PHILIP BOWMAN has his feet under the table at ScottishPower. No doubt his sleeves are rolled up, too. However, the former Allied Domecq man, in his two short weeks as chief executive of the electricity generator, may have done no more than learn truly to appreciate the size of task that he faces.
Bowman, it is widely assumed, was hired to sell ScottishPower to the highest bidder. This, since Bowman’s last job ended with the sale of Allied Domecq to Pernod Ricard, is reasonable analysis. The theory gains credibility when it is recalled that ScottishPower held recent, well-developed takeover talks with E.ON, of Germany.
But it is a mistake to assume that ScottishPower will be sold soon. If a deal were imminent, it would, surely, have been done before Bowman took charge. Indeed, one of the reasons why Ian Russell may have felt obliged to resign two weeks ago was because a deal slipped though his fingers. Restive investors, who bore with Russell through several strategic reversals in the past decade, may have seen this as the final straw.
But if E.ON, or some other bidder, was unprepared to buy from Russell, why would they buy at a similar price from Bowman? They would not, surely.
This, in turn, sends worrying messages about the health of the business. Investors may have been pleased to see Russell agree the disposal of PacifiCorp, the US generator, because it improved the chances that it would lead to a takeover. But if bidders could not be persuaded to buy the company sans PacifiCorp, it might be assumed that they think little of ScottishPower’s ongoing business.
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Bowman’s real task, therefore, may be somewhat more involved than simply finding a buyer. It might be to reform and renovate ScottishPower structurally, operationally, financially and strategically. If Bowman oversees improvements on all or even some of these scores, he will be better placed to find a buyer willing to pay an acceptable price. By the same token, a takeover may not be so eagerly sought if the company can thrive on its own.
For the time being, the share price is protected by an explicit dividend commitment given before Bowman’s appointment. Investors would, however, be well advised to monitor the business’s progress, with at least half an eye on the sustainability of this commitment.
Clouds hang over ScottishPower, but with Bowman in charge there is some light on the horizon, and it is with this in mind that shares should be held.
iSoft
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ISOFT has made huge strides by being in the right place at the right time. It benefited particularly from an acceleration in government spending on IT in medicine. It was a programme that was meant to see medical records stored electronically at the same time as hooking up GPs’ surgeries with hospitals. But yesterday the healthcare IT group had its own health records out for examination as it gave warning over delays in the NHS’s £6.2 billion IT modernisation programme.
The group said that revenues from the programme would be £30 million in the full year to April 30, an enormous £55 million lower than it had previously expected. The company, it now appears, will make nothing from software sales to the NHS programme in the second half of the year.
While group revenues, including sales to foreign health services, will not be as heavily dented, profits could be hit by more than 50 per cent because of the importance of the NHS contracts to the bottom line.
ISoft yesterday tried to reassure investors by emphasising that the revenues were being delayed rather than cancelled. This is reassuring to an extent, but the short-term outlook remains deeply uncertain, with the potential for further delays to the NHS’s programme for IT a real possibility.
The company also remains unable to give a clear outlook into the next financial year. Although it is expecting to remain cashflow-positive at the full year, question marks remain over the longer-term outlook. Rather ominously the company also said yesterday that it was assuming there would be no significant near-term increase in revenues.
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International growth opportunities may make up some lost ground. It would also be unfair to assume that this predicament is all of the company’s making. But it gives further evidence, if it is required, of the risks involved when working on contracts for Government.
The best part of £400 million was wiped from iSoft’s value yesterday. But shares trade on a multiple of revised earnings of 20. That, in the circumstances, leaves the shares vulnerable to further weakness. Sell.
Rexam
REXAM, thanks to a series of effective acquisitions, has become a leading packaging company. And it enjoys an enviable position, largely because it is a producer of tin cans in the developed markets of Europe and North America.
More recently Rexam has looked further afield. Yesterday’s £61 million acquisition of Ecanco, Egypt’s only drinks can maker, is symptomatic of the trend. Just last week Rexam spent £42 million on FangXin, a Chinese enterprise. In themselves they are relatively small deals, but taken together with activities owned in Mexico, Brazil and elsewhere, emerging markets account for about 20 per cent of Rexam’s business.
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As well as buying into emerging markets, Rexam is exploring opportunities in plastic packaging. The FangXin deal touched on both goals.
Emerging markets bring high risks as well as the potential for high rewards. Inflating energy and commodity costs are another headache. But Rexam shares, which trade at a small discount to the market average, are worth buying.