Geared for action
Private equity appears to have become an unstoppable force driving all before it with a business alchemy that few understand and even fewer can resist. As we point out in our cover story, if we all relied solely on popular myth then sensible treasurers would be running for cover as soon as they got a hint that a private equity house was sniffing around their plc.
But perhaps corporates can do something other than react like rabbits caught in the headlights of the private equity juggernaut. There are signs that corporates are beginning to work out strategies to deal with the challenges posed by private equity. As this is mostly a question of financial engineering, it is not surprising that treasurers should be at the heart of the action. As John Grout, the ACT’s Policy and Technical Director, reports from the ACT’s Midlands Regional Group’s Conference and Network event, corporates are beginning to look at techniques such as whole business securitisation as part of a review of balance sheet and funding and are finding that it is cheaper and raises more than conventional bank finance.
The veracity of such methods has been confirmed in a report by accountancy firm KPMG, Private equity versus the corporate, which suggests that the FTSE 350 can give themselves a much needed advantage over the private equity sector by moving faster and more aggressively in competitive situations and by exploiting a capacity for greater leverage.
Private equity players are often said to have the edge in winning the deal due to high leveraging but research shows that for £500m+ deals, the weighted average cost of capital (WACC) of FTSE 350 companies at an average of 10-11% is comparable with the private equity houses’ average of 11-13%.
On average, the net debt to earnings before interest, taxation, depreciation and amortisation of the FTSE 350 is 1.2 times; the figure for a private equity-backed business is a stonking 7.7 times. Corporates may not want to ratchet up to quite that degree but by increasing leverage they may be in a position to compete better.
There has been a long-held sense that leverage is bad, but we are starting to see some evidence that conservative attitudes to debt are beginning to shift. A key risk of leveraging is that the cost of debt suddenly increases. But bearing in mind that FTSE companies are big cash generators at the moment, it can be argued that only a substantial increase in interest rates would outweigh the beneficial impact on WACC of the increased debt levels. Increased leverage has always been seen as risky, but in the current climate it appears that being undergeared is the greater risk. It’s your choice.
PETER WILLIAMS
Editor
Private equity firms could be asked to comply with a best practice voluntary code of conduct after an industry body agreed to establish an independent working group.
Mohammed Amin of pricewaterhousecoopers LLP considers what the budget means for corporate treasurers.
Private equity comes under the microscope
With the various regulatory and industry bodies announcing independent initiatives to assess the impact of private equity on commercial and business activity, the field has suddenly become very crowded. The ACT Policy and Technical team is tracking the debate and where appropriate will participate in any public consultations.
Vodafone’s $19bn connection with the Indian mobile market has seen the British-based global giant ring up a $3.5bn US bond offering.
Cargill (A2/A) came with its inaugural issue in the sterling space in February. The £150m 30-year issue paid a coupon of 5.375% and priced tighter than guidance at G+98bps. This transaction follows a period of marketing to UK investors who proved receptive to its credit story.
Julia Berris talks to Tesco treasurer Nick Mourant on why the company has issued a bond that may outlast most of its investors.
The conference looked at financial policy and financing the business’s strategic plan from the perspectives of companies with different financial history and different ownership structures. Like the first ACT regional half-day conference in Huddersfield in November, this excellent event was supported by Lloyds TSB. Lee Miles, Deputy Treasurer of Mitchells & Butlers, took the chair.
In the third article in this series, Ian Cooper, Sian Hurrell and Guy Whitby-Smith of the Pension Solutions Group, RBS Global Banking & Markets, look at some of the key liability hedging solutions for pension schemes and consider some implementation issues.
While the concept of liability hedging is now widely accepted as a key part of any asset liability study, implementation is still surrounded by hearsay and uncertainty. This should not be the case: a coherent implementation strategy for liability hedging can be both transparent and straightforward.
Adrian Coats, director of treasury at Scottish Power, tells Julia Berris how working for just one company can offer a broader range of experience than working for many.
Corporate treasurers are finding an increasing need for asset-backed lending which provides flexible support to the increasingly complex working capital and cash needs of today’s corporates.
Whether the private equity market is key in terms of adding value or simply ruthless, the treasurer’s role in a private equity-owned organisation indisputably becomes more challenging, interesting and central. Private equity can change the way in which treasurers view cash management, bank relationships and legal structures.
Banking consultant Christopher Karaolis highlights some of the nuances surrounding MIFID and stresses the implications for the corporate investor.
With renewed levels of plain vanilla refinancing after very low activity last year, Fenton Burgin considers the strategic and practical issues for private and public companies looking to access the loan markets in 2007.
Most companies seek legitimately to minimise their tax. Developments affecting EU and national tax law, including the Cadbury Schweppes case, the FII case and the Varney review, should be considered carefully by organisations reviewing their treasury, capital and organisation structures.
With the deadline for SEPA looming, Nicola Toombs questions whether banks and their customers are following the best route to compliance.
Chris Bowden looks at how treasurers can best manage risk in a trading environment.
A local bank should be the first port of call for UK treasurers expanding into France, but beware: the bank/corporate relationship in France differs greatly from that in the UK. France’s bureaucracy and 35-hour week are seen as barriers to trade, but the statute-based legal system and a diminishing language barrier makes commercial ties easier.
Dimos Dimitriadis and Leo J Schuld assess the results of Deloitte’s global treasury management systems survey 2006.
The advice on how to shine at interviews remains the same, but Matthew Mattheou has seen enough to know that many people just haven’t been listening.
The 2007 Conferment ceremony was generously sponsored for the second year by Barclays, and hosted at its Canary Wharf headquarters.The ceremony was presided over by the ACT’s President, Stephen East, and Angela Potter, Head of International Trade and Cash Solutions at Barclays, gave a welcoming address.
