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Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

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Dod101
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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315182

Postby Dod101 » June 4th, 2020, 1:45 pm

ITH should really read the RNS as I have already suggested. PD is correct that this thread seems to have been hijacked and that was certainly not my intention. Sorry.

Dod

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315193

Postby dealtn » June 4th, 2020, 2:04 pm

Dod101 wrote:ITH should really read the RNS as I have already suggested. PD is correct that this thread seems to have been hijacked and that was certainly not my intention. Sorry.

Dod


Well he can speak for himself, but I think he has.

Imagine that instead of being sold off to a private equity outfit it was split into 2 listed companies that both traded in the FTSE 100 (to make them HYP eligible).

Now if the current dividend was 60p (or whatever it is), but is split into 2 companies that paid dividends of 21p and 41p going forward, would you really be judging the drop from 60p to 21p, or looking at the move from 60p to 62p.

The difference here is the company is not being split and you being given shares in 2 outfits, but selling one so you have the existing share, which itself is in a company that has disposed of £3.7bn of "assets" into £3.7bio of "cash". It might return that £3.7bn to its shareholders (by way of a special, say) in which case you can reinvest that into alternative (perhaps higher yielding shares, perhaps not) and reinstate your income. Alternatively it might utilise that "cash" itself, not return it to shareholders, and buy alternative assets which provide an income stream to allow other dividends to be paid.

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315198

Postby Dod101 » June 4th, 2020, 2:13 pm

dealtn wrote:Imagine that instead of being sold off to a private equity outfit it was split into 2 listed companies that both traded in the FTSE 100 (to make them HYP eligible).

Now if the current dividend was 60p (or whatever it is), but is split into 2 companies that paid dividends of 21p and 41p going forward, would you really be judging the drop from 60p to 21p, or looking at the move from 60p to 62p.

The difference here is the company is not being split and you being given shares in 2 outfits, but selling one so you have the existing share, which itself is in a company that has disposed of £3.7bn of "assets" into £3.7bio of "cash". It might return that £3.7bn to its shareholders (by way of a special, say) in which case you can reinvest that into alternative (perhaps higher yielding shares, perhaps not) and reinstate your income. Alternatively it might utilise that "cash" itself, not return it to shareholders, and buy alternative assets which provide an income stream to allow other dividends to be paid.


Look I know all that and I have no interest in Pennon. I am simply noting that Pennon's dividend is being rebased according to the Company itself. People can make what they like of that fact or even disagree with the Company terminology. That is up to them.

Dod

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315247

Postby Gengulphus » June 4th, 2020, 4:15 pm

dealtn wrote:If the market values something at say £2, and somebody comes along and offers £3 for it, why wouldn't you at least consider it? That's called acting in the shareholders best interests. It doesn't matter if that's "family silver" or "family brass", or whatever. The corporate activity is outing value.

Now even if capital is a secondary consideration, if that £2 is providing an income of say 10p, or a 5% yield, and someone offers you £3 that you could re-invest elsewhere at 5% (or even 4%!) you get a chance to increase your income from 10p to 15p (or 12p). Odd that a strategy that is looking for growing income doesn't embrace the chance to do just that.

I haven't looked at the details of this particular case, but that's why companies (and their shareholders agree) sell off their assets, even if they are "good bits".

and later:

dealtn wrote:You asked in the general why companies sell off assets, not the specifics of this case, or what investors should do, and that is how I answered.

(I suspect a lot of Income seekers would agree with me for a 50% increase in value over market - I can't speak for HYPers, but it would be interesting to hear their objections other than in the "trifling uplift" case, but as you say that is for another thread).

Given that you're talking about selling off part of the company (i.e. some of its assets), how do you know what what the market values that part at? It's not tradable on the open market (other than in a few special cases), so the only real guide you have is that what someone is willing to pay for it...

I.e. rather than your argument "If the market values something at say £2, and somebody comes along and offers £3 for it, why wouldn't you at least consider it?", I think the argument should generally be "If there's no open market for something, and someone comes along and offers £3 for it, then that's evidence that whatever market there is for it values it at at least £3. Consider that carefully before accepting their offer to buy it!".

