverage or analysis. But the takeover of Cobham is instructive because it shows the Government has an internal conflict. On the one hand, it wishes to encourage inward investment in the UK, on the other it wishes to protect certain politically critical assets, especially those with activities in the new Conservative constituencies in the Midlands and the North.

A merry dance

The case of Cobham was reported as simply “approved”. But on closer inspection it was much more complicated. A ballyhoo had been got up in the press, including from the original founding family and a five-month process then ensued (my summary below):

  • On 25th July 2019, the Cobham board agreed to a £4bn takeover by an Advent entity.
  • On 16th September, a general meeting of Cobham shareholders effectively accepted the offer with a 93% vote in favour.
  • On 17th September 2019, Mrs Leadsom issued an “intervention notice” under Section 67 (2) of the Enterprise Act, ordering the Competition and Markets Authority to conduct a Phase 1 inquiry.
  • On 29th October the CMA reported back, indicating it was a “relevant merger situation”.
  • On 5th November, in a written statement, Mrs Leadsom said the issues required further consideration.
  • On 11th November, Mrs Leadsom indicated that she could refer the situation to the CMA for what is known as a “Phase 2 Inquiry,” in which the CMA itself could impose conditions on both Advent and Cobham.
  • However, instead she said she was minded to accept undertakings from the companies and put these out to consultation, to be completed on 17th
  • On 20th December, the merger was approved subject to a series of fantastically complicated commitments, relating to a UK headquarters, jobs, national security and technology, outlined in a legally enforceable Deed of Covenant. There were numerous announcements in which the lawyers and civil servants had evidently been hard at work. Much of it was blacked out. It was late at night. The to-and-fro and lobbying behind the scenes would have been extensive.
  • Simultaneously, the boards of Cobham and the Advent Bidco made “post-offer undertakings” under Rule 19.5 of the Takeover Code. These, introduced in 2014, supplemented the commitments made in the Deed. These are also, supposedly, enforceable in the courts.

An open and dynamic market economy

What are we to conclude? First of all, as I said, the Government is torn about what to do in merger situations, but its overall inclination will be to agree, subject to certain commitments in relation to national security and jobs.

Second, much of this is driven by press and political reaction. The “save Cobham” campaign never really caught fire, in my view, and the Cobham family had itself sold down its stake below 2%, giving it limited standing in the debate. Critically, the Daily Mail has a new editor, Geordie Greg, who is less inclined to go over the top on such issues (at least in comparison to his predecessor, Paul Dacre) and anyway Boris Johnson is less inclined to listen than Mrs May.

In fact, the new Prime Minister, when asked about Cobham, said on the following morning: “I think it’s very important that we should have an open and dynamic market economy.

“A lot of checks have been gone through to make sure that in that particular case all the security issues that might be raised can be satisfied and the UK will continue to be a very, very creative and dynamic contributor to that section of industry and all others.”

You would not have heard Mrs May speak in those terms.

Third, despite Ministers’ inclination to approve such takeovers, we should also expect more Phase 1 investigations and conditions attached. This means the takeover process for some assets, especially in the technology and security sectors, might prove more complicated and fussy from a legal perspective.

Finally, what about the plans published in July 2018, which would have given the Secretary of State even more powers to intervene directly, bypassing the CMA, especially in relation to infrastructure and technology assets? I have yet to be told in black and white, but my strong impression is these have been quietly shelved as ancien regime.

If the Government does not get investment moving in the UK, it will fall rapidly into unpopularity, and excessively politicising mergers and acquisitions would not help. Ministers know this.

 

 

Hong Kong Exchange and Clearing’s bid for the London Stock Exchange Group showcases the UK’s still attractive takeover regime

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Ten years after Kraft launched a somewhat sharp-around-corners hostile bid for Cadbury, triggering a decade long tightening of the UK’s takeover regime, Hong Kong Exchanges and Clearing has made a £32 billion offer for the City’s cream egg, the London Stock Exchange Group.

The cash and shares offer, at a 23% premium worth £84 a share, has not been particularly well received, as it is conditional on the LSE abandoning its compelling merger with Refinitiv (that is the one with the record 38 contacts named on the announcement, of which only two were females). LSE’s shares are up only 5%. But the offer does raise interesting PR questions.

One reason for the poor reception is the belief the Government could intervene to block it. Andrea Leadsom, the business secretary, said she would “look very carefully at anything which had security implications for the UK.”

Incoming M&A

This begs the question, what powers do the authorities have to intervene, and what does this mean for the offeror and the target? These are pertinent issues, because the steep discount on UK assets means that offers for UK companies are coming thick and fast. If No Deal Brexit is off the table; and some sort of deal with the EU can be managed; or even Brexit reversed; and Jeremy Corbyn kept out of No.10 (a big if, admittedly) – offers for British companies could turn into a flood.

The Government’s powers are limited

On the face of it, there does not seem much opportunity for Mrs Leadsom to intervene. The newest set of proposed changes to the Enterprise Act, giving the Secretary of State wide powers to intervene on national security and national infrastructure grounds have not yet been implemented.

Instead, she would have to rely on the existing law, which leaves her powers tightly defined. She would have to demonstrate it was a “relevant merger situation”, affecting a company with military or advanced technology, with a turnover of £70m or more and a “share of supply” of 25% or more, or concoct an argument that it affected financial stability or media plurality (not likely).

The take-private of Inmarsat did pass the existing national security test, and it is now subject to a “Public Interest Intervention Notice”, issued without much comment in August, pending an inquiry by the Competition and Markets Authority.

The Competition and Markets Authority might wish to get involved unilaterally due to the high market share a new LSE/HK group might have in certain products, for example Asian equities trading in London and Remninbi trading.

