He would highlight (using some actual examples from published accounts) the use of items such as Goodwill, Depreciation and, what we in the old days used to call Extraordinary and Exceptional items, to present a rosy view of the accounts. 

At the time of publishing his book, Terry was an equities research analyst at UBS and the book caused quite a storm, as you can imagine. Companies mentioned in his book cried foul, pointing out that they were using legal accounting rules.  None of them sued him for defamation, of course, as what he said was essentially all true, the evidence was all there in their financial statements.

Fortunately, many of those accounting rules have since been amended, including my beloved Extraordinary and Exceptional items which is no longer a separate line item on the income statement where one could dump inconvenient losses so as not to mess up reported trading profits.

Unfortunately for Terry, his employer, UBS, were not impressed, to say the least, with his book publishing sideline and, probably under pressure from their major clients, decided to fire Terry.  However, proving that you can’t keep a good man down, Terry went on to set up and run his own, and very successful, investment firm, Fundsmith Equity Fund which has consistently produced market beating returns. I even have some of my own precious pension money invested in his fund – and been very pleased with the returns.

The reason for talking about Terry is because I see he is ruffling feathers again with his announcement that his fund has sold all its Amazon holdings. Don’t worry, it has nothing to do with dodgy accounting, but more with Amazon’s plans to invest more in bricks and mortar grocery stores.  Terry views this as a worrying change in strategy and “ran counter” to Amazon’s own stated growth principles for new projects (projects that are capable of generating good returns on capital, areas where consumers not already well served and a sustainable competitive advantage). High street grocery stores just don’t fit in with these principles says Terry.

Personally, I don’t know if he is making the right call on Amazon, but I remain a Terry Smith disciple and where he leads, I will follow with my precious pension money. Although I would probably divert some of it into a fund that’s long in Amazon – just don’t tell Terry. 

Frank Vein: – Founder, Future Capital Training and Consulting

The post Accounting for Growth at Amazon appeared first on Future Capital.

Then they decided to get more exciting by taking a huge bet on a massive expansion of their Ethane cracker plant in Lake Charles, Louisiana, USA (LCCP).  It was going to propel Sasol into a global chemicals giant.  As a Banker, I was pleased to be part of this exciting new journey and, as part of Sasol’s prep for the funding it wanted to raise for the LCCP, in 2012, we were one of 3 banks chosen as Bookrunners for Sasol’s first ever US$ Bond issue (they never really needed to borrow any money before then, their business was that cash generative).  The bond was pitched at an initial $500m benchmark issue, but such was the demand that the issue was eventually raised to $1bn. Those were the good times.

In 2014, Sasol eventually raised $9bn in funding for the LCCP and off they went to Louisiana. Management of the project was, however, nothing short of a disaster and costs escalated to $12bn. As the scale of the problem came to light, Sasol’s share price went into a death spiral, from around R375bn in 2018 to R12bn in 2020 – a near death experience, if ever there was one. So incensed were Shareholders that the two joint CEOs were given the boot. Consequence Management Sasol called it at the time.

Now I see that they are at it again having just impaired their entire Secunda liquid fuels plant to the tune of R35bn.  Thankfully, this time around it is generally due stuff outside management’s control: high interest rates, high input costs and, rather more worryingly, problems meeting emission targets which leaving them open to action which could force closure of the plant.

Notwithstanding, this must come as a relief for current management, who are also able to point to strong growth in underlying headline earnings, coupled with a juicy dividend for Shareholders. They probably won’t have to worry about a tap on the shoulder followed by the words, Consequence Management, anytime soon.

The post Sasol: Another Lake Charles Moment…almost appeared first on Future Capital.

Even at the illustrious JPMorgan, there was grudging respect and admiration for the GS guys.  Afterall, they were on all the best Investment Banking mandates and seemed to be able to rake in the fees even during difficult times.  They just seem how to know how to make money effortlessly.

I, therefore, watched with interest when, in 2016, they decided to diversify into the not so sexy, cut throat business of consumer banking. It somehow did not seem like a GS thing to do.  Yes, there was potentially a lot of money in it, but that was more for the plebs surely?

It was the legendary, now retired GS CEO, Llyod Blankfein (LB) who first started the foray into cheque accounts and credit cards – probably bullied into it after he doubled down on the GS investment banking model in the face of declining revenues. Following LB’s retirement in 2018, his successor, David Solomon (we’ll call him DJ Solly given his legendary skills at the disco turntables), decided to really get the ball rolling and push the consumer business and launching “Marcus” which became their consumer business brand, taking on the likes of JPMorgan and Morgan Stanley. 

