How does this work? The board of a FTSE 100 company launches an inquiry into allegations of “personal misconduct” against its chief executive. It goes to great lengths to show it is doing things by the book by hiring an outside legal firm to conduct the investigation and retaining two others to act as advisers.
Then, before a meeting of the directors to consider the findings of the inquiry, the chief executive resigns, despite having rejected the allegations “unreservedly”. The board deems the departure to be a retirement, meaning the executive can keep an incentive package worth up to £20m, and the company vows that the details of the investigation will never be disclosed.
To put it mildly, the WPP board’s handling of Sir Martin Sorrell’s exit seems confused. We may never know who leaked the fact of the inquiry, but, once the lid had been opened, the anxiety to keep the findings secret looks questionable. Adherence to process seems to have lasted only as long as it was useful to do so. If the chairman, Roberto Quarta, comes under pressure from shareholders to say more, he cannot complain. Investors have been left in the dark.
At a push, one could say Quarta is being commercially pragmatic. Why risk handing ammunition to rivals to lure WPP clients? Maybe, but the messy and unexplained exit of the boss of 33 years’ standing creates problems of its own. Even now, Sorrell is “available to assist with the transition”, says WPP, yet the founder signed off his email to staff with an ambiguous “back to the future” pledge. Did he mean he wants to get back into the advertising business under his own steam? If so, matters could become yet more complicated if Sorrell sets up in competition or bids for parts of the old empire.
WPP’s sticking-plaster solution to succession – Quarto becomes executive chairman and two senior executives, Mark Read and Andrew Scott, become chief operating officers – is fine as far as it goes. But if a permanent successor is recruited from outside WPP, he or she could take six months to arrive, and a post-Sorrell strategy could take another half a year to be finalised. That is a long period of uncertainty to navigate when the City is questioning whether WPP’s holding company model is fit for the age of Facebook and Google.
An optimistic view is that the founder’s departure could prove liberating for operational chiefs who have known only micro-management from the centre. It’s a point of view but Citigroup’s list of the immediate risks sounds correct: account losses, a leak of talent, a break-up and sale of some divisions; and “deep restructuring with a great deal of cost and uncertainty”.
The share price fell 6.5% on the first trading day after Sorrell’s exit. Even after a fall of one-third in the past year, that reaction looks fair. A board that for years had to defend itself against the charge that it was in thrall to Sorrell and his pay package has finally made the break. But it’s not obvious that it knows what to do next.
Whitbread should keep Premier Inn and Costa together
The idea of splitting Whitbread in two – by separating the Costa coffee business from the Premier Inn hotel chain – was a terrible idea when first promoted by jobbing investment bankers half a decade ago. Costa was too small, and too reliant on Premier Inn’s cash flows, to stand on its own. But maybe, as new 6% activist investor Elliott Advisors believes, the calculation is different now. Costa is bigger, is a commanding market leader in the UK and no longer has to be subsidised.
The difficulty, however, lies in believing the manoeuvre would somehow unlock £3bn of value from a company currently worth £7.7bn. Just because a demerger is more technically feasible, it doesn’t mean the numbers stack up.
A split might push the share price a little higher, as the 7% rise on news of Elliott’s presence on the register suggests, but dreams of an instant 40% re-rating sound fantastical. Whitbread has only two moving parts and the market ought to be able to price both easily. Costa, with a Chinese operation that is yet to break even, is not going to command a princely Starbucks-style global rating.
Whitbread’s chief executive, Alison Brittain, should stick to her stance of keeping the long-term structure under review. In other words, set policy according to the needs of the business. The short-term demands of US hedge funds should not be a priority. If Whitbread does its job well, the share price will look after itself.
