The story of Lonrho is one of Shakespearean dimensions. It is the tale of an empire built out of precious metals dug from the ground in far off places. An empire built by one dynamic man who then had it all taken away from him by his former protg in a bitter and undignified battle. As an investor relations fable, the Lonrho story has it all.
In March 1995, 77-year old Tiny Rowland was fired by the board of UK-based Lonrho plc in a bitter dispute with his fellow directors. In the same month, Rowland attended the annual meeting of the company that he had founded and controlled for 34 years in a bid to be reinstated. Surrounded by a noisy band of supporters, it was clear at that meeting that Rowland had sentiment and the small shareholder on his side.
But despite the small shareholder’s ability to make a large noise in a public meeting, it was the silent power of the institutional vote that kept Rowland out.
A year later, in February 1996, the Lonrho annual general meeting was a very different and much quieter scene. Rowland’s ‘fan club’ was considerably less strident and Rowland’s questioning of Lonrho’s chairman Sir John Leahy on the chief executive Dieter Bock’s attendance record at the office was dismissed by even his former supporters as ‘petty and small-minded and not what one would expect from a great businessman.’
At this year’s AGM, Lonrho could report results that showed an increase in pre-tax profit of 40 per cent to 151 mn, earnings per share up by more than 40 per cent and a dividend increase of 10.5 per cent. Dieter Bock’s Lonrho was showing the results of being efficiently gutted and filleted in a process that started when Bock bought in to the company in 1992.
‘Before Dieter arrived there was a quarter to a third of the size of institutional investment in the company that one would expect to see,’ says Anthony Cardew of Cardew & Co, spokesman for Lonrho, and orchestrator of its IR efforts. The company had no non-executive directors and no audit, remuneration or appointments committees. The Cadbury rules had never been instituted, there was no retirement age and no director could be dismissed without the unanimous consent of the board.
Rowland’s charisma and derring-do as he fought his way through battles and crises – including the infamous one against Harrods-owner House of Fraser – had made him and his company the darling of the private investor. But the new feeling among Lonrho’s management was that only with institutional investment support would Lonrho be able to fulfill its potential.
‘It was a company that was looked at with suspicion and fear by the investment community,’ says Cardew. Rowland’s rather individual management style had been tolerated by the institutions in the 1980s when such things were applauded, but fresh from the scandals of Maxwell and Polly Peck, fund managers had then become wary of companies run autocratically by their founders.
Hilary Wakefield, a fund manager specialising in international equities at Old Mutual International Asset Managers, part of the Old Mutual Group, concurs with that view: ‘It was one of those companies so dominated by one central figure that I had a deep-seated level of distrust,’ he says.
Cardew was brought in as investor relations consultant when Bock arrived as joint chief executive alongside Rowland in 1992. The IR brief was to establish Lonrho as a credible investment for institutions. Cardew started the investor relations campaign by getting the basics in order. That meant disseminating consistent information through the press, granting analysts regular contact with the company, and ensuring that investing institutions were regularly visited and kept informed.
‘They certainly turned around their investor relations,’ confirms one fund manager. ‘I found them charming, interesting and open.’ ‘Their clarity of policy is the most impressive investor relations move,’ adds Wakefield at Old Mutual.
Around the same time, Lonrho got its first three non-executive directors which helped in its appeal to the institutions: Sir John Leahy, ex-British ambassador to South Africa, Stephen Walls, chairman of The Albert Fisher Group and Peter Harper, ex-chairman of Hanson Industrial Services and largely responsible for Hanson’s investor relations programme.
The appointments gave Cardew an easier story to sell. ‘These are people who are respected and whose judgement can be relied upon,’ he says. Relevant board committees were established and the rules for dismissal of a director changed to require just 75 per cent of the board’s approval.
Meanwhile, Bock started selling off fringe investments, such as The Observer newspaper, and setting up future management plans designed to highlight the best parts of Lonrho. The 1994 flotation of Ashanti Goldfields, one of the most prized jewels in Lonrho’s crown, in London, New York and Accra, threw a spotlight onto the strength of Lonrho’s mining portfolio.
Mining represented 439m of Lonrho’s turnover in 1995, with operating profits increasing by 14 per cent. Ashanti Goldfields alone had profits before tax of $ 106 mn. Lonrho also had extensive control in the platinum market. Historically, Lonrho has been the third largest platinum producer in the west with the mines under its control responsible for 17 per cent of South African production. During 1995 commodities, including metals, had an excellent year which helped Lonrho’s figures, and Bock expanded operations in South Africa and entered into new mining contracts in Uzbekhistan, all of which served to strengthen the mining division.
In November 1995, a solution was sought for Bock and Rowland’s frequent disagreements: Rowland agreed to stand down as joint chief executive in return for a presidency but no seat on the board. But by February 1995, before he got to be president, Rowland had been fired. Incensed by repeated attacks by implication on his financial integrity by Rowland, Bock called an early board meeting at which Rowland was dismissed.