The rationale was straight forward: GS needed the steady earnings profile of the consumer business to counteract the uncertain, cyclical revenues of the investment bank.  GS even acquired the home improvement lender, Greensky, in 2021 at the height of the tech boom, grossly overpaying in the process. I can’t help thinking that GS would have advised their clients against the timing of such an acquisition.

Anyway, 7 years later and the GS’s consumer business is looking decidedly dicey. Losses last year amounted to $3bln and, although revenue shot up significantly, GS had to contend with that other consumer banking headache – Impairments.  Even worse, their impairments were higher than either JPMorgan or Morang Stanley’s – a bitter pill to swallow for an outfit like GS.

GS is now looking at “strategic alternatives” for their consumer business, which sounds suspiciously like saying it’s for sale.

As for DJ Solly, GS is notoriously unforgiving towards employees who don’t make money, and have nothing but contempt for those who actually lose money, so he is probably unlikely to be around for much longer.   At least he can still set the dancefloor alight with his DJ-ing skills.  I am sure that they will be much sought after on the Ibiza nightclub circuit,

The post Goldman Sachs: Are the tables turning for DJ Solly? appeared first on Future Capital.

The problem was, the location was quite remote for London. The only way to get there was via a light rail system called the DLR (Docklands Light Railway) which was totally inadequate to transport thousands of workers to Canary Wharf each day.  You could get there by bus, but again, there was no real direct route from central London, so you would have to change buses in some dodgy areas. 

I once went to a party on the Isle of Dogs (the district which houses Canary Wharf) before the area became all fashionable.  The party was in flat in a run down, high rise housing estate. It took us a tube and 2 buses to get there and, with no public transport after 11pm, we were basically marooned on the island until the following morning at 7am, before we could get another couple of buses back to the tube station. Oh, and the guy whose party it was had a couple of heavies guarding the door because “Some nutters will always want to gatecrash and start a fight”.  Was a lovely party in the end, even though I kept one eye on the door all night, just in case “some nutters” came steaming in.

Anyway, the point I was trying to make is that the difficulty of commuting to Canary Wharf made companies reluctant to move there and, as a result, the development didn’t generate sufficient income to service its constructions debts.  So, into liquidation it went, just as I started my Corporate Banking career.  Canary Wharf essentially became a white elephant and I did feel sad for the Reichmann Brothers (The owners of O&Y) as I admired their vision.  Everyone had given up on that area of London and it took a couple of Canadians to see the potential.

As luck would have it, Fortune was to smile on Canary Wharf when the Government finally completed the Jubilee tube line extension in 1999, so companies could finally have a reliable way for their staff to get to the office – and so the exodus to Canary Wharf began and the place became a huge success.

Now, it seems that things are look shaky again as the post pandemic, WFH revolution continues with many companies deciding that they no longer need large amount of office space.  HSBC, Credit Suisse and Moody’s have already decided to leave and Barclays is giving up a huge chunk of space. All of them moving back to the City.

I feel happy for the City, where I cut my teeth, as I always lamented the fact that the Banks were deserting it for Canary Wharf, but I’m also sad that Canary Wharf is once again staring into the abyss.

As for the Graduate Trainee who might be managing the next set of liquidation accounts – give me a call, I will be happy to give you some tips.

The post Déjà Vu for Canary Wharf? appeared first on Future Capital.

This for a Bank which has a 13.5% Tier 1 Capital Ratio. Sure, it is lower than some other European Banks: Barclays (15.1%), HSBC (14.7%), UBS (15%), but definitely not in dangerous territory and better than some USA Banks: JPMorgan (13.1%) and Bank of America (12.1%).

Certainly, they have some problems at their Investment Bank which lost £1bln in Q2.  Horrible I know, but hey, they are not the only one with a troublesome Investment Bank on their hands and they are planning to do something about it.

The only reason for the market reaction that anyone can offer is that the CEO, Ulrich Korner, created panic by suggesting in September of a possible capital increase to deal with costs of closing down the Investment Bank and then recently when he circulated a memo to staff reassuring them that the Bank is well capitalized. Seriously?!! The market thinks that such a reassurance actually suggests the opposite – i.e why need to reassure when everything is ok? The saying about lunatics having taken over the asylum comes to mind.

The post Credit Suisse: What exactly is the problem? appeared first on Future Capital.

Midland was a steady, if boring bank when HSBC acquired it in 1992, in one of the largest bank take overs in the UK at the time.  I, and many like me, certainly had great hope that, as a combined entity, it would be world beater for ever more.

31 years later and HSBC is facing a crucial AGM on 5^th May where Shareholders will be asked to decide on whether the Bank needs to spin off its Asian business from the rest (Western) business. The instigator of this vote is Ping An Asset Management, one of HSBC’s key Asian Shareholders, who has pushing for a while for just such a corporate action, arguing that it would release over $26bn of Shareholder value.

