Azure Global : 12/11/13

Wednesday 11 December 2013

FirstGroup rejects plan to sell Greyhound coaches and school buses

Shareholder Sandell Asset Management had argued selling US business would cut debts and boost share price

Bus and train company FirstGroup has dismissed a plan from one of its biggest shareholders to sell one of its US businesses to pay down debt.

Sandell Asset Management, a hedge fund with a 3.1% stake in FirstGroup, had urged the board to sell its Greyhound coach business and school bus division, arguing this would cut debts and boost the group's languishing share price.

In a statement on Wednesday, First Group rebuffed Sandell's proposal, saying it contained "a number of structural flaws and inaccuracies".

"The board of FirstGroup notes the recent press speculation and confirms that it has received a proposal from Sandell Asset Management," it said. "The board is open to all means of enhancing long-term value and welcomes the views of the group's shareholders. The group has engaged with Sandell several times, reviewed their proposal in detail and believes that it is not compelling and contains a number of structural flaws and inaccuracies."

FirstGroup has been struggling with almost £2bn in debts since 2007 when it bought US-based Laidlaw, the owner of Greyhound coaches and yellow school buses. The acquisition was part of an ambitious expansion programme that has seen the Aberdeen-based company go far beyond its origins in Grampian municipal buses to become one of the world's biggest transport companies with 120,000 employees. But its growth plans were derailed last year when the UK government revoked a decision to award it the lucrative contract to run the west coast mainline rail franchise between London and Scotland, following a botched bidding process.

In May the group tapped shareholders for £615m and cancelled its dividend, causing its share price to drop 30% in one day.

Hedge fund boss Tom Sandell argued that selling off the American assets would deliver "a 50% upside to shareholders" and allow FirstGroup to shake off its "historic poor performance" by focusing on its UK bus and rail business. FirstGroup's shares rose over 4% on Wednesday to 120p, after the board said it was sticking to its turnaround plan set out in May that would "deliver superior value for shareholders compared to alternatives that were considered in detail earlier this year, and which remain under review". The next review is slated for FirstGroup's capital markets day on 23 January, when its new chairman is in post. The transport group last week appointed Aviva chairman John McFarlane to take charge in the boardroom, ending a six-month search after Martin Gilbert ended his 27-year reign in May. McFarlane, who joined the board last week, becomes FirstGroup chairman on 1 January. FirstGroup's chief executive, Tim O'Toole, has argued First Group are making progress on their turnaround plan: last month the company reported pre-tax losses had narrowed to £8m in the six months to the end of September, compared with a £20.6m loss in 2012.

Gerald Khoo at Liberum Capital said FirstGroup would be better off holding onto Greyhound for now: "We struggle to see how a strategy of large scale disposals creates value. Selling underperforming assets when they are cyclically depressed is unlikely to realise more value than restructuring them and seeking an exit at a better point in the cycle, if appropriate."

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Wall Street facing tighter scrutiny as regulators move on Volcker rule

Rule, going to vote Tuesday, aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis

Wall Street is facing tighter scrutiny of its trading activities after US regulators moved on Tuesday to impose stricter rules on the types of trades banks can make following the financial crisis.

The long-delayed “Volcker rule” is aimed at curbing high-risk trading on Wall Street of the kind blamed for triggering the worst financial crisis in living memory. But the rule hit yet another hurdle Tuesday – snow storms closed much of Washington and some staff at the top five US financial regulators looked set to vote on the rule from home.

Five years after the financial crisis, the Volcker rule has become the most controversial element of the Dodd-Frank Act, the largest overhaul of the financial system since the Great Depression.

Many details of the 71-page rule, preceded by about 900 pages of explanatory text, are still to be finalised. But according to those who have seen the final draft, it appears the new legislation will impose tougher requirements in some areas than the banks had first expected.

The rule, named after former Federal Reserve chairman Paul Volcker, aims to crack down on so-called proprietary trading – betting on financial markets for banks' own gain. The rule aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis.

The rule would curb the number of risks banks can take so that they do not exceed "the reasonably expected near-term demands of customers", the regulators said.

