Many investor are wondering why there should be so many takeovers just when the media is full or reports of slowing sales and falling profits. The answer is that people buying store chains – ‘private equity’ firms and rich individuals – aren’t looking at profits. They are looking at cashflow and assets.
Profits can be inflated and depressed by accounting conventions, whereas cashflow is the amount of actual money left in a business after all its bills, including dividends to shareholders and taxes to the government, have been paid. Many retailers generate large amounts of cash in relation to their size, so they’re an attractive target. More so still if they own large amounts of freehold property, which banks will lend money against. This is the main attraction of Selfridges and Austin Reed, whose flagship stores on Oxford Street and Regent Street respectively are worth a fortune.
The frenzy has left us feeling pretty pleased with ourselves, as we had recommended buying shares in both Selfridges and Debenhams before the bids emerged. Our analysis of who might be next highlights companies as diverse as Moss Bros, worth just £40m, right up to FTSE 100 giant Dixons, which is worth £2.35bn. A particular favourite is New Look, which is a fine business even if there isn’t a bid.
Another hot issue in the papers at the moment is that of executive pay. Hysterical headlines about fat cats and payments for failure belie a more complex reality. At the IC, it is not high salaries per se that we object to – in any vaguely capitalistic society, some people are going to earn a lot more than others. Our gripe is that the committees that set executive pay and conditions operate opaquely, and their membership is frequently drawn from a clubby, backscratching business elite. Furthermore, the things that trigger the showers of bonuses and share options are not often the things that benefit shareholders. Any fool can go out and organise a takeover, but very few managers can structure one that works in the long term. Increasing profits or earnings per share is all well and good, but not if it means running up huge debts or decimating a company’s ability to invest for the future. The answer to this conundrum is not more government red tape, it is for the big institutions to start voting against outlandish pay arrangements, rather than meekly abstaining. Trouble is, the institutional fund management industry is home to some of the most egregiously overpaid people on earth!