Trying to move home can be stressful at the best of times. It’s even worse when you’re trying to move a whole company. Just ask LucasVarity. The UK-based automotive components group stumbled badly at the beginning of November last year when its plan to move its listing from London to the New York Stock Exchange was rejected by shareholders. To get the mandate for a change of domicile the company needed backing on two fronts: a simple majority of shareholders to endorse the move at a High Court meeting; and a 75 percent majority of shareholders by value. Shareholders could vote either in person or by proxy. It also required a 75 percent approval by shareholders at an extraordinary general meeting (EGM). It was a tough call. The company passed the first test at the Court meeting with a 57.2 majority but just missed the ‘by value’ goal with a 74.42 percent vote. It also failed to attain the 75 percent vote at the EGM, with 73.9 percent voting in favor of the move. LucasVarity’s strategy was stalled and its board, which many thought had put its neck on the block over the move, looked in a precarious position. In fact, buoyed by their victory, those who had questioned the proposal from the start became more vociferous. The investor relations nightmare looked set to continue.
One month on
‘I think this should be set in the context of why we made the decision to change our domicile,’ suggests Joseph Cantie, director of investor relations at LucasVarity, a month after the shareholders rejected the idea. ‘There was not one dramatic reason but several reasons. When taken together they made a very strong case to change domicile. We wanted to fulfil our strategy and found our UK base a restriction on that going forward.’ At first glance it’s easy to see why the company wanted to move its primary listing to the US: it’s half American already. LucasVarity was formed by a merger between the UK’s Lucas Industries and Varity Corp of the US in 1996. In the wake of the merger, US shareholders have grown significantly to over 50 percent. Conversely, UK ownership has fallen from around 67 percent to around 47 percent. But handling an increasingly US-centric shareholder base was just one of the reasons for the proposed shift to the NYSE. Cantie, along with senior management colleagues such as CEO Victor Rice, spent much of the time leading up to the vote doing the rounds of UK and US institutions explaining the rationale. Their arguments covered a range of peer group, capital markets and taxation issues. For example, the company perceives real advantages from being based among its automotive company peer group in the US. It argues that this will allow it to ‘compete on equal terms with its peers for acquisition opportunities,’ as well as granting it easier access to a dedicated capital pool. The company also believes it would be in a better position to manage its capital base through greater flexibility on share buy-backs and debt issuance: ‘This will allow the group to reduce its overall cost of capital and enhance returns on equity and earnings per share,’ claims the official release. Cantie offers still further explanation. ‘Strategic focus is probably the number one reason,’ he says, adding that the current situation in the UK means the company has a very inefficient capital structure and is limited in terms of managing its capital base. ‘We have inherited a large share of US domestic owners and whereas the UK is focused on dividends, the US is more focused on share buy-backs. Also the concept of leverage is more acceptable in the US.’ He says that it’s also harder to execute a secondary offering in the UK than in the US. ‘There’s a whole unique set of problems. While everyone would like to think that investing is now done on a global basis there are actually real differences between markets’
On the outside
Evidently, not all shareholders were convinced by these arguments or by the way that they were argued. At the simplest level, many UK-based retail shareholders were unhappy about investing in a US company with all the added complications this might bring. And not enough were appeased by LucasVarity’s offer of an exchangeable security to allow them to continue holding UK shares. In fact, this was originally offered to shareholders as a possibility on the understanding that the newly-created instruments be exchanged for US shares in LucasVarity Corp no more than 18 months later. After negotiations with the London Stock Exchange, LucasVarity was able to dump this requirement at the end of October. But it was too late: the damage was done. One key opponent was Schroders Investment Management. The UK-based institution held some 11 percent of the company, effectively giving it a casting vote. Neither Schroders nor Cantie will reveal the nature of their discussions at the time, but sources suggest the institution was concerned with ending up with a lower quality of paper than it currently held. Nor was it convinced of the cost of capital arguments. Other analysts and fund managers in the UK were concerned about the likely impact of tracker funds. If the move went ahead, UK indexers would pull out and US indexers pile in. In between times all hell could break loose. ‘We initially didn’t like the likelihood of people selling out the official trackers and pseudo-trackers,’ says Andrew Fisher, an analyst at Greig Middleton. He does think LucasVarity did all it could to sell the idea to the financial community. ‘They put forward their plan, it just wasn’t accepted by everyone,’ he explains. Fisher believes that some of the arguments certainly ‘hold some water’ but he is not convinced that it really is that restricting to the company to be domiciled in the UK.
Right on
Yet LucasVarity did persuade just under three-quarters of its shareholders to back the proposal. And this certainly wasn’t just a US-UK split along country lines. The level of support shows a good chunk of UK shareholders in favor. Nevertheless, it’s easier to find praise for the initiative in New York and Boston than in London. One US-based fund manager says he cannot understand why any institution acting in the interests of its clients would want to vote against the proposal. ‘I can only assume they were pushing agendas they should not have been pursuing.’ He thinks LucasVarity is stuck between a rock and a hard place in acquisition terms: it can’t pursue the 20 percent share buy-back and potential acquisitions now it is under pressure to recapitalize. ‘My presumption is that Victor [Rice] tried to make deals but prospective targets were trying to take advantage of the situation. Now it’s stuck with an over-capitalized balance sheet and it lacks the currency to take part in industry consolidation. They’ve left the company without proper leverage in negotiations and an undervalued stock. They’ve cost themselves in the short term and the long term. It’s very perplexing.’ Cantie won’t admit that the company is left in a difficult situation but he does acknowledge that the arguments it was rehearsing prior to the vote still ring true. ‘Those who think we don’t need to change domicile haven’t listened to the arguments,’ he contends. ‘Basically the loss of the vote was a setback. We’re working diligently on coming up with some answers for the future but we’re not saying much at the moment.’ Cantie confirms that the company expects to detail its answers in March. So did the company fail to convey its message? ‘I’m not sure we did anything wrong,’ responds Cantie. ‘I guess in hindsight you could say we should have explained it better.’ He says the institutions who voted against understood the situation, they just didn’t agree with it. ‘It was highly debated with all institutions. I guess at the end of the day we failed. I come back to one point: Schroders.’ Nick Jones, LucasVarity’s corporate relations director, adds that he thinks the whole debate became highly personalized around Victor Rice for all the wrong reasons. ‘The board unanimously agreed on the move.’ ‘There is a perception that Victor and senior management don’t spend enough time in the City,’ notes Cantie. ‘The 25 UK analysts who cover this company would probably want more face time than they get but we choose to spend more time directly with our shareholders. We see our large UK shareholders more than the typical UK company.’ He adds that management time has to be allocated appropriately and that LucasVarity’s management spends a lot of time on the road looking at acquisitions. ‘This is the roll-up-your-sleeves type of management team. They are different to your typical UK team.’
Stay and fight
One New York-based fund manager is in complete agreement. ‘I don’t know what those who voted against were thinking but they don’t know the management team very well. These are not the sort of guys who walk away from a fight.’ As for those on the ‘victory’ side who defeated the proposal, most recognize it as a hollow victory. ‘One has to look at it in the light of the actual vote,’ says another London-based fund manager. ‘Around 26 percent wanted it to stay in the UK and 74 percent wanted it to go to America. It’s not easy to regard that as a triumph.’
