What is happening at Grangemouth is part of a wider new trend for doing business like a hedge fund, writes Alf Young
As THE fate of the Grangemouth petrochemical complex teetered on a precipice this week, elsewhere the hedge fund industry was flexing other muscles. One London-based fund, TCI, emerged with a 5.8 per cent stake in Royal Mail, the biggest new shareholder in the now part-privatised letters and parcels delivery business.
On Monday, pressure from US-based hedge funds – led by Aurelius Capital and Silver Point Capital – helped wrest from the Co-operative Group control of its troubled banking arm. By swapping bond debt they’d picked up earlier this year for a song for equity, those two will end up with stakes of around 10 per cent each in the bank. The Co-op will see its own stake slashed to just 30 per cent.
We will see how long the bank’s promise of a more ethical approach survives the arrival of these funds among its owners. Some call them vulture funds. Quite how their bargain-hunting instincts square with the mutual ethos of the Co-op is anyone’s guess. The man who runs Aurelius is a former bankruptcy lawyer Mark Brodsky. His approach to investments has earned him the nickname “Terminator”.
Hedge funds are designed to make money, whatever the prevailing market weather. Hence their generic name. Their intention is to buy cheap and sell dear. Every time. Many have a reputation for an aggressively activist approach to managing their investments. They don’t take prisoners. And they tend to operate beyond the kind of scrutiny and regulation faced by more mainstream investment vehicles trying to attract the public.
Strictly speaking, Grangemouth’s owner Ineos isn’t a hedge fund. But the way the multinational chemicals conglomerate is structured and operates broadly mimics the hedge fund approach. Mancunian Jim Ratcliffe, its creator, majority shareholder and the man directly controlling Ineos Capital, is a trained chemical engineer. But before launching Ineos in 1998 he immersed himself in financial engineering.
Viewed from the perspective of his hedge fund peers, Mr Ratcliffe played a blinder this week. By shutting down the complex and then threatening the liquidation of the entire petrochemical plant, the Ineos chairman had the leader of Unite, Len McCluskey, and the workers his union represents where he wanted them, virtually begging him to keep the place open, on almost any terms. Unite even sacrificed its plant conveners, promised no strikes for three years and swallowed an unquantified number of job losses in the medium term, to get Ineos to think again.
And the man who has said more than once he no longer regards Britain a particularly profitable place to make things – energy “expensive”; logistics “costly”; skills “middle to poor”; pension costs “outrageous” – also achieved a political first. With less than a year to go before Scotland votes on independence, he had nationalist and unionist political leaders, who rarely have a good word to say about each other, standing shoulder to shoulder urging him to keep Grangemouth open. Surely an inadvertent poster opportunity for the Better Together campaign.
There is near-universal relief that such a crucial link in Scotland’s downstream oil supply chain still has a viable future, based on shipping liquid ethane from fracked US gas to replace Grangemouth’s diminishing feedstock from the North Sea. But as that understandable relief subsides, there’s a much bigger issue still nagging away. It needs to be confronted and openly discussed.
Before it threatened to liquidate the Grangemouth petrochemical plant, Ineos had a £300m investment plan to facilitate the shipment and processing of that cheaper fracked gas from the US. It had been talking to the Scottish and UK governments for most of this year about financial support for that investment. When it rescinded its closure threat yesterday, it simply put that plan back on the table.
Ministers in the Scottish and UK governments confirmed their financial support – £10m in grants from Edinburgh, £125m in loan guarantees from London – and commended the workforce for taking such a significant hit to their terms and conditions to save the plant and their jobs.
In return did Alex Salmond, Alistair Carmichael or Ed Davey even raise with Jim Ratcliffe the prospect that Ineos might think again about its 2010 decision to move its headquarters to Switzerland to avoid paying tax in the UK? At the time the group suggested the move would save it some £375m by next year. Now that it is expecting, with state support and a reduced cost base at its Scottish plant, to make more money out of Grangemouth, what’s to stop Jim Radcliffe doing a U-turn on his Swiss tax shelter too?
I think I know what his answer might be. Why would I pay more tax on Ineos profits than I absolutely have to? You politicians are all competing with each other to cut corporate tax rates so companies like ours will invest in your economy rather than your neighbour’s. In Switzerland I can keep an eye on my competition. Lots of them are here. As we said back in 2010 when we announced we were going, paying as little tax as possible saves cash that can be better spent to “secure competitiveness and re-investment across Ineos’s production facilities”.
Hedge funds – and private, tightly-controlled companies like Ineos that mimic the ways of hedge funds – don’t really do corporate social responsibility. Tucked away in Swizerland, outwith the European Union, Ineos has fewer shareholders than can be counted on the fingers of one hand.
Indeed, the Grangemouth plan manager took to talking, as this week’s crisis unfolded, about the shareholder. Singular. Grangemouth may be a vital cog in the Scottish economy. But when it comes to what happens to a key strategic asset, all roads lead back to one man. Jim Ratcliffe.
Governments have scant leverage on this emerging corporate phenomenon of the 21st century. Its face is stonier. Its mindset ruthlessly determined. Its main concern is finding distressed and discarded assets and turning them into added gold dust. What happens to individuals and communities when these assets are shuffled around barely registers.
No mainstream UK politician seems prepared to question this trend. Or debate how powerless it leaves them. And when anyone suggests a discussion about whether some key sectors of our economy are of such strategic importance they ought to remain under public control, Jim Ratcliffe is way ahead of you.
He’s already sold a half share in the Grangemouth oil refinery into state control. But the state is China, in the shape of its biggest oil company, PetroChina. Our politicians can’t really complain. Our First Minister is also wooing China for all he’s worth. And to kickstart its new civil nuclear power programme, the Westminister coalition is dependent on state-controlled enterprise in France and China too, to deliver the goods.