What were they smoking in Kier Group’s boardroom last September when the directors decided it would be prudent to increase shareholders’ annual dividend by 2% to 69p?
Nine months later, the contracting group’s share price has crashed from 900p to 108p. Kier’s borrowings are much higher than imagined at the time, despite the arrival of £250m in cash from a badly-received rights issue at 409p last December. Andrew Davies, the new chief executive, is now ditching smaller business units to try to get borrowings under control and restore the faith of trade insurers. And, naturally, the dividend is a goner. There won’t be one this year or next.
As far as it goes, Davies’ rescue strategy looks sensible. The group will sell or “substantially exit” divisions that include the housebuilding unit Kier Living and the commercial property operation. Both have contributed to the wild swings in Kier’s debt levels, and so score badly in the hunt for much-needed stability.
In theory “core” Kier should be more predictable. It will be concentrated on regional building work plus contracts at big infrastructure projects such as the Hinkley Point C nuclear plant, the HS2 railway and Crossrail. For good measure, the new boss is cutting 1,200 jobs. It’s a plan.
It was also essential that Davies move quickly. He’s been in post for only eight weeks and had hoped to take another month strategically reviewing the mess. There was no time to wait, however, once trade insurers started to question the strength of Kier’s balance sheet. Half the challenge here is to restore confidence. Best to get on with some execution.
Indeed, this debt-reduction effort could have been adopted two or three years ago, and it surely became essential after Carillion’s failure shocked lenders and suppliers in the world of contracting 18 months ago. That earthquake was either missed or ignored by Kier’s board when it was pondering their dividend declaration last year. Philip Cox was the chairman then, and still is. By rights, he should join the ranks of those Kier employees who will lose their jobs.
Do not weep for Babcock
It would not be a surprise if Babcock’s investors were depressed. Shares in the Ministry of Defence contractor have been falling since the purchase of the helicopter firm Avincis in 2014. Brexit hasn’t helped. Nor has the MoD’s lack of cash. Nor has a hostile online campaign by a mystery “research” outfit. But sufficiently depressed to contemplate an all-share merger with the outsourcer Serco?
Surely not. Babcock’s board itself dismissed the approach – made in January, but confirmed only now – as having no strategic merit, a judgment that feels correct. The supposed synergies in defence were loose. Babcock, which refits nuclear submarines and owns the Devonport and Rosyth shipyards, is far higher up the engineering ladder. The point is illustrated by the two sides’ profit margins. Serco achieves 3% while Babcock, for all its troubles, still gets 11%.
One can’t blame Serco’s chief, Rupert Soames, for trying to be opportunistic. He has been widely applauded for his efforts to fix the company and it would not be a surprise if he were in search of a bigger stage to try to get his share price to motor. But Babcock shareholders do not need to shed tears over what might have been. Self-help, assuming it actually happens under the incoming chair Ruth Cairnie, must be a better long-term approach.
Deutsche, now a market cap minnow
As Deutsche Bank contemplates creating a €50bn (£45bn) “bad bank” as a way to stop losing so much money in investment banking, let’s remind ourselves of the market capitalisation of Germany’s financial champion. It’s a mere €13bn, which, in global banking terms, doesn’t even qualify for second division status.
Let’s also recall what used to be said about German banks. David Marsh, a guru on German financial matters and chairman at the Official Monetary and Financial Institutions Forum thinktank, wrote recently that the former chancellor Helmut Schmidt “used to lament how Germany’s giant banking groups would stoke up dangerous enmity among neighbouring countries by inevitably dominating European finance”.
As Marsh said, those past fears “now look near-comical”. Indeed, if the politics would allow it, Deutsche could be seen as a takeover target for a larger European rival. Even Barclays’ adventures in investment banking look conservative by comparison with Deutsche’s.