I'm not saying that the results of that consideration should always be "It's worth at least £3, possibly more. By accepting their offer to buy it, I at best break even and possibly lose, so I shouldn't accept that offer!". That's very plausible-sounding, but it suffers from a flaw: there may be very good reasons why the asset might be worth less to you than it is to whoever's making the offer. (Indeed, that's what any successful sale should be based on: if you own an asset and I own £N, and I value the asset at more than £N while you value it at less than £N, we'll both feel we've gained if I buy it from you for £N.)

So when deciding whether to sell off company assets, the question directors should ask is not "Is this offer more than the market value of the asset?", but "Is this offer more than what the asset is worth to our company?". Trying to decide what the asset is worth to the company is usually hard, since it requires one to value an uncertain future stream of cashflows generated by the asset, which involves forecasting those future cashflows and deciding on an appropriate discount rate to arrive at their present value. But it's easier than determining the market value of something for which there is no open market!

So if you want to decide whether the Viridor sale is a good deal for shareholders, the way to go about it is to try to work out what returns Viridor would plausibly produce for Pennon in the future if Pennon kept it, add up the values of those returns, discounted to their present value, and compare the result with what it's being sold for. But I should stress the "if" at the start of that, as it's fraught with practical difficulties - as already mentioned, deciding on the future returns is difficult (like all forecasts, especially those about the future), so is deciding what discount rate to use (basically, the higher the discount rate, the more short-termist you're being; the lower the discount rate, the more exposed to long-term forecasts), and even if you do all of that, the likelihood of your votes (assuming you get through the usual obstacle course for casting them) affecting the decision is low. Especially in a case like this one at this stage, as today's results say about the Viridor sale (with my bold) "Shareholder approval and European Commission merger clearance received, now finalising the last condition precedent"!

Or more briefly and slightly over-simplified, shareholders have already agreed to sell the family brass/silver; the practical considerations now are only what to do with the proceeds!

Gengulphus

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315255

Postby Arborbridge » June 4th, 2020, 4:33 pm

IanTHughes wrote:Please, I am not for one minute suggesting that, as an HYPer, I seek out such disposals and/or re-investment opportunities. However what I am suggesting is, if I am forced to "sell" part, or even all of a holding, as a result of a "market transaction", I am at least comforted when given the opportunity to increase my HYP's yield. I should also add that such "market transactions" may also present an opportunity to improve my HYP's diversification.


Ian


Well, I can certainly agree with "comforted" :) .

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315256

Postby dealtn » June 4th, 2020, 4:33 pm

Gengulphus wrote:
dealtn wrote:If the market values something at say £2, and somebody comes along and offers £3 for it, why wouldn't you at least consider it? That's called acting in the shareholders best interests. It doesn't matter if that's "family silver" or "family brass", or whatever. The corporate activity is outing value.

Now even if capital is a secondary consideration, if that £2 is providing an income of say 10p, or a 5% yield, and someone offers you £3 that you could re-invest elsewhere at 5% (or even 4%!) you get a chance to increase your income from 10p to 15p (or 12p). Odd that a strategy that is looking for growing income doesn't embrace the chance to do just that.

I haven't looked at the details of this particular case, but that's why companies (and their shareholders agree) sell off their assets, even if they are "good bits".

and later:

dealtn wrote:You asked in the general why companies sell off assets, not the specifics of this case, or what investors should do, and that is how I answered.

(I suspect a lot of Income seekers would agree with me for a 50% increase in value over market - I can't speak for HYPers, but it would be interesting to hear their objections other than in the "trifling uplift" case, but as you say that is for another thread).

Given that you're talking about selling off part of the company (i.e. some of its assets), how do you know what what the market values that part at? It's not tradable on the open market (other than in a few special cases), so the only real guide you have is that what someone is willing to pay for it...



Well that's not strictly true either (although I agree with much of what you say, but for brevity won't quote all of it).

If you have a market valuation for the entirety of your company, and you also have a good idea of what some part of your company would be worth by way of market value, if it was a regulated utility with a number of quoted alternatives priced by the market, the Directors are able to derive the market valuation of the remainder.

As a Director you will also have an idea, as an insider, of what the relevant future cash flows etc are likely to be for that part of the business.

So if the market values the entire company at £5bn, and you can derive that the part you aren't selling is likely to valued at £3bn you might feel justified in claiming the market values the "rump" at £2bn (although you might see it at £2.5bn say). If someone else values it higher and offers £3bn then I am saying as a Director you are obliged to consider that and in the best interests of shareholders maybe accept, or at least inform the shareholders.

