Shire saga smells of over​adventurous engineering

Roll up, roll up, who wants to buy Shire? The FTSE 100 pharmaceutical company, itself built by acquisitions, is suddenly awash with suitors. Takeda of Japan has made three offers. Shire rebuffed the lot but wanted to keep talking, possibly in the hope that another bidder would show up. Its prayer was answered. Allergan of the US, maker of Botox, popped up to say it is contemplating an offer.

Serious sums are at stake here since Takeda’s third offer was worth £44bn, or £46.50 a share, but this whole saga carries a whiff of overadventurous financial engineering. It’s not obvious that either Takeda or Allergan, who are both smaller than Shire, can make the takeover numbers work.

Allergan hovers as Takeda fails with £44bn Shire takeover bid

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A worry about Shire – and a reason its share price had slipped to £30 a month ago – was its level of debt. The figure was $19bn (£13.4bn) at the last count. Yet the Takeda proposal would involve adding leverage to leverage. The Japanese company would have to find £16.7bn to pay the cash component of the offer to Shire shareholders. To fund the rest of the transaction, Takeda would virtually double its number of shares in issue so that Shire investors end up with 51% of the new company.

That structure may suit Takeda but it’s hard to see the appeal for Shire’s shareholders. If Takeda was offering pure cash, finding the readies would be its own shareholders’ problem. Why, though, should the London owners of Ireland-based Shire want to own half of a heavily indebted Japanese pharmaceutical firm? Shire’s board was right to reject the offer: Takeda should be told to massively improve the proportion of upfront cash.

The nature of any Allergan offer is a mystery at this stage – indeed one may never emerge. But the same principle should apply: if you want to talk, bring cash, lots of it. Allergan’s shares fell 6% on news of its interest. Takeda’s have already slipped 8% since it made its first approach. Maybe neither can sensibly afford this deal.

Same old strategy for Debenhams

Debenhams has cut its dividend in half, unveiled an 85% slump in bottom-line profits for the half-year and said its restructuring programme will cost £85m, not the £55m originally projected. And, by the way, the finance director is off to Selfridges.

The chief executive, Sergio Bucher, gamely tried to look on the bright side. He is “hugely encouraged” by progress with his “Redesigned” strategy to make Debenhams a leader in “shopping as a fun leisure activity centred around mobile interaction,” which, frankly, sounds much the same as every other old-school retailer’s survival strategy.

It is unfair to judge a three-year plan after 12 months but the journey to the promised land of profitable growth looks harder than at the outset. Five years ago, Debenhams was making £139m of pre-tax profits; this year’s outcome will be close to £50m.

For investors, the best that can be said is that the share price may be overstating the gloom. At 22p, Debenhams is worth just £270m. Yes, it is carrying debt of £248m, but borrowings are well within covenants. That position buys time and hope that rivals will go out of business or shrink, gifting a few shoppers to Debs. It’s something to cling to.

So is the thought that the government might wake up and recognise that a reform of business rates is overdue. Justin King, the former chief executive of Sainsbury’s, made the point (again) yesterday that online retailers enjoy the enormous advantage of not paying a property-based tax that their store-based counterparts can’t avoid. The system is behind the times. King is right – it’s time ministers addressed a playing field that is unfairly tilted.

Alarm over Unilever

“We remain highly confident of achieving the required level of shareholder support,” says Graeme Pitkethly, Unilever’s chief financial officer, talking about the proposal to abandon the Anglo-Dutch corporate structure and go wholly Dutch.

We’ll see how that works out but the mood music among UK investors is not good. Only Columbia Threadneedle has dared to announce its concerns but the FT reports that three top-20 investors and one top-40 house are also alarmed.

One cannot be surprised. Unilever would retain a listing in London but, crucially, it would exit the FTSE 100 index. That would create huge selling pressures among those funds that track the blue-chip index or are obliged to hold a given percentage in UK-indexed stocks. Why would any fund in that position be in favour of Unilever’s rejig? The only logical vote would be against a proposal that requires a 75% majority of shareholders in the plc class of share. This tale may not be over.