Nationalisation plans will bring more than howls of outrage | Nils Pratley
15 May 2019 21:30
Jeremy Corbyn and John McDonnell have heard the howls of outrage from boardrooms and are unmoved. If Labour comes to power, the promised vast nationalisation programme would proceed at prices “to be decided by parliament”. Translation: compensation would be set below market prices.
How far below? The next rung down on the valuation ladder is the regulated asset base, as used by regulators when they calculate returns on capital, but Labour appears not to fancy that formula either.
Instead, it is pushing “shareholder equity”, otherwise known as retained earnings, where the numbers can be substantially smaller. Even then, it would seek to make deductions for “asset stripping” and “state subsidies” since privatisation.
Crunch a few numbers to get a feel for how severe the haircuts for shareholders could be. National Grid’s electricity transmission business – the pylons and wires part – showed regulated assets of £13bn in its last set of accounts. Remove the 65% portion that is funded with debt and assume about £4.5bn is funded with equity. The stock market might currently put a 30% valuation premium on top, giving a total of £6bn.
Then look at the retained earnings in the division’s accounts, the focus of Labour’s attention – £3.5bn. After the assorted deductions, the nationalisation price for the electricity transmission network might be £3bn, or half the current implied market price.
Moody’s, the credit rating agency, ran a similar exercise for the English water companies and produced an even lower ratio – about a third. One can quibble over details in these calculations but the gist seems clear: the discounts could be enormous.
Naturally, the companies regard the entire nationalisation ambition is wrong-headed from start to finish. We’ll leave that debate for another day since a new government plainly has the right to implement a manifesto proposal. But the level of compensation for investors is the important bit. Boards, pension funds and investors will fight for a fair price and, arguably, would be asleep at the wheel if they did not.
You can see defences being erected already. Thames Water issued its most recent bonds with a “nationalisation event” clause that requires immediate repayment if public ownership were to happen. Or try the advice offered by Peter Atherton, independent energy analyst at Cornwall Insight, in a blog a year ago. He suggested companies, while not trying to thwart nationalisation, could seek a fair price via measures such as moving corporate domicile, re-issuing debt under US jurisdiction or placing corporate funds overseas.
You may also like:
Few companies want to seen to be reaching for their lawyers at this point but any cut-price plan is bound to be tested in the courts. The stakes are higher than they were in 1997 when Gordon Brown applied a windfall tax to the privatised utilities.
It won’t stop there. UK pension funds would be shouting about a smash-and-grab raid on ordinary savers and workers with save-as-your-earn share schemes. Foreign sovereign wealth funds, who have piled into UK utilities, will be threatening an investment strike in the UK. Is Labour prepared for the onslaught?
The energy paper itself, Bringing Energy Home, offered a reasonably coherent sketch of how the gas and electricity networks would be reorganised under a national energy agency. And the document, thanks to a superb 2017 report by Citizens Advice, was strong on how the energy network companies ran rings around the regulator for eight years and made outsized profits.
But one always comes back to price. “Existing shareholders will be compensated with bonds,” said the document, repeating Labour’s vague formulation. Yes, but you’re still dancing around the key issue.
“There may be disagreement about what market value is, but you’ll struggle to find any case of an OECD government deliberately setting out to pay less than market value,” says Dan Neidle, partner at Clifford Chance. He’s a corporate lawyer, so he would say that. But it’s a fair point.
Here’s a rare event – a FTSE 100 chief executive handing back a part of his bonus because the performance of the company wasn’t good enough. Yet cheering David Potts at Morrisons, and finance director Trevor Strain, is the wrong reaction.
First, why was the remuneration committee awarding bonuses if even the two men running the shop think the company could have done better?
Second, Potts’ returned bonus portion relates to “personal objectives” such as increasing direct sourcing of “eggs, nuts, bananas, pittas and crumpets”. A bonus for buying crumpets? Isn’t that the day-job at a supermarket chain?
Even after the deductions, Potts got £4.6m and Strain £3.2m. No prizes for heroism are required.