Again this is all hypothetical, and not about Pennon (I haven't yet done any analysis on the company or this transaction in particular). This was all in response to an enquiry of "...why companies sell off "good bits" of themselves..."

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#315482

Postby Gengulphus » June 5th, 2020, 11:27 am

dealtn wrote:
Gengulphus wrote:Given that you're talking about selling off part of the company (i.e. some of its assets), how do you know what what the market values that part at? It's not tradable on the open market (other than in a few special cases), so the only real guide you have is that what someone is willing to pay for it...

Well that's not strictly true either (although I agree with much of what you say, but for brevity won't quote all of it).

If you have a market valuation for the entirety of your company, and you also have a good idea of what some part of your company would be worth by way of market value, if it was a regulated utility with a number of quoted alternatives priced by the market, the Directors are able to derive the market valuation of the remainder.

That's rather circular, isn't it? The company is made up of the part you're selling and the part you're keeping: you're trying to deal with the fact that there's no market value available for the former by assuming that there is one available for the latter... But there isn't - having an idea what the market value of something is isn't the same thing as having its market value available. In addition, and probably more importantly, you're making the assumption that the market value of the whole is the sum of the market values of the parts - and that assumption isn't justified: synergies between businesses do happen, and so do their opposites. (And the history of company mergers is littered with examples of directors failing to have a good idea of what those synergies/anti-synergies are...)

dealtn wrote:As a Director you will also have an idea, as an insider, of what the relevant future cash flows etc are likely to be for that part of the business.

Agreed that the directors are in a better position to forecast those future cashflows than outsiders are - but they're still only forecasts, subject to steadily greater possible errors the further they try to look into the future. At some point in the future, they become so subject to error that the 'forecasts' are better not even described as informed guesses, but as pure guesses. That point will be further into the future for the directors, but not necessarily enough further to greatly improve the reliability of a calculated total present value of those future cashflows. E.g. even for directors of a regulated utility such as what will be left of Pennon once Viridor has gone - a type of company that is generally regarded as having some of the more reliable cashflows - I wouldn't expect directors' forecasts of future cashflows to be anything other than guesswork beyond the maximum time to the next election plus maybe a year for an incoming government to actually bring its plans into effect. That's a maximum of about 6 years of reasonably reliably forecastable cashflows, which on reasonable discount rates and assumptions about inflation will make up less than half of those cashflows' net present value.

Basically, I do expect directors and other insiders to have a considerably better idea of the next few years' cashflows than outsiders do, and that's very useful for their actual role, i.e. managing the company. It's considerably less useful for the investor's role of valuing the company because most of a company's value usually lies beyond even insiders' foreseeable-future horizons.

dealtn wrote:Again this is all hypothetical, and not about Pennon (I haven't yet done any analysis on the company or this transaction in particular). This was all in response to an enquiry of "...why companies sell off "good bits" of themselves..."

Understood and basically agreed - though on a wording point, I would probably say "theoretical" rather than "hypothetical". (I.e. it's general theorising about companies selling off parts of themselves, not making a hypothesis that a particular company will sell off a particular part of itself and trying to work out what the consequences of that hypothesis are.)

And I've no problem with that: although this is a board about practical matters, having a good understanding of the theory and of its limitations is helpful when trying to make the practical decisions this board is supposed to be about. But we should also keep in mind the question of what those practical decisions actually are... With regard to decisions related to companies selling off parts of themselves, they're usually limited to:

* when such a sale is major enough to require shareholder approval, a decision whether to vote about it, and if so, in which direction - in this particular case, it was major enough, but the boat has sailed as regards voting;

* generally assessing the company with regard to whether to buy it (or more of it) for one's HYP;

* for tinkerers, generally assessing the company with regard to whether to sell part or all of it from one's HYP.

On those last two, Pennon has made it clear that they intend to use some of the Viridor sale proceeds to make a return to shareholders, but have not yet said how, how much or when (I would guess because they probably haven't yet made all the decisions and almost certainly haven't yet got all of the details). As far as buying is concerned, I would regard Pennon as being in a bit of a limbo at present, with an unknown-but-probably-large proportion of the current value of my holding essentially locked up in the anticipated Viridor sale proceeds. It seems likely that I'll want to reinvest the returned capital to restore the value of my holding, but trying to do so before I know how much to reinvest isn't really possible! And as far as selling is concerned, I'm a tinkerer but I think it unlikely I will sell. That's because I think Pennon unlikely to meet any of my main criteria for selling, which are (a) to trim an overweight holding; (b) the dividend looking unsustainable; (c) the company becoming very different from the company I bought, in a way I don't like, e.g. by moving into a different sector that I've already got enough of or by moving abroad. (That last one is a strong personal preference, especially not to have to deal with foreign dividend income in my tax returns - I don't expect other HYPers to share it!) Of those reasons, (a) and (c) are very unlikely to apply - my current holding is only about 2.7% of my HYP and can be expected to reduce when the return of capital goes 'ex', and while the company's sector is shifting from water utilities plus waste services to only water utilities, under 5% of my HYP is currently in water utilities.