The rule will also tackle so-called portfolio hedging, a practice that was supposed to allow banks to offset risks with investments in other portfolios but which critics charge has been used by Wall Street to hide risky speculative bets. Under the new rule banks will be required to identify the exact risk that is being hedged.

According to the executive summary issued by the US Federal Reserve, Volcker would also prohibit “any banking entity from acquiring or retaining an ownership interest in, or having certain relationships with, a hedge fund or private equity fund,” with some exceptions. It would also require banks to establish an internal compliance programme “designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.”

While the Volcker rule was drawn up in the wake of the financial crisis, it was given fresh impetus last year after JP Morgan Chase’s $6bn losses on the so-called “London whale” trades. The bank contended at the time that the huge risky bets being made in London were meant to hedge risks being taken elsewhere.

Wall Street’s lobbyists have won some key concessions. Some securities linked to foreign sovereign debt – money owned by foreign governments – will be exempt. There will also be exceptions for banks’ market-making desks, as long as traders are not paid in a way that rewards proprietary trading. Wall Street’s bonus culture has been seen by some as a prime cause of excessive risk taking.

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Federal Reserve chairman Ben Bernanke said in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.”

The rule will not come into force until July 2015 and Wall Street lawyers are now expected to comb through the document looking for loopholes and considering whether to mount a legal challenge.

Oliver Ireland, co-head of financial services practice at Morrison and Foerster, said with such an enormous rule “the devil is very much in the detail.”

“Fundamentally it’s the same rule in that it tries to put an end to prop trading,” he said. But he said he doubted it would be enough to halt the next financial crisis. The rule addresses banking entities – not hedge funds. And even in this case, where risky trades are being limited, Ireland said there was a good case that the wrong issues were being tackled.

“It’s not going to stop ‘too big to fail’. It’s not going to stop banks taking risks. Banks lend money with the expectation of getting it back and that’s fundamentally a risky business,” he said. “This is aimed at trading and if you look back at the last financial crisis that goes back to bad lending practices on mortgages. That happened before anyone had traded anything,” he said.

Youth unemployment could prolong eurozone crisis, Christine Lagarde says

IMF chief warns against prematurely declaring an end to the economic crisis, saying joblessness puts future growth at stake

Christine Lagarde, the managing director of the International Monetary Fund, has warned that long-term prospects for eurozone growth look bleak unless politicians act urgently to stoke domestic demand and tackle youth unemployment.

After months of relative calm in financial markets, and with Ireland due to end its painful bailout programme and its reliance on the IMF this weekend, some European politicians have declared the worst to be over for the 17-member single currency zone.

But speaking at the European Economic and Social Committee in Brussels, Lagarde warned against prematurely declaring an end to the economic crisis.

"Can a crisis really be over when 12% of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50% in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down their debts?"

She warned that high youth unemployment could jeopardise the economy's ability to grow in the future, by creating a generation of young people without the skills to take their place in the jobs market. "What is at stake is Europe's potential for growth in the future," she said.

"Unemployment at a young age means a lack of on-the-job training, depreciating skills, and possible withdrawal from the labour market. Experience tells us that long spells of unemployment lead to a less productive workforce down the road."

Lagarde called for a raft of reforms, including fixing the battered banking sector to "jump-start growth", and warned that with monetary policy all but exhausted, and interest rates already close to zero, governments might yet need to resort to a new fiscal stimulus if recovery fails to take hold.

"In the event growth is low for a protracted period of time and monetary policy options are depleted, fiscal policy will need to provide more support to domestic demand," she said.

In a veiled criticism of Germany, which has tended to rely on an export-led growth model, Lagarde suggested that boosting Europe's growth potential will require stoking demand at home too.

"Most of the demand for European goods and services comes from abroad, not from within, leaving the economy at the mercy of the ups and downs of global trade. European demand for European products remains lacklustre."

After European Central Bank president Mario Draghi unexpectedly announced a cut in interest rates last month to stave off deflation, Lagarde called for the ECB to "keep interest rates low and convince investors that it will do so for as long as is necessary".

