Friday, 7 December 2018

Interserve / Kier Group short selling etc

Following on from Kier Group (and Carillion, of course) it looks like Interserve is facing some serious financial pressure. According to the FT there are "rescue" talks underway that involve a debt for equity swap that would largely wipe out existing shareholders. It is also suggested that subsequently the company would attempt a rights issue (if I'm reading it right). I can't imagine that would be a popular one, and there is an anonymous quite from a banker suggesting as much.

Anyhow, I thought I'd take a look at the short positions. Bear in mind that this is only capturing shorts disclosed by the UK regulator that are above 0.5% (you can get better/more extensive data from from IHS Markit but I don't have access to it). The 0.5%+ positions currently stand at 5.69% for Interserve - actually down a bit from last week. Here's a screenshot from Shorttracker (which just captures the FCA data) that shows the historical trend.

The share price didn't do much today buy has nearly halved in the past month and is down roughly 80% this year. Given that the FT story has just broken there might be some action on Monday.

Also had a quick look at Kier Group. Its share have more than halved over the past month, mostly of the loss in response to the emergency rights issue. The short position is also down, from about 14% to 12%.

Again, remember that actual total shorts will inevitably likely be higher (presumably there are some out there between 0% and 0.5%). Dunno if the slight downward trend means anything or not. Maybe some shorts feel they've made their money? Maybe some stock lenders want their shares back?

Anyway, will keep an eye on both

Thursday, 6 December 2018

Capita recruits employee directors

Just a "workers on boards" nugget, but Capita has announced it is seeking to recruit two employee directors. You can read the press blurb here or the story in the Times here.

When I dug around a bit I discovered that this had actually been announced back at the start of August in the H1 results:

So that's three companies so far that I know that will have worker directors next year (First Group, Mears Group and Capita). This will obviously go higher. I reckon in a few years it could be quite commonplace.

Sunday, 2 December 2018

Major shareholder turns against Ryanair board

Just a quickie, but I spotted last week that Baillie Gifford had voted against the re-election of both David Bonderman (chair) and Kyran McLaughlin (SID) at the Ryanair AGM in September.

Why does that matter? Because Baillie Gifford is a large (4%) and long-standing Ryanair shareholder and, as far as I can see, has not opposed any board members in recent years.

Another straw in the wind I think.

Kier Group in trouble

Kier Group's shares took a nosedive on Friday afternoon, after the company announced a £250m rights issue intended to pay down its debt. The background to this, according to Kier Group, is a mixture of lenders pulling back from the construction sector, more scrutiny of debt levels by potential customers and pressure to reduce payment times to suppliers.

Some of the comments in the coverage from Friday are toe-curling. For example, here's a snippet from the FT:
Alastair Stewart, an analyst at Stockdale Securities, said: “This was clearly an emergency rescue rights issue, required by some of their lenders at breakneck speed. A few years ago Kier were seen by the industry including rivals as probably the most conservative, solid company in the sector. Now it looks like the banks have given them a month to save themselves.”
Kier Group is one of the most heavily shorted UK stocks. According the FCA's list of disclosed short positions (which only lists 0.5%+ positions) total shorts at that level and above are almost 14%. That is the largest total short position in the list, and given that there are likely to be other shorts out there below 0.5% the real total could be a few points higher. (I think I can see about another 2%)

Here's a chart nicked from ShortTracker showing how FCA disclosed short positions in Kier Group have changed over time. Obviously negative sentiment has been on the rise throughout 2018.

Who is behind it? Below is a list of the firms reported by the FCA as currently shorting Kier Group. Note that Marshall Wace actually has two short positions held by different bits of the firm, totalling 4%.

After that the next biggest short is BlackRock, with 2.44%. BlackRock also has a long position. According to the most recent annual report, this stood at 5.9% as at 19th September. So as well as having the second largest short position in Kier Group, it also has (or had) the third largest long position.

And for good measure BlackRock also appears to manage some legacy Kier Group pensions.

And another notable player in the Kier Group shorts list is Naya Capital. This firm gave the Tories £100k in the run-up to last year's general election. So another public sector contractor being shorted by a firm that funds the party in power.

If any of this sounds familiar, that's because there are a lot of similarities with Carillion. The same firms shorting, and similar links. Let's hope the company has a rather better outcome.

Back on the long side, Woodford and Aberdeen Standard have very big positions (14%ish and 13%ish respectively according to CapitalIQ). In the latter case there is a decent chunk of UK pension fund money in the mix. Looking further down the share register, it is notable that the BAE pension scheme is also heavily exposed with 2% (one of a number of large positions they hold in UK companies that I have come across).

Coincidentally Kier Group just held its AGM. On the ballot were two resolutions seeking authority to disapply pre-emption rights. Not uncommon, but a bit more meaningful now. Both passed with spanking majorities. I can only see a couple of disclosed investor votes on the AGM so far - NBIM and BMO - and no oppose votes on either. But they aren't major holders anyway, NBIM having cut its position right back.

