Making a necessity out of a virtue

Have you heard the news? Apparently a really big company is planning to offload all of its property in a corporate PFI-style deal that is valued at megabucks. Consortia A, B and C are all rumoured to be bidding for the project, which will be one of the first to come to fruition.

Over the past two years or so there must have been something like 20 versions of this story, involving some of the biggest names in UK corporate life. Yet so far limited progress appears to have been made, in the UK at least. Why?

The case for corporate PFI (combining asset transfer with full service contracts) is disarmingly simple: something of the order of 40 per cent of UK company value is tied up in real estate. That is a lot of value to be locked into something that will never be core business. Why not sell the assets, lease them back on terms that 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 an argument – not against, but in mitigation. Look at it from, say, the finance director’s viewpoint. If a bid comes in for his company, 40 per cent of the value of which is in the form of real estate, he knows the absolute minimum worth of the firm, because property valuation is pretty well established.

Now suppose he sells 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, a finance director 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 per cent of the size and a much easier takeover target.’

Corporate PFI is like joining the euro: rational argument is there – now it needs to become compelling

Remind me. How easy is it to value goodwill?

There is a counter argument – that with no assets the company would be immune to asset strippers – but it doesn’t really convince, does it?

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 per cent 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 big chunk of the company’s value to mortgage on the future.

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.

Corporate PFI is a good idea which 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 it’s a bit like joining the euro. The rational argument for it is there – now it needs to become compelling.