One can guess at how the thinking went in the boardroom at Pennon, owner of South West Water. The Labour party is threatening to nationalise the water industry, so let’s try to defuse some tension by giving customers free shares. We’ll call it “a new deal” and talk about “empowering” people.
Up to a point, one can understand the idea to do something eye-catching. The shadow chancellor, John McDonnell, has yet to explain how he would pay for his plans, or which of the many versions of public ownership he prefers (two big oversights), but he has definitely tapped into resentment with the current privatised model in England and Wales. Water companies know they are seen as greedy and unaccountable. It is why, as they unveiled their business plans for the next five-year regulatory period, many announced various “partnership” ideas that were nods to the nationalisation debate.
Pennon’s plan, however, looks half-baked. It apparently polled strongly, but one wonders if the researchers described a worked example. The company plans to offer customers a shareholding, or “shadow” shareholding, worth £20m, which sounds vaguely impressive until you realise it equates to £25 per household for the 800,000 households in the south-west. At Pennon’s current share price of 755p that means three-and-a-bit shares each, which would be hideously fiddly to administer.
As for the claim that customers will “be able to receive a share of the company profits as shareholders do”, punters should know that Pennon’s shares currently yield 5%. So the starting dividend income on a £25 holding would be about £1.25 a year, not always enough for half a pint of beer in a Cornish hostelry. Such tiny sums probably wouldn’t convert many waverers to the joys of privatisation. Pennon tends to be more open than most of its breed, but this looks like a gimmick that could easily backfire.
Rivals kept things simpler. Thames, whose financial engineering, pollution and leaks have done most to excite nationalisation fever, said its private owners would have to accept lower dividends while an extra £2bn is spent on infrastructure. Severn Trent said it would give 1% of profits to a “community fund”. Both approaches ignored soaraway boardroom pay, another source of complaint, but at least they are easier to understand than token shareholdings.
Three concerns for Funding Circle
Roll up! Who wants to invest in a loss-making company that could be valued at £1.95bn even though it admits it won’t be making profits a priority for a while? Oddly, the flotation of Funding Circle, a peer-to-peer lender for the small business sector, could become a hot ticket. The firm is a new-breed financial technology company and “fintech” is meant to be a new sport at which the UK will excel.
Funding Circle, co-founded in 2010 by the chief executive, Samir Desai, a 35-year-old who could find his own stake worth £125m, has certainly done enough to convince Anders Povlsen, the Danish billionaire whose previous punts include the online fashion retailer Asos. Povlsen’s fund has committed to buy a 10% stake as long as the firm’s valuation doesn’t exceed £1.65bn, before the raising of £300m of capital. More impressively, Bank of New York Mellon Corporation has agreed to lend $1bn (£780m) via Funding Circle’s US platform, which is a useful leg-up. At the moment, the original UK platform is about 70% of the whole.
There are three main worries. First, will regulators and politicians smile upon lending platforms? The current stance is broadly supportive, since extra competition for banks is popular, but sturdier capital buffers may be demanded in time. Second, how will Funding Circle’s loans perform in an economic downturn? The boast that the credit-scoring data is as good as the banks’ has yet to be tested properly. Third, how much profit can Funding Circle, which doesn’t take any direct lending risk itself, eventually expect to make from its setup and service charges?
The last one is the big unknown. Losses last year were £35.3m, which is hardly surprising when 40% of revenues of £94.5m were consumed by marketing costs. However, £5bn of loans have been arranged since the launch, including £1bn in the first half of this year, which suggests serious potential. As an investment, Funding Circle is clearly high-risk but one suspects this float will find fans.
Quick decision required from Carney
At this point, Mark Carney could probably name his price to extend his stay as governor of the Bank of England. The chancellor, Philip Hammond, clearly wants a familiar face in Threadneedle Street for the year after Brexit and seems not have an alternative name in the wings amid the current negotiating fog with the EU. The best hope is that Carney makes up his mind quickly. Another week or two of uncertainty and the Treasury will look desperate, ill-prepared, or both.
