Betting short-term on Victoria

At a venerable carpet maker, shareholders may be about to place a bet with the company's executive chairman that he will succeed in stripping some or all of its assets and growing the remainder to return them £3 a share within two years. Since the current share price is £2, success means all shareholders will win. But success is not assured.

Late on Friday, after the market closed, Victoria, the carpet manufacturer, announced it was entering a bet with its executive chairman. If it returns £3 a share to shareholders within two years, the company will pay him on a scale that increases with the amount raised. If it doesn't return £3 to shareholders within two years, he will forfeit a £20,000 charge for entering the arrangement, a contract for difference, but could lose up to £100,000 if he depletes shareholder value.

The arrangement is subject to the approval of shareholders, which is highly likely. Geoff Wilding, the investment banker who now runs Victoria owes his position to a bitter boardroom battle in which major shareholders, some members of the founding Anton family and a hedge fund reportedly based in Switzerland, acted in concert to take control.

Since the Share Sleuth portfolio takes a long-term view on UK stocks, I find every aspect of this arrangement unappealing. Presumably, members of the founding family have given up on turning Victoria around in its current form, and would take cash instead, accompanied by a hedge fund interested in a quick profit.

The published strategy is to grow Victoria, although earning £3 a share in excess cash (£21m) to return to shareholders in two years seems unlikely considering the company has earned only a tenth of that in net profit once in the last six. A break-up or sale seems more likely, and if Victoria has a future independent of an acquirer, it could be as an Australian company since the UK is a drag on the group and management sees growth opportunities in Australia, already its main market. Geoff Wilding, the investment banker from New Zealand who now runs the company, is an investor in Flooring Brands, which operates in Australia.

The circular with full details has been sent to shareholders, but has yet to be published on the company's website. Roger Lawson, chairman of Sharesoc, and a shareholder of Victoria who will vote in favour of the bet has seen it. Under the basic winning scenario, a return of £3 per share, Wilding would make about £1m, but he could make £5m or more.

The bet looks risky. Wilding stands to lose up to £120,000, a substantial but not necessarily significant sum to him. While the company says the bet aligns his interests with shareholders, the incentive may be to go for broke.

An element of asset stripping could unsettle staff and customers, potentially destabilising the business. The first year under Wilding's management is unlikely to be propitious. He forecasts break-even at best while previous management delivered profits, albeit at a subdued level. The company says it has too much capacity and stock, particularly in the UK, which it will dispose of.

Victoria's announcements emphasise the negative, ahead of the positive, which may help align shareholders behind a vague strategy where anything goes so long as it achieves the desired return of capital. But if Wilding fails, it may leave shareholders with a damaged company, if it loses valuable staff and accounts.

I added Victoria to the Share Sleuth portfolio because I thought it would reward patience. I believed it would improve performance by diversifying into commercial markets, and investing in synthetic carpets and vinyl floor tiling. Short-term pain, investment in a poor market for carpet manufacturers generally, would lead to long-term gain as Victoria emerged a stronger company. 

I may have been wrong, overly romantic even, but I understood what it was trying to do and was happy to wait and see.

It's tempting to assume Wilding has a stupendous deal up his sleeve, or operational magic dust, but with the information made public by the company the alternative looks like a big gamble. It may excite some traders. Not me. 

I've slapped Victoria in the red-zone of the portfolio matrix, which means I'm preparing to jettison it from the Share Sleuth portfolio. 

Share Sleuth Portfolio Matrix (1)

Comments

The circular and full details are in fact on their website as of y/day , under GM details, but not all that easy to find. The details appear after the circular. Not for the fainthearted, however; unbelievably complex. As a small shareholder, I am not impressed. Completely OTT in my view. And since my shares are in a nominee account (at present in an ISA but will have to come out now they're in AIM so will now be subject to tax) I don't get sent a copy but have to print out my own from the website. You omitted to mention that Anton Alexander "may benefit under the contract by personal arrangement with Mr Wilding". According to the Sunday Times, the company says there aren't any specifics for this because it's just an agreement between friends to thank Alexander for his support. (Yeah!) Wonder how that will figure on their tax returns. No PAYE or NI on payments to Wilding under the contract either, unless HMRC won't play ball.

Thanks Lorna. It's here in case anyone's interested: http://www.victoriaplc.com/victoriaplc/dlibrary/documents/Final%20Circul...

How silly, making that kind of bet! It seems to me that it is lacking seriousness or responsibleness. He is already paid for running the company right? And now he is getting some kind of deal that could give him extra reward for something he is meant to do?

Still, I think you are right to be giving up this company. Better to take a reasonable loss of roughly 20-25% than to lose the majority!

HI Joe, thanks for your comment. I don't know how much he's paid. It will be interesting to find out in the next annual report.

So the CFD terminated in July and Geoff Wilding was issued new shares equivalent to 50% of the company as compensation, which seems like a spectacular erosion of shareholder value at least in the short term. The current price doesn't appear to reflect the full extent of the dilution.

What are the possible implications going forwards?

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