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Buckles Down

1 November 2011 By Quentin Webb

Investors are on guard against managerial hubris. That’s the message from the collapse of G4S’s $8 billion bid for ISS of Denmark, after Europe’s biggest shareholder revolt over M&A since Prudential’s move on AIA was crushed last year. The veto undoubtedly dents the record of Chief Executive Nick Buckles – but it shouldn’t spark a management clearout.

Leverage was at the heart of the deal’s collapse. To buy the indebted, private-equity owned ISS and keep its own investment-grade credit rating, the British security firm needed a big rights issue. That required a high approval hurdle of 75 percent, tempting naysayers to rebel. And even with part-payment in stock, the deal would still have lifted G4S’s net debt to 3 times EBITDA: among the highest leverage ratios in the FTSE 100. That too rattled investors.

The strategic shift into cleaning and cooking also looked suspect to some, as did the challenge of creating one of the world’s largest private employers. The deal was also a surprise. Buckles “pre-briefed” big shareholders. But the risks of leaks mean you can’t let everyone in on the secret early.

Failure shouldn’t force Buckles out. Until announcing the takeover, his track record as CEO was stellar: total shareholder returns of 123 percent, versus 33 percent for the FTSE 100, and 48 percent for the FTSE 350 Support Services index. The damage to the shares, largely reflecting the prospect of the sale of more than G4S’s existing share count, should be mostly reparable. The actual financial damage is limited to 50 million pounds of fees.

But if Buckles is allowed a mistake, he still has a PR job on his hands. His reputation wasn’t strong enough to convince shareholders he could execute a transaction of this size. He needs to apologise, and listen. That tactic seems to have prevented heads rolling at the Pru, scene of a bigger debacle.

Then Buckles should return to the small, often emerging-market focused acquisitions that investors thought they had signed up for. G4S may yet become a one-stop-shop that guards, cleans and cooks for big corporate clients worldwide. It’s a decent idea – but clearly one that investors want tested on a smaller scale first.


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