The delivery man

by Real Business - Thursday, 30th August 2007

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If the fly on the wall at the Business Post Group’s board meeting of July 31, 1998 had any appreciation of dramatic irony, he certainly got himself a humungous dose. Chairman Neil Benson had already polished his speech for the company’s annual general meeting two hours later. He was all set to talk about the company’s storming performance of the past 12 months and how the current year already looked promising. Then he discovered there would have to be an unwelcome last-minute revision. Across the table, managing director Mick Jones was adamant. He was resigning. All ears turned to Peter Kane, the company’s founder and, more to the point, still the owner of 50 per cent of its shares. Ears - not eyes, that is - because Kane was several thousand miles away on his yacht. Instead of enjoying his surroundings, he was clasping a phone. His instructions emerged from a loudspeaker on the boardroom table. Not given to begging, Kane told Benson to be done with it. Jones had clearly made up his mind. Benson would have to tell the meeting about Jones’ resignation. And Kane would be back shortly to pick up the pieces. The fly on the wall didn’t record whether Kane told the meeting that one of the pieces he intended to pick up would be the resignation of Business Post’s finance director, Torquil Montague-Johnstone.

So where’s the irony in this everyday story of boardroom upheaval? Answer: in the stratospheric regard which Business Post had built up since arriving on the Stock Exchange in 1993. Back then the overnight parcel delivery company - with its £40m sales and £5m profits - had been mere flotation fodder. True, its impressive margins and growth rate attracted a high rating and a £60m valuation at the offering price of 120p per share. But otherwise, it was unremarkable - as seemed clear within a year when the shares fell to 98p.

But appearances were misleading. In its first five years as a quoted company, Business Post went from strength to strength. The 1997-98 results which were to be the high point of that AGM showed turnover of £98m and profits - wait for it - of £19m. In other words, despite sales having doubled, margins had been stoked up too. Wouldn’t you like a bit of that?

It was a class act. And pretty soon the shares caught up too - after a slow start - rebounding to 175p by the end of 1994. Then they donned oxygen gear, ascending to 600p by the beginning of 1998. But it didn’t end there. Last February, Business Post collected the brightest accolade around - the Financial Times’ Company of the Year Award. Admiring investors bid up the share price towards 900p. Business Post’s motto, “We deliver” obviously applied to more than its parcels. Few shareholders would have argued that Peter Kane - his stake now worth £240m - was more than entitled to indulge his nautical tendencies.

Some of his other tendencies, however, might have caused the odd qualm. They ultimately came to cause worse in the case of Torquil Montague-Johnstone, a career corporate financier who had been in the right place at the right time when Business Post needed a finance director for its flotation in 1993. Peter Kane and his brother and fellow-director, Michael, are blunt-speaking entrepreneurs whose success rests on a strong - “military” is a recurring description - management style. Montague-Johnstone, on the other hand, is your urbane professional who might have felt just a little out of place when he left Business Post’s stockbrokers to join the Kanes as the firm’s only other executive director. No doubt his package, including options over 840,000 shares at 78p and a commitment to allocate replacement options when these had been cashed in, helped him decide on his career change.

Any tensions were invisible to outsiders. And with the Kanes planning to step back from their galloping creation, tension was “diluted” by the rise of Mick Jones. The Kanes appeared to organise their succession plans very well. Mick Jones had been recruited from rival couriers, TNT. He arrived on the scene a year before flotation to take day-to-day charge of operations. And he proved an excellent appointment... Perhaps he was disappointed not to get a seat on the main board when it was restructured for the flotation. And he may have been miffed to receive an options package that was significantly less handsome than that of Montague-Johnstone. If so, he never showed it.

First Peter, and then Michael Kane, stepped down to non-executive roles and lengthy, tax-driven, periods offshore. But they stayed closely involved. Flying visits to inspect depots and issue edicts to tidy up that yard and redecorate this foyer were just one aspect of their continuing proprietorial interest. This appears not to have ruffled Jones, who is said to match the Kanes in forcefulness whilst exceeding them in his capacity for diplomacy. Jones became managing director in April 1997. He and Montague-Johnstone made a convincing team as they continued to unravel the Business Post success story before an entranced City audience. “Another result, another 20 per cent-plus increase in earnings... the price premium to the market is justified,” judged the Financial Times in November 1997.

Which was, in fact, the very moment when it all started to go wrong. It was time to revisit the subject of directors’ options. You will recall that in addition to his original options, Montague-Johnstone was entitled to a replacement package. The second was unlikely to promise the same magnificent bounty as the first, which had by then grown into an after-tax nest egg of several million pounds. Still, for the finance director of what was shortly to become Company of the Year, it would no doubt be worth having. The bare minimum in similar companies would be a package of options over shares worth four times the director’s salary.

According to insiders, there were lengthy toings and froings over options during the early months of 1998 between Jones, Montague-Johnstone and Business Post’s board remuneration committee, comprising the Kanes and chairman Neil Benson. It is said that Peter Kane suggested the Business Post’s shares were too valuable to give away because of the high share price (although, in fact, the higher price suggested fewer shares would have to be put under option and the option holder’s gain from them would be lower). The matter came to a head in June when the company’s profit statement was due to be released to the Stock Exchange and its annual report finalised. The final tranche of Montague-Johnstone’s original option award was to be crystallised on June 15. With what would it be replaced?