Mark Tucker and Noel Quinn (HSBC Chairman and CEO respectively) are having none of it, arguing the complexity of a break up and possible loss of synergies as some of the reasons not to head down that road. With the Asian business currently responsible for over 60% of the group profits, a break up would indeed be a huge, and likely messy, exercise. Just the thought of separating the systems would send shivers down my spine.

The problem is, HSBC has been a sluggish performer over at least the last decade, with returns lagging those of its peers and there is certainly a feeling among long suffering Shareholders that something has to give.  The only question is what.

It is difficult to say if Ping An has enough support for a spin off vote on the 5th, so difficult to call the outcome.  However, even if they lose, I would bet my bottom pound that their campaign will not die with the vote.  Instead, it will just up the ante and launch a massive charm offensive to persuade Shareholders.  Unless Quinn can reverse the fortunes of HSBC – and fast, the break up calls will become louder and more persuasive – and something will have to give….maybe it will be back to my old Midland bank….

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Now, for those who have in the past attended my M&A workshops, you will know that I describe a Shareholder Rights plan as a pre-emptive defence mechanism i.e., a company tends to put one in place in anticipation of a possible hostile bid in the foreseeable future. With Twitter, the Rights Plan is being put in place while the Barbarians are already at the front door! The question is why so late?

Well, for one thing, I suspect that the Board never expected a hostile bid like this.  Although one could argue that employing a Rights Plan should be like normal insurance – you never expect the ghastly to happen but want to be covered should it does.  The other reason is probably more to do with the Shareholders themselves:

Under the Rights Plan, Shareholders will effectively be intitled to additional shares at half the current share price should Musk’s shareholding (plus any the shareholding on any other Bandidos who are prepare to join him) go above 15% without approval of the Board.  Again, in the old days, the trigger point for a Rights Plan used to be at 51% (i.e. control) but these days you can find them as low as 5%, but that is more to throw off Shareholder activists like Carl Icahn (An article for another time). Anyway, any additional issuance of shares in this way would mean that Musk and his Bandidos would then have spent more money to buy those newly issued shares as well, rendering the deal far too expensive in the process.

Under the Rights Plan, Shareholders will effectively be intitled to additional shares at half the current share price should Musk’s shareholding (plus any the shareholding on any other Bandidos who are prepare to join him) go above 15% without approval of the Board.  Again, in the old days, the trigger point for a Rights Plan used to be at 51% (i.e. control) but these days you can find them as low as 5%, but that is more to throw off Shareholder activists like Carl Icahn (An article for another time). Anyway, any additional issuance of shares in this way would mean that Musk and his Bandidos would then have spent more money to buy those newly issued shares as well, rendering the deal far too expensive in the process.

While reports say that the Board has adopted the Poison Pill (I prefer the old name), as anyone with knowledge of these things will tell you, a poison pill normally requires shareholder approval first – boards cannot just will-nilly authorise the issuance of new shares. This means that Twitter shareholders were quite happy to authorise a poison pill even when a hostile takeover was already effectively in progress.

Again, this is not normally the case given that Shareholders can only benefit from a hostile takeover due to the fact that an Acquirer will generally have to offer a massive premium to entice Shareholders to sell.

I suspect that Twitter shareholders are very keen to do a deal here and have calculated that a limited duration Poison Pill, together with a clause which allows Musk to continue to engage the Board, could be just the way to do it – with a juicy premium. Musk is already offering a 38% premium and Shareholders must think that they can squeeze him for some more. The poison pill, in this case, is therefore not a mechanism to swat away any hostile takeover (as normally would be the case), but more of a way to squeeze the Acquirer. 

Musk and his Bandidos will likely have to pay a hefty price (I suspect more of 40% -45% premium) if they want control.  Afterall, Musk did say he is not worried about making money on Twitter, so he probably would be happy to pay such a hefty premium – I would like to see him persuade other potential Bandidos want to charge the enemy with such a maverick leader?

At time of writing, Bloomberg reports that it looks like deal may be concluded by Monday, 2^nd May.  Can’t wait to see the terms – and who will be the Bandidos at his side.

The post What an interesting twist in the battle for Twitter last week. appeared first on Future Capital.

All this came about following revelations from Bloomberg that FAD was snooping around, prompting FAD to release a statement confirming that, yes, they had been looking at StCh, but have now shelved the idea. Notwithstanding the fact that FAD shelved the idea without acting on it, under current UK takeover rules, FAD is not allowed to make any tender offer for StCh for at least another 6 months following its expression of non-interest. The only way to get around this is if they are able to table a Board approved bid…. or if another rival bidder enters the scene.

