The late Frank Muir would have made an ideal director at BP. Muir was the master of Call My Bluff, the game the oil giant is playing with its Russian partners. One side makes an outrageous move, and is caught out — or not — by the other, and then the roles are reversed.
The game has run for years, but we had a speed round last week. Mikhail Fridman, leader of the group of Russian tycoons that owns half of TNK-BP, said he would resign as the joint venture’s chief executive. The relationships between the tycoons and BP had broken down irrecoverably, he said, and things could no longer continue as they were.
On Friday morning, BP would have made Muir proud. We agree, they said, and we want to sell up. Fridman’s bluff was called, and now AAR, the group of investors he represents, has to think hard about what it does next. The tycoons were keen to sell out to BP themselves, and nearly did so last spring, with legal wrangles delaying a deal at the last minute. Do they want to double their bet and buy out BP? Or do they hope another Russian group will emerge as a bidder, one with which they can do business?
TNK-BP is a prize worth squabbling over. As my colleague Danny Fortson points out on the opposite page, it has generated $38 billion in dividends since it was set up nearly a decade ago, and six times that in royalties and tax for the Russian government. After the Gulf of Mexico oil blowout and spill, it was a vital source of profits for BP, allowing it to restore dividend payments to shareholders.
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While the AAR group has a strategic headache, so does BP. If it leaves TNK, will it be able to build a new business in Russia? Or is this threat aimed at bringing Fridman and company back to the negotiating table, with BP eventually taking complete control of the joint venture? And if it does sell, what does it do with the money?
The last point is the most intriguing. The half share in the Russian business is worth about $25 billion (£16.3 billion). BP could hand it back to shareholders in the mother of all special dividends, but that wouldn’t show much imagination.
Bob Dudley, the chief executive, is under constant pressure from shareholders to do something bold — our share price chart shows why — and here is his chance.
He could use the Russian windfall to fund a break-up of BP — the sale of the refining arm and a clutch of older, higher-cost oilfields — and a bid for riskier but more rewarding assets. He could splash out on one of the emerging east African oil explorers, or on a big shale gas play. Or how about something really big — a bid for BG Group, the FTSE 100 gas producer that has exciting growth prospects, and is a snip at the current market value of £41 billion.
Money talks at Xstrata
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THE secret of comedy is timing, and you can say the same for deal-making. As I predicted last week, the Xstrata-Glencore merger comes with a hefty retention bonus for Mick Davis, the Xstrata boss who will be chief executive of the combined group. He will receive £30m (in annual instalments) if he stays for three years. There are no performance conditions, and the sum will be on top of his normal salary, bonus and long-term incentive plan.
Five years ago that might not have led to uproar, but the timing now is lousy. The shareholder spring has sprung, and no-strings retention payments look like the apogee of fat cattery.
Xstrata’s directors, led by the City grandee Sir John Bond, have agreed to the payment for two reasons. One, they want to make sure the merger doesn’t become a takeover by Glencore, and think the best way of doing that is by keeping their man as chief executive. It’s an insurance policy. Second, they reason that if shareholders vote against Mick’s money, the whole deal will fail and Xstrata’s share price will fall 20% or more.
The latter may be the clincher. The shareholder spring came about because the corporate governance specialists at big institutional investors, who had long been overshadowed by fund managers, finally had their day in the sun. Public revulsion at executive pay gave them the chance to push for tougher votes at annual meetings. It was all about principle.
Xstrata-Glencore, however, is all about money. Faced with the threat of a collapsing Xstrata share price, principles may be put on hold.
Boardroom shake-up
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ON the subject of corporate governance, here is a shocking fact: not one candidate put up for election by FTSE 350 companies between 2006 and 2010 was rejected by shareholders. It was discovered by Pirc, the governance advisory service, during research as part of its submission to the Kay review on whether equity market short-termism harms UK plc.
The research is referred to in a note by Cevian Capital, the activist investor chaired by Lord Myners. Cevian argues that the process of board selection is a big weakness in Britain. Boards — in particular, chairmen — choose new board members, not shareholders. The status quo is reinforced, not challenged. Cevian suggests an adaptation of the Swedish system, where board members are selected by a committee of shareholders.
Bullish on Italy
IF you feel the fun of the jubilee weekend is lifting your spirits too much, I recommend the latest work of Albert Edwards, resident gloom-monger at the City offices of French bank Société Générale. Edwards is a renowned bear, of whom people have taken more notice as first the banking crisis and then the eurozone crisis erupted. The title of his note last week — “They laughed. Oh yes, how they laughed. But they’re not laughing now” — pretty much sums it up.
Edwards thinks the spectacular falls in German government bond yields, the result of investors seeking a safe haven, are a sign of things to come, and the bad American jobs figures on Friday will no doubt have strengthened his views (see Irwin Stelzer below).
Edwards expects American and British bond yields to do the same as Germany’s as the American and Chinese economies suffer hard landings. The S&P 500, America’s stock market barometer, will roughly halve in value, crashing through the March 2009 trough. “All hope will be crushed,” Edwards rounds off helpfully, in case you missed the point.
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He sees opportunities, however, in an unlikely place. Italy, which never had the credit boom that has laid low other western economies, “can emerge from this quicker . . . [and] may be an interesting place for cheap, long-term equity investments.”
dominic.oconnell@sunday-times.co.uk