Free of Rowland, Bock set about his plans to demerge the Lonrho group into two entities, the mining interests and a trading and hotels business, in an attempt to unlock the value in the group. It is these efforts which have best pleased the institutional investment community. Says one fund manager: ‘The demerger of assets is a good idea. The day of the conglomerates is now over. It’s questionable whether they add value.’
As part of the unbundling process, Bock proposed that Lonrho’s platinum interests should be merged with Impala Platinum, which is owned by Gencor. This proposal, which was greeted warmly by the City and the platinum market, was approved by shareholders representing 378 mn votes – about 49 per cent of Lonrho’s shares. Among the 1.57 mn votes against, roughly 0.2 per cent, was that of Rowland, who publically opposed the merger, saying that it undervalued the company.
However, despite the majority support, a surprise move in late April this year by the European Commission prohibited the merger on the grounds that it would create a duopoly in the world’s platinum market. The Commission was technically allowed to intervene because of Lonrho’s listing in London, but the EC’s decision was seen by many to be an empty gesture to show that it had power over even those bits of companies whose operations were physically located outside of its remit. Most people closely connected with the platinum industry agree that this is one industry group that does not need protection.
Rhona O’Connell of T Hoare & Co says in her latest report on the platinum markets, published before the EC’s decision was known: ‘The EC probe revolves around one of the platinum industry’s most notable characteristics, the battle for market share. The EC (presumably looking for ways to spend our taxes) has noted that both Gencor and Lonrho have operations in Europe (but not, it should perhaps be pointed out, platinum mines!) and thus expressed concern over a possible oligopoly if the merger goes through. Frankly, given the history of this market and its perpetual tussle for market share, plus the influx of possible new producers over the next few years, we believe that the argument has little merit, but the wheels of bureaucracy grind relentlessly on.’
Stymied by Europe, Gencor has appealed. But it is just possible that Lonrho will remove the platinum interests from the London quotation and take it out of the regulatory reach of the EC.
To facilitate the demerger process further, Bock also brought in South Africa’s largest company which has extensive mining interests of its own, Anglo American Corporation. Anglo acquired 5.9 per cent of Lonrho’s shares in early March, shares that ironically came through an option from Rowland to Bock and then on to Anglo. Bock has also granted Anglo a further option which will allow them to acquire his 18.5 per cent of the mining house at the time of the demerger for 220p per share.
It is this transaction which has set slight warning bells ringing among the institutional investor community. Says one portfolio manager: ‘If Bock has decided that there is only a finite amount of potential left in Lonrho, then that has implications for other investors.’
Cardew has an answer ready for those worried investors. He argues that Anglo was brought in as a big brother. ‘Bock wanted to demerge and was keen to get Anglo involved because for the mining interests to be successful it requires further expertise,’ he says. Lonrho’s existing expertise in mining, according to Cardew, is limited to holding a string of minority investments in separately listed mining companies. ‘If it were demerged, the fear was that the market would see it as an investment trust in mining and trade it at a discount.’
A rumour that Bock was forced to bring in Anglo because he could not afford to take up the option on Rowland’s last 5.9 per cent is also dismissed by Cardew. ‘Bock didn’t have to sell to Anglo,’ says Cardew. ‘He has close to 300 mn worth of Lonrho. He didn’t necessarily want to find the money to buy an additional stake in the company in which he already owned 18.5 per cent.’
If Bock had kept the 5.9 per cent from Rowland, it would have put his shareholding up to nigh on 25 per cent: ’25 per cent of one company is too much for one man,’ says Cardew. But not apparently too much for one company, as Anglo will have nearly 30 per cent under Bock’s option scheme. The role of Anglo was not left out of the EC’s comments. Anglo has a significant interest in the platinum market itself. Any move to take control of Lonrho on the part of Anglo is likely to be blocked by the EC as well, it warned.
The Lonrho demerger circular for shareholders will be with them in the late summer – July or August, according to Cardew. Once, and if, the demerger goes through, the plan is that Bock will invest up to 25 per cent of his money from the option with Anglo into the non-mining business, thereby under-pinning it.
That side of the business is made up of hotels – Lonrho Hotels – and trading companies. The new Lonrho Africa division will be slotted into this side of the group. It comprises a large number of trading companies in the agricultural, motor and general sectors operating in nine African countries. Operating profit for Lonrho Africa was 38 mn for 1995, an increase of nearly 19 per cent over 1994.
Lonrho Hotels includes the Metropole Hotels in the UK, the Princess Hotels in North America and a collection of hotels in Africa. The operating profit for the hotels business was 44 mn in 1995. Bock’s own businesses revolved around hotels and property and hence, presumably, the appeal of the rump of the demerged Lonrho for him.
So far, Bock does not seem to have taken a false step in fulfilling his plan to unlock value in the Lonrho group. ‘The profits in the three years since he has been at Lonrho have shown a steady improvement through establishing proper management practices,’ says Cardew.
That has required finding profit where it wasn’t previously evident – an effective investor relations strategy in its own right. Keeping the institutions informed about the new story has helped pay dividends to both parties in more than one sense.
‘Bock has inherited an impressive company from Rowland,’ concludes Wakefield. ‘He has achieved rationalisation and improved value for shareholders. There will be setbacks involved but that doesn’t ut me off.’
