High-profile casualties of market slump

Jul 16 2008 by Andrew Hebden, The Journal

Today’s publication of The Journal Top 250 companies has two notable absentees. Andrew Hebden reflects on how the credit crunch and the collapse of the housing market has robbed the prestigious listing of two of its best-known names.

BRIGHT sunshine cast long shadows on Newcastle’s Quayside as senior representatives from some of the North East’s most successful companies lined up on the banks of the Tyne for the photocall to mark the publication of the landmark 30th edition of The Journal’s annual Top 250.

A year on, it is apparent that the storm clouds were already gathering for two of the top performers.

Both Northern Rock and Barratt Developments were, on the face of it, enjoying the best of times, riding the crest of a property boom which had delivered 15 successive years of house price growth.

The Rock had come to symbolise the buoyancy of the banking sector – the building society turned small bank had rapidly scaled the rankings on the back of an aggressive growth strategy, guided by its former marketing chief Adam Applegarth.

Famed for its willingness to offer 125% mortgages of five or six times people’s salaries, its turnover this time last year had topped £5bn. It was up nearly a quarter on the year before and secured number-one spot in the prestigious Top 250 for the third successive year.

There had, however, already been a hint of the troubles that lay ahead. Just a few weeks earlier, the bank issued a warning that its annual profits would be hit as rising interest rates took their toll on margins from cheap fixed-rate home loans.

Shares in the group plummeted by nearly 12% to 830p after it said underlying profits for the year would miss analyst expectations.

How much Applegarth knew about the vulnerability of the business is a moot point but, as the sub-prime crisis began to unfold across the Atlantic, its business model looked increasingly strained.

While it had grown its mortgage book six-fold in the decade since demutualisation, its deposits had only doubled.

This meant it was increasingly funding its expansion from the wholesale money markets on a short-term basis; it would then parcel up these mortgages and use them as security for future lending.

The Bank of England first made clear last April that the wholesale money markets may be adversely affected by events in America.

Northern Rock was on the back foot from that point on and by August it was seriously short of cash, prompting its request to the Bank of England for support the following month and the well-publicised run on the bank which secured its demise.

The bank’s eventual nationalisation rules it out of inclusion of today’s Top 250.

Meanwhile, at Barratt Developments the newly-appointed chief executive Mark Clare had wasted no time in unleashing his own aggressive growth strategy.

His feet had been under the desk for just a few months before, along with new finance director Mark Pain, he concluded a deal that was to catapult Barratt into the FTSE 100 and the status of Britain’s biggest housebuilder.

At the time, one national newspaper profile of Clare, who had been poached from a senior position with British Gas owner Centrica where he was tipped as a future chief executive, made the point that he had never laid a brick in his life.

Why should it matter? Running a housebuilder in Britain’s inflated property market was almost a licence to print money.

The £2.2bn purchase of Wilson Bowden in a deal principally financed by debt was always a brave move, but with the building sector flying high, it didn’t seem like a huge gamble.

Critics of Clare’s strategy point to the fact that the acquisition also went against the grain of recent history at Barratt.

Founded by Sir Lawrie Barratt in 1958 and listed on the stock exchange 10 years later, it did make acquisitions during the 1970s but since its struggles during the housing crash of the early 1990s, when it nearly went out of business, its recovery had been rooted in more cautious, organic growth.

The company’s strategy over the past 12 months or so has seen it abandon that path and sever its ties with the North East.

Most of the key functions from the company’s headquarters in Newcastle transferred to Wilson Bowden’s offices in the Midlands.

In contrast, Clare’s predecessor David Pretty, who famously sold Margaret Thatcher a Barratt house, had insisted on keeping two offices, one in Newcastle and one in London.

The official company address is now in Coalville, Leicestershire, a move which automatically ruled the company out of inclusion in today’s Top 250 listing.

It can’t even lay claim to being the UK’s biggest housebuilder any more after the merger of rivals Taylor Woodrow and George Wimpey in July last year.

Saddled with debt following the Wilson Bowden deal, the company has found its share price take a dramatic beating over the past 12 months as confidence has evaporated from the housebuilding sector.

Last week’s confirmation that it has secured the necessary funding from its backers to ward off a potential rights issue has been a rare chink of light in a grim 12 months.

Alasdair Reisner, deputy news editor of industry magazine Construction News, said Barratt was paying a huge price for last year’s ambitious move, which had been encouraged by a culture in the industry where each of the big players was egging its rivals on.

“Everyone wanted to be the biggest in the industry ... but no one seems to have considered whether biggest necessarily means best,” he said.

“The canny operators said, ‘The industry doesn’t look too good just now, it is probably best to leave it alone for a while’.

“A lot of this has been blamed on Mark Clare, but I don’t think that is necessarily fair.

“The housebuilding sector as a whole is responsible for this. They have all contributed to the feeling that this boom could never end.”

Despite its current predicament, Mr Reisner predicted Barratt would pull through while Taylor Wimpey was in a more dangerous predicament.

“Do I think that Barratt will ride out the storm? Yes I do.

“But it will not be pretty and there will be some ugly moments along the way,” he said.

Vinay Bedi, divisional director for stockbroker Brewin Dolphin in Newcastle, said it had been a difficult year for the region with the problems suffered by two of its highest profile listed companies.

But it had been tough to foresee just how grim things were going to get.

“Twelve months ago, it was just starting to emerge that there was a major problem and the Northern Rock share price was beginning to fall away rapidly,” he said.

“With Barratt, the knock-on impact of the credit crunch and the sub-prime difficulties for the banks was very difficult to comprehend last July.

“There was no doubt there would be an impact but the magnitude has been greater than most people had anticipated.

“The storm clouds were visible a year ago but the darkness of them was not quite as apparent.

“As for 15 months ago, I defy anyone to have predicted how things were going to turn out.”

POOR GROWTH PERFORMANCE

THE problems at Northern Rock, and Barratt Developments’ decision to move its head office to the Midlands, has robbed the North East of two of its highest profile plcs in the past 12 months.

The number of regionally-based companies listed on the Stock Exchange has fluctuated over the years but the total number has failed to grow substantially, despite the advent of the Alternative Investment Market.

The latest figures from the London Stock Exchange (LSE) show there were 142 listed companies in Yorkshire and the North East at the end of June this year with a market capitalisation of £33bn. This number compares favourably with other regions, but the majority of firms are based in Yorkshire (the LSE does not break down the number between the two regions).

Vinay Bedi, divisional director of stockbroker Brewin Dolphin in Newcastle, says it is a source of frustration to him that the number of plcs headquartered in the North East has not grown in any meaningful way since he first came to the region 20 years ago.

“As a regional performance, this has been very poor indeed,” he said.

“We are one of the weakest regions for plcs in the country.”

Mr Bedi concedes there is no real logic behind this trend, although he has his own theories.

At the smaller end of the scale, he believes that North East business people have a tendency to be sceptical about the benefits of taking their firms public as it means them giving up complete control of the company.

“Other entrepreneurs in the rest of the country seem to be more realistic about it.

“We argue that it is better to have a smaller slice of a much bigger cake than a bigger slice of a much smaller cake,” he said.

“At the top end of the market, a lot of our high-quality quoted companies that have grown tend to be attractive takeover targets and we do seem to lose a lot of companies in this way, with the head office functions moving outside the region.”

Mr Bedi said he believed it was important that the region had a high concentration of quality plcs.

Having senior executives based in the region means they are more likely to develop an understanding of and affinity to the North East, he said.

This makes them more loyal to the region and more likely to commit the company’s long-term future to the area.