With nothing. For whatever reason, the remuneration committee decided there would be no replacement options.

The outside world was oblivious to the resulting tension. As the market evaluated the £19m Business Post made in the year to March 1998 and the £23m which analysts had pencilled in for the following year, it decided the shares fully justified the higher price levels to which they had risen after February’s Company of the Year accolade.

If Montague-Johnstone was planning swift revenge, an opportunity soon presented itself. On July 2, Jones, who was planning to buy a new house, sold virtually all his shares at 880p, netting £700,000 before tax. Insiders say this transaction had been notified to and received a nod of assent from Peter Kane. But it came as news to him that alongside the liquidation by his managing director of virtually all his shares, his finance director had decided on the same course of action in respect of his entire holding – in his case, rustling up a cool £4m to add to earlier gains. Montague-Johnstone dropped a memo into chairman Neil Benson explaining that the sale of his shares was a protest against the decision on his replacement package. He also pointed out “other corporate governance deficiencies.” Strangely, the share sales went unremarked in the press and the share price rose slightly.

Accounts differ as to what happened next, though it’s generally agreed that Peter Kane went through the roof. On one account, he immediately called Business Post’s City advisors to a meeting to ascertain how they would react to the FD’s rapid departure. On another, it’s suggested that Jones told him he had no business making such enquiries and that Montague-Johnstone’s future could only be decided by the board as a whole. Whatever the details, Montague-Johnstone stayed in place.

He continued to sit tight at the board meeting on the day of the annual general meeting. And, he says, he was also relaxed when Benson made his statement at the meeting confirming that the company expected further gains, thus assuring City analysts that their 1998–99 profit forecasts looked reliable. After all, protests Montague-Johnstone, “Mick Jones wasn’t leaving immediately – he would be working out his full year’s notice.” Situation normal.

If only. With the shares beating a swift passage south, the final denouement started at a board meeting on August 12. This time present in person, Peter Kane announced that as he and Michael would be resuming executive duties anyway, Jones might as well switch to non-executive status immediately. Jones seems to have had no objections. As for Montague-Johnstone, if he wasn’t prepared to resign, his contract would be terminated. But Montague-Johnstone didn’t take this lying down. He minuted his view that the return of the Kanes was “widely perceived as a retrograde step.” The politer conclusions were announced to the Stock Exchange, along with confirmation that trading results continued to be satisfactory. The shares’ downward descent was arrested.

Within a month, this proved a touch optimistic. Out came another announcement which took the shares down to 200p (and knocked £200m off the value of Peter Kane’s shareholding compared with eight weeks before): “Earlier sales forecasting assumptions were unrealistic.” Profits would not grow after all. In fact, they might shrink. Sales forecasting assumptions being the province of the finance director, Montague-Johnstone felt provoked. The August announcement, he told reporters, had not been agreed by him, and the instant he had seen it he had sent a memo to Peter Kane saying he was unhappy about the reassurance it gave the City on Business Post’s trading. “If there had been proper corporate governance...”

Last November, Business Post came out with maintained half-year profits and persuaded analysts that the second half of the year (ending March 1999) will see the same results. The shares have achieved a remarkable rehabilitation, doubling the money of investors who bought at last September’s lows. The board has been rebuilt with six new directors alongside the Kanes, including a new finance director and two non-executives.

Views on whether the full magic will be restored differ. One franchisee (most Business Post depots are run by franchisees who have paid up to £150,000 for the privilege) says, “Mick Jones was good, but the Kanes were always in close contact. In fact from where I sit, nothing’s changed.” However, a Jones appointee at the regional level says, “The last few years’ growth was down to Mick. It was helped by his more inclusive management style. They will struggle to get back on track.”

Meanwhile, with what some consider indecent haste, in early December Jones completed an £86m management buy-in of Business Post’s close competitor, Amtrak. Commentators noted that Amtrak’s founders sold out lock, stock and barrel.

So what are the morals of the tale? We don’t pretend to have picked up every nuance of the Business Post bust-up. Furthermore, the tale isn’t over yet. Perhaps Peter Kane will be back on his yacht in a year or two, mulling over what to do with a £500m fortune. Any conclusions should be seen in this light. That said, there are some lessons in there somewhere...

If there’s a smouldering personality clash on the board, it may be wise to pay the junior smoulderer to go, rather than add petrol.

Too many small flotation prospects select important members of their team at the last minute. As an estimate, around 40 per cent of such companies only decide the make-up of their board as their flotation prospectus goes to the printers. Take the Newcastle United board. It came together at the last minute - and lasted about as long. If you intend to float and to be a success afterwards, make sure your board is in place a year, not a week, in advance.

Presumably, Mick Jones would have been sorely tempted by the Amtrak deal, whatever the circumstances. But the immediate cost of losing him appears to have been around the £200m mark (the difference between the value of Business Post in June 1998 and its value today). Perhaps he would have stayed for a cut of this. And maybe – just maybe – it would have been worth doling out the cash.

Contacts
Alistair Blair won the 1999 Periodical Publishers Association Business Writer of the Year award. Contact him at ablair@pobox.com