ALEX BRUMMER: Bad bend on tobacco route

Preaching about the environmental, social and governance (ESG) agenda has become the cradle of big investors.

Likewise, companies and their boards are responding with increasingly detailed ESG reports and endless target bromides.

But when there’s money on the table, ESG principles rarely suffer from slack boards or big battalion shareholders who are all too willing to grab the money and scramble.

Moral cowardice: If there was a board that should have survived on social and governmental grounds alone, it was Vectura, which has sold out to tobacco giant Philip Morris

Not only ethics and governance are set aside, but also the fiduciary duty is jeopardized.

Often accepting the first offer on the table and then seeing competing bidders attracted at significantly higher prices can lose the very best deal for investors.

Amid the recent takeover frenzy, one of the few boards to battle over price and ownership was that of security group G4S, then led by John Connolly.

The result may have been the same, in the form of a private equity-dominated buyout, but a good defense of a hostile bid, ending in an auction, resulted in a better price and a solid air of all arguments.

If there was a board that should have survived on social and governmental grounds alone, it was Vectura’s, which sold the pass to Philip Morris, one of the least socially desirable companies in the world.

Tobacco companies are deadly machines – just look at the warning on a cigarette pack. Virtue signaling, by purchasing in the healthcare pioneer Vectura, the dial will not change.

There is no guarantee that Vectura R&D and science will not be used for the wrong purpose.

The Marlboro cigarette group employed an outdated stock market practice and effectively fixed the outcome by grabbing 29 percent of the shares in the open market.

Still, a board of directors, with an experienced life sciences chairman in the hot seat, Frenchman Bruno Angelici, could have followed French compatriot Pascal Soriot in Astrazeneca and told buyers to take a walk.

Instead, Vectura was in the awkward position of holding an informal auction between major tobacco and private equity giant Carlyle. The fact that the Marlboro man was only able to muster 45.61 percent of the minority supporters speaks for itself.

The ire of medical groups such as the British Thoracic Society, which represents asthmatics (including my own family), should have been taken much more seriously by the board and shareholders who took on the poisoned shilling.

Rightly so, Vectura will never again be allowed near such groups. As we report, Axa is among the investors who are honest about their ESG principles by speaking out against the deal.

The moral case against Philip Morris takes precedence over all other factors. What it does show is that company presidents and boards of directors are far too quick to give in to looters without even making up the money.

The phenomenon is not limited to the UK. The board of the German-listed pet food supplier Zooplus bit into the hand of the takeover firm Hellman & Friedman, but eventually agreed to an 18 percent higher offer from the same party, which initially failed to get a good deal for the shareholders.

Both UDG Healthcare and St Modwen Properties both accepted initial offers from financial buyers Clayton, Dubilier & Rice and Blackstone, respectively. In fact, they were made to look silly when prices were forced higher.

In both cases, dissident shareholders made enough noise to raise bid prices. By being seduced by low-ball offers, the directors opted for a simple life.

That’s before anyone even touched on ESG aspects of the offering, such as governance and transparency and the social impact of falling under private equity ownership. In almost all cases, there is another buyer in the wings.

Now it turns out that KKR, with the experience of UK-based Pets At Home, was a potential rival bidder for Zooplus, but stepped aside after the board accepted the first sub-octane offer.

A better process would be for boards to announce they have an offer, basically acknowledging they’re for sale, and test the waters to see if an auction opens up. This is what tends to happen in the US.

A flawed bidding process is bad enough. What is unbearable is an ethical vacuum that allows big tobacco to take control of Vectura.

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