Most pre-pack deals to buy companies in administration have an unpleasant taste to them, few more so than the collapse of accountants and business advisers RMS Tenon, which was bought this week by Baker Tilly.
Shareholders quite rightly come last in the pecking order
I would hope that no readers of this column clung to the shares until the last moment but we all make mistakes and it is easy to be wise after the event. However, the debacle is worth commenting on because there are always wider lessons to be learnt.
Tenon built up to become the seventh largest accountancy company in the UK, mainly through merging smaller, scattered accountancies into a larger nationwide organisation that could compete on a more equal footing in an industry dominated by four big players. Tenon, like Baker Tilly and BDO, had little chance of prising blue chips away from the likes of Deloitte and Ernst & Young but it could attract the custom of medium sized and smaller quoted companies.
All went well as profits and dividends rose but acquisitions helped to boost debts to levels that were unsustainable in the credit crisis. The corporate fashion for gearing up to make the balance sheet ‘more efficient’ gave way to a realism that came back to haunt Tenon, whose banking facilities and covenants became a burden as Tenon scaled back its operations in the downturn.
One warning sign that emerged over the past five years was that Tenon continued to increase its dividends despite a slide in pre-tax profits. Business advisers really should be more prudent. The economic situation was hardly a secret and stock markets suffered. So did company advisers.
In the financial year to the end of June 2010 the dividend was barely half covered by earnings. In the following year Tenon produced a loss, yet it persisted with a totally uncovered dividend.
Even so, this column extolls the virtues of investing in companies that pay dividends so shareholders could be forgiven for clinging on in the early stages of decline. The important thing in such circumstances is to take any opportunity offered by a temporary rise in the share price to face reality and get out.
Such opportunities occur right up to the final stages of a quoted company’s death throes. Tenon shares spiked above 60p in late 2009 and again in early 2011. If, quite reasonably, you missed the opportunity to cash in then, two more chances to cut your losses cropped up in mid-2011, when the shares briefly recovered from just over 20p to 31p and then 29p.
Even last winter, when disaster loomed larger, it was possible to take advantage whenever the battered shares edged above 6p. Better to get 6p than nothing, which is what shareholders get now.
One other lesson for shareholders is not to take at face value what the directors of any company say in their trading updates, a point I make forcefully in my book Understanding Company News. They will often put the best gloss on things and just six days before it all went pear shaped Tenon issued an assurance that talks with Lloyds Bank over the overdraft facilities and banking covenants were making progress. Directors are human and it is natural to keep hoping that all will work out in the end.
What is likely to make shareholders hopping mad is that Baker Tilly announced on 25 July that it was considering making an offer for Tenon. Four weeks later it decided not to bid, whereupon Tenon collapsed into receivership and Baker picked up its rival anyway without paying a bid premium.
Quite frankly, I don’t blame Baker Tilly for driving down the price. It has shown considerably more business acumen that Tenon’s directors, who had no bargaining chips left. Shareholders quite rightly come last in the pecking order and Tenon admitted last week that even if a takeover went ahead there would be little or no value for shareholders.
The best course of action for shareholders is to learn lessons and move on. Arguing the toss over the unfairness of pre-pack administration deals distracts attention from those lessons.
Onwards and slowly upwards
Economic news continues to be mildly encouraging and, as I have said before, if that means an early end to quantitative easing here and in the US then that is all to the good.
The housing revival on both sides of the Atlantic is if anything gathering pace but without creating a bubble at this stage. Factory orders in the UK are at a two-year peak. The failure of the coalition government to reduce spending is worrying, as is an increase in government debt in July, but at least tax receipts are running well ahead of last year.
In Europe, there has been further confirmation that while Germany is riding high most of the Eurozone is still mired in recession. Overall, the worst is probably over but there will be more setbacks along the way, the next one being a third bail-out for Greece at the end of this year.
Investors should remain cautious but it is still worth buying shares on any dips.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