Finally, in case you were wondering, the total disclosed short position in Interserve on the FCA list stand at 6.4%. We might expect to see that creep up as concerns about the sector spread.

Thursday, 29 November 2018

Sports Direct - Mike Ashley's declining popularity

Perhaps others spotted this at the time, but I just realised that Mike Ashley saw a very sizeable vote against his re-election at the most recent Sports Direct AGM.

On the headline vote he walked it with a vote against of just under 10%, or 44m shares. But obviously he's the controlling shareholder so a lot of those votes are his. So if we look at the votes on independent directors (where his holding is stripped out) the total number of minority shareholder votes cast is 120m. So the minority shareholder vote against his re-election was 36.6%. There can't be that many votes against chief execs that are that high. What is more I can see some interesting names voting against him - like M&G.

It's also up from a roughly 20% minority shareholder vote against in 2017, 20% against in 2016 (though including abstentions takes total not in favour to 27%) and 11.5% in 2015.

Obviously there is no chance of him being ousted, but it again shows you how unusual Sports Direct is in governance terms.

Saturday, 24 November 2018

Chief execs, incentives and discounting

A quick plug for Are chief executives overpaid? by Deborah Hargreaves, formerly of the High Pay Centre. Spoiler alert: the answer is YES.

The book is a quick run through what top pay looks like, why it has changed and grown, some of the attempts to tackle it and so on. Of interest to people in the corp gov microcosm, the book is pretty critical of shareholder primacy. As I've argued previously, this has already become the "common sense" amongst left-of-centre policy wonks (last year's IPPR report fleshed out what I think is the centre of gravity now) and I have seen the odd similar approach from the Right too. It does feel like the ground is shifting, so it will be interesting to see if we start seeing more policy / regulatory ideas in this space - one to keep an eye on.

On pay specifically, as always my eye was drawn to the section on motivation (where again I think opinions have shifted, though practice has not). So here's a chunk:

[R]esearch by Professor [Alexander] Pepper... undermines the argument that top executives need ever bigger carrots dangled in front of them to improve their work ethic. He has found executives 'are much more risk averse than standard economic theory would suggest'. This means they value a 'sure' thing such as money more highly than a risky option such as the promise of a share award.

At the same time, 'executives are very high time discounters'. This means that if they know they will not get their share award for another three years, they disregard its value. 'This empirical evidence challenges conventional wisdom about the merits of high-powered incentive plans and pay for individual performance. It suggests that long-term incentives may actually be fuelling increases in executive pay, rather than helping to contain pay inflation.'  

I've always found the point about discounting very interesting, and wonder how execs compare against the rest of us. But it also blows a hole in some of the ideas being pushed as 'reforms'. For example, if you advocate that LTIPs have a 5-year timescale rather than a 3-year one, aren't you just diminishing the value of it in the eyes of execs even further?

I had a back and forth with a defender of the "make pay more long term" school a year or so back, and their argument seemed to be that execs say they don't value long-term rewards because they want short-term ones. To me that sounds self-evident. If you say "I put a lower value on Y than X", you can also express this as "I put a higher value on X than Y" (unless I'm missing something?). So I don't see why we don't just accept that when execs say they value long-term incentives less they mean it.

Of course the reason why some people don't like this conclusion is because then you have to question why - if the function of incentives is to get execs to do what shareholders want - would you change the structure of rewards in a way that makes them less attractive to recipients? If you have a lot invested in a set of beliefs including "long term = good" and "performance-related pay = good" that's going to be lead to some major cognitive dissonance.

Wednesday, 21 November 2018

Voting different ways on the same stock

There's always a danger that a) if pension funds delegate voting rights to asset managers and b) if they appoint multiple asset managers then they may end up voting different ways on the same stock.

Googling around for something completely different the other day, I came across a current example. The fund in question actually has managers that in some cases hold the same stock and, on some pretty significant votes at significant companies they voted different ways. This is flagged up by the fund's investment consultant (I've anonymised the managers):

On Amazon and Tesla, MANAGER A does not believe a separation of CEO and Chair positions would bring governance improvements and did not vote in favor of the resolution. The manager aligned itself with Facebook management on not adopting a responsible taxation code and not requiring reporting of “fake news” or reporting on the gender pay gap. MANAGER A did not disclose its position on the dual-share class issue.

On Amazon and Tesla, MANAGER B took the opposite position to MANAGER A and does believe separating CEO and Chair positions will bring governance improvements and voted against the management. The manager aligned itself with Facebook management on not adopting responsible taxation code but was in favour of reporting on “fake news”, the gender pay gap and abolition of dual-share classes.

Actually the fund has a third manager that also holds one of the same stocks as the other two:

MANAGER C voted against Facebook’s management on the reporting on “fake news”, the gender pay gap and abolition of dual-share classes but did not disclose votes on adopting a responsible taxation code. 

Needless to say, Amazon, Tesla and Facebook are companies that have some controversial practices. But the fund's appointed managers have voted different ways on some key issues.