Afternoon:
9°c
Hugh Osmond's Pearl Group was put back on the road today. It was announced that it had reached agreement on the terms of a reverse takeover from Liberty, one of those special-purpose vehicles with capital looking for ideas, and that in return for a capital injection of about £500 million, its bankers and creditors had additionally agreed to take a haircut of roughly the same amount.
The result is an improvement in the group's balance sheet of about £1 billion, which Osmond and his colleagues believe is enough to allow the group to start doing deals again.
It was deals that got Pearl into trouble in the first place, of course, and one deal in particular - the purchase after an acrimonious battle of Resolution, its rival consolidator of closed life funds. Pearl paid a top-of-the-market price, got rather less than it had hoped for and paid for it with debt just as the market was turning. The change in market sentiment against heavily indebted companies added further to its woes and it has become increasingly obvious in recent months that if the group sought to continue without fresh capital, it was in danger of becoming something of a zombie itself - able to survive, but unable to do anything meaningful.
That was not what Osmond had in mind when he got into this business. Rather, he saw the huge opportunity there was to mop up other zombie insurance businesses, run them properly, improve returns to policyholders and still make a tidy sum for himself.
He and his backers have paid a high price to gain their freedom - or should that be their liberty? - from debt. The deal is a share exchange, so Pearl shareholders will get Liberty paper but will hold only 30% of the new group, albeit with an additional earn-out arrangement that, if met, could add a few percentage points to this.
At the start, however, Liberty will have about 60% of the shares so it has in effect paid £500 million for a near two thirds stake in a business with net assets after all likely liabilities of £2.3 billion. But that's what happens if you get into a position of weakness. They have in effect done to Osmond what Osmond has so successfully done to many others in the past.
The remaining shares go to Royal London, which had a slice in Pearl following an annuity deal last year, and to management. There will now be several months of tidying up. Liberty shareholders have to vote on the deal but it is so sweet for them, that must surely be a formality. Liberty will then change its name to Pearl. Towards the end of the year, if things go according to plan, it will replace its share quote on Euronext with a primary listing in London.
On current estimates, the company should be large enough to be a member of the FTSE 100 - making its listing bigger than anything else likely to be seen in London this year. It may well also prove to be popular compared with the other life companies in the sector, in that its balance sheet has been made totally transparent by all the work done during the reconstruction, so it should be free of the nagging worries that have undermined its peers.
It now appears it will have enough capital, even under the stringent tests of the Financial Services Authority, to be able to pay a dividend. And the business going forward will have the Pearl team at the helm.
Interest burden squeezes Ineos
Pearl is not the only business in danger of being crushed by debt. Indeed, in Gibson Hall just off Bishopsgate, a far larger proposal is today being put to several hundred bankers whose one thing in common is that they have lent money — some £6.2 billion of it — to Ineos, the petrochemical business.
Ineos came from nowhere in the past decade by buying chemical complexes that BP, ICI and others did not want to run any more to become Britain's largest private company, and of course it borrowed money to do the deals.
Now the recession has deflated sales, the price of oil has been all over the place and profits have crashed. So it's not debt that's crippling Ineos, it's finding the money to pay the interest.
Goodwin's good call on tennis
As Andy Murray progresses smoothly so far through the rounds at Wimbledon, it is worth taking a moment to acknowledge the part played by
Sir Fred Goodwin and Royal Bank of Scotland in getting him where he is.
The discreet RBS logo on Murray's sleeve is not the result of some sponsorship deal thrashed out in the heady days of the credit boom when Murray was already a star. In fact, RBS picked up on the Murray and his tennis-playing older brother Jamie long before any of us had heard of them. The bank's willingness to sponsor them as young unknowns allowed them to develop their talents — and Sir Fred was very much the instigator.
So let's give him some credit. Giving us someone to cheer at Wimbledon may not make up for wiping out RBS, but it's a start.