That leaves reason (b) - the dividend looking unsustainable. That's relevant both to why I think I'm quite likely I'll want to reinvest the returned capital to restore the value of my holding and why I think it unlikely that I'll want to sell because of an unsustainable dividend. That might seem odd in view of the statement in the results that "Pennon's dividend policy for 2020-25 for the re-based Continuing Group will be growth of CPIH + 2% per annum, from an implied Continuing Group dividend for 2019/20 of 21.11p per share." The reason is that I think it pretty likely that the return of capital will be pretty large and done by a special dividend plus a share consolidation, or something with similar effects such as a B share scheme (capital only for tax purposes, not the old type that offered shareholders a choice between income and capital) plus a share consolidation. The company has form for doing capital returns by special dividends plus share consolidations, albeit quite a long time ago (two of them, in 2003 and 2006), and if they follow suit this time, I would expect that "implied Continuing Group dividend for 2019/20" to be adjusted as normal for the consolidation and in line with the reduction in the company's market cap as a result of the special dividend (or whatever) going 'ex'. A rough halving of the company's market cap doesn't look implausible to me, which would make the consolidation be in the region of 2-for-1, which would adjust that 21.11p per current share to around 42.22p per consolidated share, i.e. in the region of the current dividend. If those things were to happen, the effect on shareholders would be roughly equivalent (other than possibly for tax purposes) to a compulsory sale of half of their holding, with the special dividend (or whatever) being equivalent to the sales proceeds and their dividend income from the holding being roughly halved, but that halving being due to the reduced number of shares rather than to any significant dividend cut.

I'm not by any means saying that's what the company will do - it appears quite plausible to me that the company will do something reasonably close to it, but 'quite likely' falls a long way short of 'certain'! But the wording does indicate to me that the 21.11p figure takes the sale of Viridor into account but not the implications of the return of capital. It's certainly not impossible that the return of capital will be significantly smaller than I'm thinking likely, which would result in those implications being smaller and so not enough to prevent there being a significant dividend cut.

So basically, I'm not trying to give any sort of definite verdict about the dividend being cut or not - just saying that I think the jury is still out about that, and will remain out until the company gives details of how much it plans to return to shareholders and how it plans to do the return. My guess is that that will happen when or shortly after the sale finally completes and the company actually has the cash...

Gengulphus

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#324618

Postby monabri » July 8th, 2020, 4:37 pm

"Pennon Group plc ("Pennon") is pleased to announce that it has completed the sale of Viridor to funds advised by Kohlberg Kravis Roberts & Co. L.P. for an enterprise value of £4.2 billion."

viewtopic.php?p=324616#p324616

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Re: Pennon Group Full Year Results 2019/20 nb Dividend to be rebased Notice.

#324646

Postby kempiejon » July 8th, 2020, 6:08 pm

"Pennon will now review the most efficient and effective method of returning value to shareholders, alongside considering earnings accretive market opportunities. Any potential investment will be assessed in terms of value creation and the impact on shareholder returns, income and growth, as well as the impact on customers and other stakeholders. Any use of capital to pursue an investment opportunity will be compared with the alternative of returning that capital to shareholders, maintaining our strong focus on financial discipline. We aim to update shareholders on this review at Pennon's half year results announcement in November 2020. "


I will now review the most efficient and effective way of dealing with my new holding and look forward tentatively to the November outcome. Not usually given to make unforced trades this move requires my attention as I have several times found the company I bought is no longer the same monster following takeovers sales or acquisitions. My buys in Pearson, Rank Hovis McDougal, Vodaphone, Aberdeen Asset Management all left me holding different companies to those I purchased none have played to my advantage - here's another example; Viridor is/was an attractive part of Pennon as Verizon was as part of VOD.


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