The IMF would also like to see a series of labour market reforms, including making it easier for skilled employees to cross Europe's borders in search of work; cutting employment regulation; and shifting the burden of taxation from income on to consumption, in the hope of boosting future job prospects.

"There can be no letting up on reforms until growth has recovered sufficiently to arrest the rise in unemployment and debt," Lagarde said.

Trial of Labour donor Victor Dahdaleh abandoned

Serious Fraud Office abandons case and judge instructs jury to return not guilty verdicts

The Serious Fraud Office has abandoned a major corruption trial in which it accused one of Labour's wealthiest party donors of making multimillion-pound payments to win lucrative contracts.

In the latest high-profile setback for the SFO, its counsel told Victor Dahdaleh, the accused, that there was no longer a realistic prospect of a conviction after its main witnesses withdrew evidence or co-operation.

The 70-year-old businessman, a former associate of Tony Blair and Peter Mandelson, had maintained his innocence after being accused of paying bribes worth £40m to former managers of Aluminium Bahrain (Alba) in return for contracts worth £2bn.

At Southwark crown court in central London, counsel for the fraud office said it would present no evidence against Dahdaleh, leaving the judge to instruct the jury to return verdicts of not guilty on all eight charges.

"After careful consideration of all the circumstances of this case, the SFO has concluded that there is no longer a realistic prospect of conviction … and accordingly we will offer no evidence," said Philip Shears, lead counsel for the prosecution.

With the SFO not presenting any evidence, the judge instructed the jury to return verdicts of not guilty on all eight charges. The jury was then discharged.

The long-running case had involved allegations of corruption at senior levels of government and business in Bahrain, a sensitive issue at a time of political unrest in the Gulf kingdom.

Dahdaleh, a British-Canadian national, had pleaded not guilty to all the charges relating to events between 1998 and 2006 at Aluminium Bahrain (Alba), the world's fourth-largest aluminium smelter, which is majority-owned by the Bahraini state.

Dahdaleh had been accused of paying bribes to former managers of Alba in return for a cut of the £2bn contracts.

One Alba chief executive Bruce Hall, 61, has pleaded guilty to a charge of conspiracy to corrupt. Dahdaleh was the only remaining defendant in the case.

The court heard that Alba accounts for 10% of Bahrain's GDP and nearly 70% of its non-oil exports. It is three-quarters owned by the Bahraini government.

The trial, which began in November, was expected to continue until next year and has so far cost millions of pounds.

It is understood that the costs of the case – the investigation into Dahdaleh began six years ago – will run to several millions of pounds.

The agency has been at the centre of a number of failed inquiries and collapsed trials. In August, the SFO said it had lost 32,000 pages of data and 81 audio tapes linked to a bribery investigation into BAE's al-Yamamah deal with Saudi Arabia. The investigation into the huge arms deal was discontinued in 2006 after intervention from Blair, the then prime minister .

The shadow attorney general, Emily Thornberry, said the case had highlighted that the SFO "cannot be relied on" to carry out complex investigations.

"This collapse shows that the government has yet to put the SFO on a sustainable footing," she said.

"The SFO under this government has lurched from shambles to shambles and cannot be relied on to carry out the complex investigations and prosecutions it was created to undertake."

"As long as ministers fail to get a grip of this situation, the taxpayer and the UK's reputation for fighting economic crime will suffer."

Government insiders have said that the new National Crime Agency, which was launched in October, could take over some of the work of the SFO.

In a statement, the fraud office said it had decided to withdraw from the case after its key witness, Hall, changed his evidence during the trial. Two other key witnesses refused to attend the trial, it said. "That impacts on the fairness of the trial as well as the prospects of conviction," it added.

Neil O'May, a partner at the legal firm Norton Rose Fulbright, which represents Dahdaleh, said the SFO had serious questions to answer about the case.

"It is an emotional day and [Dahdaleh] has been overwhelmed and relieved by the acquittal," said O'May. Dahdaleh will seek recovery of his legal costs, he added.