Have you heard the news? Apparently a really big company is planning to offload all of its property in a Corporate PFI deal that is valued at megabucks. Trillium, Servus, Mapeley and Citex are all rumoured to be bidding for the project, which will be the first of its kind to come to fruition.
Over the past two years or so I have read something like 20 versions of this story, often involving some of the biggest names in UK corporate life. Yet so far not a single proper private-sector PFI deal has been struck. It’s always, as they say in software development, going to happen ‘real soon now’.
Although there have been sales and leasebacks, usually involving traditional property companies, full-featured Corporate PFI has not taken off.
I suspect the reasons, although expressed in many different ways, boil down to something quite simple. But more of that shortly.
The case for corporate PFI is disarmingly simple: something of the order of 40% UK company value is tied up in real estate. For a software firm, retail, bank or widget maker that is a lot of value to be locked into something that will never be a core business. Why not sell the assets, lease them back on whatever terms suit your business plan and outsource the day to day management? Huge amounts of cash could be unleashed to reinvest in core businesses. Simple.
Except that the ‘case for’ also contains the seed of the - well, not a case against, as such, but argument in mitigation. Look at it from, say, the finance directors’ viewpoint. ‘If a bid comes in for my company and 40% of its value is in the form of real estate, I know the absolute minimum worth of the firm, because property valuation is pretty well established. ‘
Now suppose I sell all of the real estate. What happens to that value? One of two things. In line with much current management speak, it could be returned to shareholders. As far as I can tell shareholder value theory, at least as it is expressed in the UK, seems to comprise of ‘give the shareholders as much cash as quickly as possible’. Setting aside the argument that this is a pretty stupid way to run a company, an FD might think this is fair enough.
Or he might think: ‘Hang on a minute. The goodwill attached to our brand would have to increase a hell of a lot to offset the removal of assets from the business, or we will be 60% of the size and a much easier takeover target.’ Remind me. How easy is it to value goodwill?
There is a counter argument, I suppose, that with no assets the company would not be vulnerable to asset stripper takeovers, but it doesn’t really convince does it? As far as I know, selling all the real estate was not part of Royal Bank of Scotland’s plans for NatWest.
The other thing that could happen to the money is that it could be reinvested in the core business. But what exactly does that mean? Is it a single project? It would have to be huge, with a pretty good chance of success to commit 40% of the company’s value to it. Or is it a series of projects, or a sort of internal venture capital fund?
Either way it is a very big chunk of the company’s value to mortgage on the future.
From the FD’s point of view, surely that would border on the reckless. A simpler approach, such as a sale and lease back of some of the assets, could raise more rational and easily targeted amounts of liquid capital - perhaps with US style leases from US property investors more used to concepts of full service. And, besides, analysts do not strike me as too keen on huge amounts of cash sitting on deposit for future projects. You can practically hear them shouting ‘Give it back to the shareholders.’ Back to square one.
The thing is that Corporate PFI is a good idea, if only because it promises to break the feudal and adversarial ethos of UK landlord and tenant practice. Its proponents are very good at making a case for it. But what they have, so far, failed to do is to make a compelling case.
It is a bit like joining the Euro. I suspect that if you could persuade Joe Public that joining would increase his annual income by 40% he would say ‘Sod the pound. Gimme Gimme Gimme!’ The case, of course, is not that compelling. I suspect that, in a different environment and on a different scale, proponents of corporate PFI have got to find a way to make its argument compelling, rather than merely rational.
© 2000 Ian Cundell