Business | General
Earn-out plan could succeed in UK energy sector
As a way of breaking a stalemate over price, solutions such as these can be pragmatic. Contingency terms function like a call option, allowing the buyer to commit some money up front and then wait and see what the outcome is. They also usually create incentives for managers to stay on and work hard after the acquisition.
- Financial Times
- Published: 00:05 July 29, 2008
Ministers like to fulminate about the UK's "buy now, pay later" culture. But when it comes to the sale of the state's own assets, the government seems quite happy to take an IOU. Shareholders in British Energy, the nuclear power group 35 per cent controlled by the government, look likely this week to be offered a share of the company's future profits in a plan that should clear the way for it to be carved up between France's EDF and Centrica of the UK.
As a way of breaking a stalemate over price, solutions such as these can be pragmatic. Contingency terms function like a call option, allowing the buyer to commit some money up front and then wait and see what the outcome is. They also usually create incentives for managers to stay on and work hard after the acquisition.
But the usage in this case seems odd. "Earn-outs" are normally seen in creative and knowledge-intensive industries such as technology and pharmaceuticals, where there may be genuine differences of opinion over the value of the intellectual capital the seller is bringing to the table.
Here, there are hard (albeit ageing) assets in the form of eight nuclear plants, sites for a lot more, and a tangible trading history. The only unknowable is the degree to which nuclear power will be used in the future, but this government and its putative Conservative successor has assured British Energy there are no plans to reverse a commitment to supporting new building on its sites.
If a structure emerges as reported, it will reflect a cash-strapped Treasury's determination to keep buyers onside - at a time when it is openly pondering one-off windfall taxes for energy companies. Meanwhile, minority shareholders should be wary. As long as an earn-out lets a value discrepancy stand between buyer and seller, both sides are forestalling the inevitable. As with the consumer credit bubble, somebody will win eventually and somebody will lose.
Short measures
What is it about short-selling that brings out the worst in regulators? In the past two months, those on both sides of the Atlantic have scrambled to deal with what they said were crises brought on by the predatory short-selling of financial stocks.
The UK Financial Services Authority and the US Securities and Exchange Commission each scrapped their usual pattern of industry consultation and put out new restrictions so quickly that they were still tinkering with the details as the rules came into effect.
Neither regulator seems to have had the courage to follow through on its convictions. The FSA's June rule sought to protect companies carrying out rights issues by forcing short-sellers to reveal positions above 0.25 per cent of outstanding shares. But the one-off disclosures do not actually limit shorting and simply supply an unilluminating snapshot of who holds what.
The SEC is considering a disclosure rule but for now it has opted for more prescriptive measures. It temporarily banned a form of shorting known as naked shorting in which the seller does not arrange to cover the bet by buying or borrowing shares within three days. But the rule affects only Fannie Mae, Freddie Mac and 17 banks. If the practice is really such a problem, what about the 8,500 other banks?
Both rules smack of scapegoating. It is easier to point the finger at hedge funds than address systemic problems.
But regulators should not forget their history. Outside short-sellers were blamed for the 1929 crash but the Pecora Commission investigation revealed that the main beneficiaries of the practice were banking insiders such as Albert Wiggin, the Chase president.
In an era of global computerised markets, new rules on shorting may indeed be necessary. But the current regulations seem more like poorly conceived window dressing.
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