It’s 2008 all over again. One of the country’s biggest banks is rescuing a stricken rival in a deal that will prevent the government having to bail it out while creating a finance titan with unparalleled domestic market share. Except this isn’t Britain nine years ago and the Lloyds TSB rescue of HBOS, but Spain today and the Banco Santander rescue of Banco Popular.
Santander is one of the most widely held shares in Britain, with 1.4 million private shareholders, the result of the Spanish bank’s purchases of Abbey, then Alliance & Leicester, then some of the carcass of Bradford & Bingley. Most have tiny holdings of 100 to 200 shares worth £500 to £1,000 and barely give them a second thought, happy to bank the dividends that come in once a quarter.
Lloyds’ purchase of HBOS was, of course, notoriously value-destructive. Conducted with little due diligence and some serious arm-twisting from Gordon Brown, it proved to be a disaster for Lloyds shareholders when the senior management belatedly looked under the bonnet.
The Spanish deal should not be like that. First, Santander is getting Popular for free, paying a nominal €1, whereas Lloyds paid £12 billion in its own stock for HBOS. Second, the bondholders are taking a haircut, which saves Santander another €2 billion.
Third, the loan book quality at Popular will have to be spectacularly bad for Santander to have to make further write-offs. After injecting a fresh €7.9 billion into its target, it will already have provided for 69 per cent of real estate loans going bad.
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The prize for Santander is Popular’s nice little niche in small business lending and a dominant overall market share in Spain and Portugal. It is confident that it can squeeze €500 million in synergies from the combination by 2020. That looks do-able, if not conservative, accounting for only 10 per cent of the Iberian cost base of the two groups.
This is the biggest deal so far for Ana Botín, Santander’s chief executive, who used to run the bank’s UK operations. It is not without risks. The total Popular balance sheet is €147 billion, enough to cause serious bruising if mishandled. It’s amazing how much rubbish there can be in a loan portfolio created in the midst of a property boom.
Yet the potential prize is considerable. Shareholders should sit on their shares, which continue to yield 3.8 per cent, and wait for details of the capital-raising in July.
MY ADVICE Hold
WHY Unlike the HBOS calamity, this rescue deal might just work
St Modwen Properties
Analysts reacted warmly to the St Modwen Properties strategy day yesterday, lifting the shares 6 per cent to 353p. However, this was a bit of a non-event. Mark Allan, the newish chief executive, isn’t about to make any sharp yanks on the tiller and that is probably no bad thing. The only discernible shift in philosophy is slightly more emphasis on industrial and warehouse development.
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Meanwhile, tactically, the company remains in an awkward place. Plans to sell a £500 million plot of land on the Thames at Nine Elms fell through in March, and while Mr Allan insists he is making progress on signing up a new buyer, sentiment over the short-run prospects for high-end luxury property in the capital is not making the job any easier. The company still has enviable market positions, particularly in its core area of regeneration and in residential housebuilding, that should be enough to see it through any further disappointment at Nine Elms.
After yesterday’s surge the shares trade at a 28 per cent discount to net assets. It’s hard to see that discount narrowing much further in the short run. Investors bearish about the British economy should see it as an opportunity to take a bit of profit.
MY ADVICE Sell
WHY Good track record but Nine Elms casts a shadow
RPC Group
Investors have fallen out of love with RPC. For years the packaging group’s formula of expansion through repeated acquisition financed by equity issuance seemed to hit the spot, producing strong total returns. Now doubts have crept in. The company has underperformed the FTSE all-share index by more than 31 per cent this year after falling another 61½p to 788½p yesterday. Earlier in the year the shares fetched more than £10.50.
On the face of it, there was nothing to scare the horses in the full-year results yesterday. Revenues were up 67 per cent, adjusted operating profits up by 77 per cent and the full-year dividend was lifted by a whopping 50 per cent to 24p. Return on capital employed is a robust 15.1 per cent, albeit down from 15.7 per cent last time. Integration of recent past purchases like GCS and BPI has been completed while others are “bedding in well”.
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Yet the relentless pace of acquisition, the frequent restatements of earnings figures, the labelling of huge amounts of cost as “exceptional” and the way management bonuses go “kerching” on the basis of adjusted earnings numbers have got investors rattled. The company chose not to go public in addressing concerns raised by an analyst at Northern Trust in March. Further share price progress may be hard until it does so.
RPC was one of the Tempus Top Ten tips at the start of the year and is now firmly established as the turkey in the portfolio. It trades on only 11.5 times prospective earnings with a prospective yield of 3.5 per cent.
MY ADVICE Hold
WHY Inexpensive, but the love affair with investors is over
And finally . . .
Mahmud Kamani, the Boohoo.com co-founder and joint chief executive, and two of his siblings were seeking buyers for £80 million-worth of stock last night. At the same time the online retailer announced plans to raise £50 million from new shares to finance extra warehouse capacity. Boohoo lifted its forecast for sales growth this year from 50 per cent to 60 per cent while disclosing that Pretty Little Thing, its edgy sub-brand, had grown at 305 per cent over the past three months.