The stock market, we are invited to believe, has been in a state of utter turmoil for the past few weeks. Fund managers have been hiding in bunkers, apparently, afraid to consider new investments. It’s rubbish, of course, but that doesn’t prevent every company that pulls its flotation, or IPO, from blaming the market.
The latest is debt-collector Cabot Credit Management, a firm that buys portfolios of defaulting loans from banks, energy suppliers and retailers at a discount and then tries to collect the debts. Ken Stannard, chief executive, reports a “high level of engagement and interest” from “a wide array of investors” but, oh dear, “the timing has been unfortunate with respect to IPO market conditions”.
Really? The FTSE 100 index is a mere 1.8% below its level on 20 October, the day Cabot announced its intention to float. That’s nothing. A more plausible explanation for abandonment is that investors thought Cabot’s owners – principally, a US debt management company called Encore and private equity firm JC Flowers – were asking too much. The reputed valuation was £1bn.
Investors were encouraged to question that figure by some admirably robust questioning from hedge funds. Step forward Bybrook Capital, which has been arguing loudly that the costs of chasing the debts of distressed borrowers are enormous, thus the cash flows for the collector aren’t as juicy as they may appear.
Bybrook may be talking its book, since it probably has short positions in other debt-collectors, but that’s not a reason to ignore it. Recall that Lansdowne, another big London hedge fund, was short of Northern Rock’s shares for years before the bank’s collapse because it thought the business model was flawed.
Cabot can hardly protest that it was friendless in the debate since it had five City firms working on its float, including the great houses of Goldman Sachs and Morgan Stanley. Cabot’s owners, if they wished, could also cut the price-tag to try to get the float away, just as ready-meal firm Bakkavor did last week. They didn’t, which is their choice, but, please, spare us the bleat about “market conditions”.
The story here seems simple: investors assessed the risks in the unlovely business of collecting debts and didn’t like the price.
We need to talk about Kevin
They probably weren’t in a mood for jokes in GKN’s boardroom, but let’s hope somebody used the obvious line: we need to talk about Kevin.
In September, Kevin Cummings, head of the aerospace division, won the race to be GKN’s next chief executive and was hailed as an “excellent” successor to Nigel Stein. The promotion would take effect in January. Then came a small problem: last month’s £15m charge to cover a write-off of stock and receivables in an aerospace plant in Alabama. Now it’s a big problem: GKN has looked at more of its US plants – making parts for Black Hawk helicopters – and confessed that a further charge of £80m-£130m is needed.
That sum is hard to skip over. It represents about 15% of inventories held by the aerospace division, a hefty proportion. GKN did not explain why Cummings, who had led the aerospace division since 2014, is leaving “with immediate effect”, but reticence is easy to understand. Pay-off arrangements for a chief executive-designate who is ousted before he starts the job will be a legal minefield.
Cummings’ exit leaves GKN in a succession muddle. Anne Stevens, an ex-Ford veteran hauled from non-executive benches to be interim chief executive, is a useful stand-in. But a permanent replacement will probably come from outside and she or he will take time to arrive.
In the meantime, excitable City analysts can forget any idea that GKN is about to demerge its aerospace division from its better-performing automotive business. Nothing will happen until the new boss arrives. That is probably a good thing: GKN is an engineer and there ought to be cross-over skills between cars and planes.
The accounting episode puts a dent in Stein’s successful leadership of GKN, but the recovery from the 2009 recession has still been impressive. Jolly good. Now, before you go, don’t forget to explain to shareholders why the accounting controls in the US were so poor.
Second thoughts needed over second referendum
Does Lloyd Blankfein, chief executive of Goldman Sachs, think before he tweets? In his latest Brexit-related offering, Blankfein opined that chief executives in the UK are too afraid to say that a second referendum on leaving the European Union would be a good idea. “So much at stake, why not make sure consensus still there?” he asked.
It’s a reasonable question, but, come on, few things are less likely to bring about a second referendum than public lobbying by the multimillionaire American boss of a US investment bank. The effort is bound to be counter-productive. Does that not cross his mind? Do none of his clever colleagues in London advise him to speak softly? Or does he just like the attention?
