Wednesday, 21 July 2010

Steer Clear Of The New Lord Hansons...

In my Money Week column this week, I've been arguig that investors should steer clear of financiers such as Nat Rothschild, and Hugh Osmond. They look like the new Hansons. Here's a taster....

In a dull, nervous market, they have at least provided a splash of colour. In the past few months, investors have seen two high-profile IPOs by celebrity financiers – Nat Rothschild and Hugh Osmond – raising huge sums of money to create new listed acquisition vehicles.
Investors appear to have bought into the concept enthusiastically. Both men come across a new generation of Lord Hanson’s, the fabulously successful 1980s tycoon, who used his company as a vehicle for a series of high-profile takeovers, gobbling up huge chunks of British industry, and making a fortune for his army of loyal and devote shareholders along the way.
But the Rothschild’s and Osmond’s investors are making a big mistake. This is the wrong decade to be trying to recreate the acquisitive conglomerate that was so successful three decades ago. There is very little money left to be made through financial engineering. If investors want high rates of return they should be looking to small companies, technology entrepreneurs, or the emerging markets. The new generation of mini-Hansons are not going to deliver it for them.
There is little escaping the ballyhoo that surrounded both IPOs. When your name is Rothschild, it is not too hard to get pulses racing in the financial markets: it remains, a couple of centuries after the dynasty was founded, the best brand name in high finance. Nat is the latest in a long line of Rothschild’s to play the markets with consummate skill. He may be best known in this country for his very public row with George Osborne in 2008: it was Nat Rothschild who claimed that Osborne tried to solicit a donation from the Russian billionaire Oleg Deripaska after visiting his yacht off Corfu that summer. But Rothschild has been known for some time as a hedge fund manager with excellent links to the Russian mega-rich.
Last week, he successfully floated Vallar in London, raising £707 million from investors for a shell company that plans to make acquisitions in the mining and natural resources industry. Together with James Campbell, a former Anglo-American executive, the new business will hunt out lowly-rated assets and piece together a new conglomerate. Investors loved the concept. The company raised comfortably more than its £600 million target for the float.
They were just as keen on Hugh Osmond’s new venture. Back in March, the financier raised slightly more than £400 million for his vehicle, Horizon. Osmond first made his name on the floatation of Pizza Express with his colleague Luke Johnson, and went on to create the pubs chain Punch Taverns. He’s made plenty of money for his backers over the years. The idea behind Horizon was to find companies that had taken on too much debt, buy them, restructure their balance sheets, and get them back into good shape. It has been linked with the homebuilder Crest Nicholson and the car repair chain Kwik-Fit, although it hasn’t completed a deal yet.
Both companies look to have ambitions to become the Hanson of the new decade. Through the 1970s and 1980s, Lord Hanson built up a hugely successful conglomerate. He’d buy up companies such Imperial Tobacco, strip out and sell-off irrelevant subsidiaries, toughen up the financial discipline of what remained, and make a fortune for his shareholders in the process. One of Mrs Thatcher’s favourite tycoons, he helped re-shape British industry in that turbulent decade, and although he didn’t leave much of a lasting legacy – the Hanson that remains is quite a small building products company – he was a hugely influential figure in his day.
Just like Hanson, Vallar and Horizon are acquisition vehicles run by celebrity financiers, built around the idea that they can buy up assets cheaply, work them harder, and piece together a conglomerate founded on the personality of a dominant financier.
The trouble is, it is not likely to work. The climate in which they are operating is very different from 30 years ago.
First, there aren’t many underperforming conglomerates out there ready to be broken up. One of the most successful tactics of the corporate raiders of the 1980s was to target big companies that had lazily put together a mix of businesses they didn’t understand very well. But every company has slimmed down to its core business at least a decade ago - there aren’t any left to break up.
Next, there are not many companies that are being inefficiently run. Two decades of chief executives mouthing the mantra of shareholder value mean there aren’t many companies that can be easily made leaner, or more focussed – and certainly not by men who are better know for their financial connections than for their ability to actually run a business.
Thirdly, two decades of pressure from the private equity industry mean that most assets are ‘sweated’ about as far as possible. There isn’t much fat out there to cut, and certainly not in the way there was in the 1980s. Likewise, if there was value to be created out of re-structuring a balance sheet, the chances are one of the leveraged buy-out funds would have already bought it.
True, Osmond may be looking to restructure companies that have taken on too much debt. But if they are good businesses, their existing banks or shareholders will surely do that for them. Rothschild may use his contacts to find mining assets that are worth a lot of money – but why won’t their owners list them themselves, or sell them to one of the resources giants?
The reality is, there is no low-hanging fruit out there, which is all these kind of
acquisition vehicles can pick.
Investors should realise that there are likely to be very meagre returns from financial engineering in the next decade. That era is over. If you are looking for above average returns, you should be looking at small entrepreneurial companies, at technology stocks, or to the emerging markets. That is where the growth is coming from – and not from celebrity financiers, no matter how illustrious their track record or family name.

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