This drastic Uniq pension idea could go down a treat

Nick Goodway
27 Oct 2010

For several years, people with a slightly warped sense of humour have referred to British Airways as a giant pension fund black hole with small transport business attached.

Now it looks likely that they can really describe Uniq as a pension fund that owns a small chilled-food business.

Pending regulatory clearance and shareholder approval, the biggest supplier of sandwiches to Marks & Spencer will issue new shares amounting to 90% of its equity in return for the pension fund wiping out a £436 million deficit. Existing shareholders will end up with just 10% of the equity.

To understand how Uniq got into this position, climb with me into a helicopter. This is a journey that took place several years ago, and was a whirlwind tour of much of England.

From London, we flew north to a chicken and turkey processing plant in Shropshire, down to a dairy delivering milk somewhere in the Midlands, on to a St Ivel cheese factory in Somerset and ended up in a haulier's yard in the same county. This was Unigate, a rambling conglomerate, where frankly there was little rationale in many of the businesses being under the same roof. (It even had a 100-strong US restaurant chain!)

Not surprisingly, the company was dismantled. The big deals were selling the dairy and most of the cheese operations to rival Dairy Crest and spinning off the haulier Wincanton separately on the stock market.

That left the rump Uniq, a perfectly decent business selling over £300 million worth of sandwiches, salads and chilled desserts to supermarkets every year.

However, while Uniq employs 2200 people, it still has a staggering 21,000 in its closed pension scheme. That's some legacy. Only former ex-state-owned behemoths such as BA and BT have comparable pension fund inheritances. Chief executive Geoff Eaton and the pension fund trustees have spent more than a year wrestling with how to deal with a deficit which could quite simply crush the company.

Their first plan, which could have taken up to 50 years to wipe out the deficit, was rejected by the pensions regulator. Hence this week's radical “deficit-for-equity” swap plan.

We have already seen slightly less-radical ideas from Diageo, Whitbread and ITV using respectively whisky, properties and shares in a transmission company as assets to back their pension fund deficits. They all intend to take those assets back once their deficits are sorted.

Uniq cannot do that, although it will give the pension fund a put option to sell it £25 million to £30 million of its shareholding in the future. In the meantime, the pension fund can use its 90% stake in Uniq to take out an insurance policy against its liabilities.

So what can existing shareholders do? The simple answer is not a lot, because even 10% of something is worth more than 100% of nothing. Indeed some analysts reckon that once the pension deficit is sorted Uniq's stock market value should be about £72 million, which is nine times the £8 million it is valued at today. So they won't actually have lost too much. At the same time Eaton will be released to get on with what he does best, which is managing the underlying business. Convenience food is still a strongly growing market.

The latest-quarter sales figures are robust and Eaton is full of praise for new M&S chief executive Marc Bolland.

Who knows, he might even convince him to bring back the much-mourned (at this desk) cheese and Marmite sandwich. This could be a case where all stakeholders really can win.

High cost of flotation is leaving small companies listless

Are we about to see another upturn in companies quitting the junior stock markets AIM and Plus?

This week alone, a PR outfit, Freshwater, and property investor Hilton Ventures have announced their departures.

In the last quarter, 45 companies disappeared from AIM. Nearly half (20) were taken over and eight went under.

The worrying rise is in those simply giving up the ghost and ceasing to be listed because their plans have come to nought and the cost (about £150,000 a year) is no longer worth it. This is a classic phase in the economic cycle. Investors avoid small companies in tough times. Liquidity in their shares disappears and new fundraising becomes nigh on impossible.

Perhaps a government-backed venture capitalist should be created that could inject fresh cash into growing businesses. You could call it Investors In Industry.