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A business is plainly going through a rocky patch when the boss has to dust off his wallet to meet the payroll. Admittedly, Terra Firma boss Guy Hands has more money in his back pocket than the average small employer, even after losing £200m on the ill-fated EMI takeover. But private equity executives are more demanding toilers than most, which is why the financier is shelling out £20m on retention bonuses.
Terra Firma’s revolving door spun merrily back in the geared-up noughties, thanks to Mr Hands’ exacting management style. But his reputation as a dealmaker meant financing for new buyouts was available, so new recruits were too.
Now the tax exile is better known for the £1.75bn loss that his investors incurred on EMI, the music group behind The Beatles that it bought for £4.2bn at the height of the credit bubble. Which means conversations with potential capital suppliers must get a little frosty after the usual pleasantries about the weather. The firm’s old funds are maturing meanwhile, with a consequent reduction in income from management fees.
The belief that Mr Hands is Terra Firma has turned from a marketing advantage to a demerit. Apax trundled on following the retirement of Sir Ronald Cohen and Damon Buffini returned to the ranks of the rainmakers after a spell running Permira. But it would be harder to play down the significance of Mr Hands – and his folie de grandeur – by suggesting that his firm had suddenly become heartily collegial.
Accepted wisdom dictates that in a deleveraging world, a proportion of private equity businesses will be forced into run-off by the disinclination of investors to throw good money after bad. Terra Firma is an obvious candidate for this fate.
Lombard has no greater scruple against kicking a man when he is down to his last £93m than any other business opinionist. But there is a good contrarian case for backing Mr Hands, providing he steers clear of trophy assets. His early-career genius was to snap up undervalued assets in such unglamorous industries as pubs and waste management. He may be reverting to type with purchases of care home and garden centre groups. All we are saying, to paraphrase John Lennon, is give Guy a chance.
Dialling up dividends
It is not in the City’s nature to ask for more with the timid entreaty of an Oliver Twist. Having jacked up the final dividend by 12 per cent to 8.3p and promised a 10-15 per cent increase every year for the next three years, BT Group chief executive Ian Livingston was taken to task for stinginess by some analysts.
Expectations of a business whose shares have returned 227 per cent over three years have a habit of running ahead of reality. A terminal payout of 8.5p was hoped for before the telecoms company agreed in March to sling £2bn the way of its underfunded pension scheme. BT’s lossmaking global division, which supplies phone services to governments and multinationals, also held back underlying earnings that were up 3 per cent for the group at £6bn.
The dividend, covered a comfortable four times, looks high enough to keep a lid on discontent over this bad apple in an otherwise unexceptionable barrel. But the company is nevertheless under pressure to find the wherewithal for higher payouts. The generous pay of the adroit Mr Livingston increases the leverage of overgrown Olivers.
BT should keep calm and carry on investing. One cash stream is paying down debt to lift the credit rating and reduce interest costs. Another flow – around £2.6bn a year – is paying for more broadband capacity, which should benefit the economy as well as BT. Better to displease a few of the people every results day than all of the people on a results day a few years hence.
Their indecision is optimal
As Europe’s economy teeters on the brink of disaster (again) David Cameron steps forward with plans for – hold on to your seats – a groceries adjudicator. Moreover, the plan for a Grand Inquisitor of wholesale yoghurt buyers has been heavily watered down. Just like the yoghurt. And other measures in the Queen’s Speech.
Evidence of the dithering temerity to which successive governments are prone? Sure. And thank goodness. Unexpected changes deter investment. The predictability of the UK business environment (give or take maladroit tinkering with taxes on unpopular industries) is guaranteed by Westminster’s taste for fuzzy consensus. Planned legislation will tie up politicians with ineffective activity. Business really has no grounds for complaint.