The Takeover Code

Additionally, the Hong Kong Exchange must be careful what it says publicly. 2014 changes to the Takeover Code mean that the Panel has greater powers to police and enforce via the courts “Post Offer Undertakings”, relating to jobs and disposals and so on. These were put in place after Kraft said it was shutting a factory it promised to keep open during the Cadbury offer period.

Winding up the Daily Mail

So what are the non-price defence options available in such a situation, where intervention is unlikely? The answer is simple: raise a great ballyhoo among shareholders via the press and in Parliament. The Daily Mail and the Daily Telegraph can be especially useful in such situations, as the current offer for Cobham by the US private equity group, Advent, has demonstrated.

However, arguments which work cannot be based on mere sentiment, but on a genuine economic case made to shareholders, preferably inflamed by a sense that the offeror has played fast and loose in some way. Last year’s campaign to stop Unilever moving its listing to Amsterdam was especially instructive.

The arguments which worked against Unilever were: FTSE 100 tracker funds would be forced sellers, so investors faced an economic loss; the real motive of the management was to take advantage of more protective Dutch takeover rules; UK investors would be losing a quality, blue-chip, ESG compatible company which they could not readily replace in their portfolios; and that retail investors had been treated disgracefully because many of them could not vote, even though they had five per cent of the shares.

Leading shareholders were approached to speak out on all these matters and the sensible ones, such as Lindsell Train and Threadneedle, did so.

A good PR strategy

What about if you are an offeror? The key here is to anticipate the likely arguments and issues which will be made, and to pre-empt them. In a really high-profile situation, it may be worth making the Business Secretary an insider a few hours ahead of an announcement. The drafting of the release will be critical, articulating a credible case as to why the offer is in the interests of shareholders and the UK economy as a whole. The Post-Offer Undertakings regime can be used to make commitments on, say, investment and jobs, in order to settle key stakeholders.

An active communications programme, including letters and or meetings with MPs and briefings with journalists is also desirable. Answer the question, why is this deal such a good idea?

Corbynomics

If Jeremy Corbyn gets into Government, things will be much more complicated. Among the issues companies will have to wrestle with is up to 10% of equity being controlled by an “Inclusive Ownership Fund” controlled by employees, who may also have up to a third of board seats. There will be higher capital gains taxes and voting by short term shareholders, such as arbitrage hedge funds, could be banned.

The UK continues to have a relatively open and pragmatic takeover regime, but in the end an element of self-restraint and common sense always applies, which an experienced PR adviser working alongside the management, brokers, legal team and proxy advisers, is always best-placed to provide. However, if there is a Labour Government, an orderly commercial life will be much more difficult.

 

 

Theresa May is a genius – discuss?

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There, that has caught your eye.

We are accustomed to thinking that Brexit has degenerated into a shambles and Mrs May’s strategy of “kicking the can down the road” has been a disastrous humiliation. That is certainly a valid point of view. But from her own narrow self-interested perspective she remains in Downing Street and has avoided taking any of the many final decisions which might coalesce opposition to her.

That strategy marked up another success overnight when the European Council agreed an Article 50 extension until October 31st.

At Boscobel we have continuously resisted the Government’s claim that the country faced a binary choice of Theresa May’s deal or No Deal, as we believed Parliament would approve neither. That continues to be our advice.

A leadership contest?

This morning, the Today Programme was full of disinterested speculation that Mrs May will now be “forced to step down”. That is a possibility. But the fact is there is no legal or constitutional mechanism to remove her from office in the short term. And unlike most politicians she seems utterly immune to the daily hue and cry of the media, Parliament or indeed other people’s views and feelings generally.

She has particular contempt for Cabinet government, one of the many important constitutional conventions our politicians have undermined in recent years. That said, given that at least five of her colleagues now have leadership campaigns up and running, she can enter a plea in mitigation.

Investor confidence

From an investor perspective, last night’s European Council decision has its merits. There is a huge amount of deferred investment, pent up in the system. There were only three IPOS on the London Stock Exchange in the first quarter, the lowest number since the financial crisis. UK companies are holding a record 35% of GDP in cash on their balance sheets.

For managers and investors with capital to allocate and who can ignore the media, the Brexit pause should be an opportunity to make incremental decisions. Very large decisions may still be put off, as the acute political uncertainty around the UK will continue.

What is the medium term outlook?

  • The UK will almost certainly participate in the European Parliamentary elections, with candidates to be selected in the next couple of weeks. The polls suggest this will be a disaster for the Conservatives.
  • The franchise could be critical, as EU citizens resident in the UK will be entitled to vote. They have been treated appallingly by the political and bureaucratic process and are difficult to poll. One suspects, without evidence, they will vote for remain parties such as ChangeUK.
  • Relative to the hard core Remainers, at the top of which sit the eminence grises of New Labour, notably Tony Blair, the Brexiteers (especially the European Research Group in Parliament) are in disarray.
  • Experience of life suggests the longer and more frequently something big is delayed, the more likely it is to lose momentum altogether. We should start to contemplate the possibility that Brexit may never happen, or not unless the mandate is refreshed by a Second Referendum.

In EFTA, it would be in a working free trade agreement, but outside the jurisdiction of the European Court of Justice, the Common Agricultural Policy, the Fisheries Policy and the Customs Union. We would enjoy rights of consultation and veto over new laws, as they applied to us.

At Boscobel, we have supported a campaign for the so-called Norway solution. It is now commonplace in Parliament that there are, in fact, two pillars of European treaties, holding up a common-roof called the European Economic Area. The EU political treaties make up one pillar, but there is another made up of the European Free Trade Association. It still makes sense for the UK to leave the political institutions of the EU and move into EFTA.

For this policy to work it would require something to shift. But that tinkling sound you can hear is just the can being kicked down the road. Again.

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