Now, Winters knows that the FAD statement, although seemingly innocuous, would have been loud enough to stir all potential predators out there out of their slumber. He also knows that those predators would immediately have briefed their corporate finance teams who are, as we speak, pouring over the StCh numbers and punching them into their valuation models.

While making a bid for StCh may not have been an agenda item for 2023 for any of them, none of them would want to be caught napping should FAD manage to smooch up to the Board and deliver a Board recommended bid, or if a rival predator throws in their own bid. They would want to be ready to gate crash any party – or maybe even initiate one of their own.

So, spare a thought for Winters and his team. As if they do not have enough on their plate, trying to rebuild an undervalued bank but now they are also destined to spend 2023 having sleepless nights and catching a fright each time their mobiles vibrate – wondering if, when or where a predator might pounce. They know that StCh is now firmly in play.

Frank Vein: Founder, Future Capital  www.futurecapital.global

The post Standard Chartered: In play? appeared first on Future Capital.

Yamana, was snatched from Gold Fields by another Canadian gold producer, Agnico Eagle.  I say snatched, because negotiations were complete, SA Reserve Bank approval was in place and the only outstanding item was the prickly issue of shareholder approval.  Griffith certainly thought the deal was done and dusted until Agnico Eagle came along and spoiled the party by snatching Yamana from Gold Fields, like a Hyena snatching prey from a hapless Leopard.  

The reason was all in the final offer price. Although the Gold Fields offer was initially higher at nearly $7bln, it was an all-share deal and the value of the deal declined to below $4bln as the Gold Fields share price started to falter due more to sector sentiment, than anything the company did.  Griffith was loathed to increase his offer, wary about not getting into a bidding war.  As a result, the Agnico offer of a $4.8bln share-and-cash deal became the more attractive option for Shareholders and they accepted that offer instead.

There are various reasons for the high failure rates, with one of the key reasons being overpaying for an acquisition, especially when in a competitive bid situation.  Too many CEOs let their ego get to them once a rival bidder arrives on the scene and they feel that they have to win the deal at all costs, resulting in paying too much for the asset and the subsequent destruction of shareholder value.

This is why I truly feel that Griffith was hard done by.  My view is that Gold Fields is sending the wrong message by forcing out a CEO who simply wanted to avoid destroying shareholder value.  After all, what message are they sending to any incoming CEO: – You make sure you win an acquisition battle no matter what the cost?  Talk about encouraging the wrong kind of behaviour. Frank Vein: Founder – Future Capital Training & Consulting www.futurecapital.global

The post Gold Fields and the resignation of Chris Griffith appeared first on Future Capital.

Read’s exit was executed by the board, but it is clear that activist investors played a not too insignificant part in pushing the board in that direction.  Read was blamed for Vodafone’s sluggish operational performance and lethargy in executing key transactions, including the sale of struggling divisions – all combining to produce an underperforming share price for its long suffering Shareholders.

One key and influential investor, Xavier Niel (Atlas Investissement) thinks that Vodafone is “too fat, too slow, too complex”.  He called for a “slimmed down company with a “focused European footprint” – and he was not the only one, with other key Shareholders including the likes of Etisalat and Cevian Capital, all believing that that Vodafone needs a refreshed vision.

This obviously has implications for Vodafone’s 65% stake in South Africa’s Vodacom, should Niel have his way, as Vodacom quite clearly does not fit into a focused European footprint strategy.  Also, interesting that Vodafone recently finally completed the sale of its 55% stake in Vodafone Egypt to Vodacom. It was an all-share deal resulting in Vodafone increasing its shareholding in Vodacom from 60.5% to 65.1%. Possible strategy to neatly package African investments into one entity for an easy sale process? Well, let’s see if they do the same with Vodafone Ghana which has had a ‘For Sale’ sign on it for many months now.

I know I’m just speculating on a possible Vodacom sale as, I’m sure, that Vodacom is still a valuable asset within the Vodafone portfolio, currently accounting for 13% of overall revenues. However, one could also argue that this may the time get the best price for the asset, especially considering the hefty gross €53bn debt mountain weighing down the Vodafone Balance Sheet. Also, last month Bloomberg reported that Etisalat was eyeing Vodafone’s stake in Vodacom

Methinks where there’s smoke, there’s fire and, definitely, during my investment banking days, the events of the past month would have been more than enough motivation to prepare pitch books to advise on the options for the Vodacom stake. As an Investor, it’s probably time to go overweight on Vodacom?
Frank Ven – Founder, Future Capital www.futurecapital.global

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