Struggled finances shouldn’t be blamed for Greensill’s troubles

It’s been a week to forget for financial innovation. Greensill Capital, a supply chain finance company founded by the son of an Australian watermelon producer, is on the brink.

The plot so far has more twists and turns than an M Night Shyamalan movie – and probably more memorable characters as well. Monday, Credit Suisse suspended $ 10 billion in funds related to assets created by Greensill. Regulator BaFin took control of its German bank later in the day as lawyers for Greensill warned in an Australian court that if its business were to wind down, 50,000 jobs globally were in danger. Wednesday morning his British arm had deposited for insolvency protection in UK courts.

The company’s role in supporting steel tycoon Sanjeev Gupta adds to the chaos. He also employs former British Prime Minister David Cameron as an adviser.

Greensill specializes in invoice financing, a centuries-old practice that involves a third-party financial institution paying a company’s suppliers before the invoice date and with a small discount. It’s a win-win for all parties involved, in theory. Suppliers get paid faster, their customers pay later, and the financial institution makes a small return on its capital.

But like many financial innovations, this is a “stair up, elevator down” arrangement. If the availability of financing disappears overnight, the company and its suppliers suddenly find themselves with less available money. Illiquidity and even insolvency can arise.

Critics were quick to point out Greensill’s troubles as another sign of financial market insanity. But it is wise not to jump to conclusions.

Explosions in financial markets are generally idiosyncratic. Think of Carillion, the government contractor who collapsed in 2018. The problem was an accounting one: In a desperate attempt to maintain revenue growth, the company was reaping more from its slow projects than it should have been. When the money didn’t arrive, he was forced to take a £ 845million provision on his debts, and the balance sheet began to collapse.

Supply chain finance creates its own accounting temptations for the business involved. Like former analysts Marc Rubinstein and Stephen Clapham underline last year, the practice boosted both the company’s cash flow and return on capital employed while masking its true debt. For analysts and investors, it presents a difficult web to disentangle.

Any autopsy of Greensill has the potential to usher in new regulation of supply chain finance in the form of new accounting rules and more institutional scrutiny. However, that won’t matter much because, like a mole, the next failure of a high-profile business will appear completely elsewhere.

Blinded by science

The Daily Mail never tires of the experts, writes Bryce Elder.

Exasperation met the news that Daily Mail and General Trust are buy New Scientist, the in-house magazine for hypothesis testers. Being owned by a tabloid publisher means trading credibility for sensationalism, the argument goes. A common trope among commentators was to borrow slang from MailOnline’s famous “shame sidebar”, joking about molecules in romantic tangles and researchers flaunting their beach bodies.

The concern is understandable. The self-proclaimed voice of Middle England has an uneven track record on science, notably its amplification of fears around the MMR vaccine. (Giving credit to fraudulent MMR research was “a matter of deep regret,” the Mail said in a leading article in 2019.)

However, DMGT is not a proxy for its flagship title. Paul Zwillenberg, Managing Director since 2016, rebuilt the group by selling high-value business information services and recycling cash into cheap but robust mainstream brands. Euromoney magazine, real estate portal Zoopla, software maker Hobsons and energy news provider Genscape were eliminated on valuations of up to 40 times their operating profits. Journal I, its previous big acquisition, cost less than 5 times its historic ebitda.

At £ 70million, New Scientist is more expensive, around 10 times the expected ebitda, which is fine for a company that makes three-quarters of its revenue from subscriptions. International and event-based expansion is what fits Zwillenberg’s game plan; interfering on the editorial side does not.

The next step will be the float of Cazoo, a used car retailer in which DMGT has a 20 percent stake. Although it only opened in December 2019, Cazoo is said to be looking for a valuation of £ 6 billion, or three times the title value of a round table in October. Analysts have valued DMGT’s online, print and exhibition activities at around £ 360million, £ 280million and £ 200million respectively, meaning Zwillenberg’s cazoo could be more precious than all those put together.

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Everything is academic for many institutional investors. DMGT is banned due to a dual ownership structure that locks in control with Viscount Rothermere’s family trusts and excludes it from an FTSE listing. And while a treasure overhaul of company listing rules could normalize two-tier ownership, its proposed five-year limit would have to preclude an action brought in 1932.

For everyone else, the biggest obstacle to investing remains the Daily Mail. Rival newspaper publishers have tried to rename the group to distract from the issues elsewhere, which could offer a solution for DMGT. But given Zwillenberg’s policy of eliminating the sacred cows, it would be remiss to rule out a more radical solution altogether.

Greensill: [email protected]
DMGT: [email protected]

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