By Ben Shenton
THEY say that the public get the government they deserve. I don’t know what the people of Guernsey did in an earlier life to deserve the one they have, but it must have been terrible.
I’ve run my own private-sector business and also held senior positions within the Jersey government. While the latter preaches openness, it is very much on a “do as I say, not as I do” basis, and only the very worst private-sector companies achieve the questionable practices and opaqueness of government.
For the past 46 years I have worked as an investment manager in both Jersey and London. I am a Chartered Fellow of the Chartered Institute of Securities and Investment. Following last week’s publication of my article on the ferry debacle, a number of people asked what I would do and who I would award the contract to. My conclusion is limited by the information I have and does not factor in political considerations and non-business matters. As I wrote last week, to succeed in the transportation industry you need the best management, and you need to sweat your assets. If you cannot operate profitably, you will just carry on raising debt levels, and raising capital, until you either go bust or become a zombie company. Zombies are companies that earn just enough money to continue operating and service their debt. They have no excess capital to spur growth and are considered close to insolvency. Zombies are high-risk investments, and not for the faint-hearted. Guernsey seem to like them. Aurigny could be considered a zombie company. With the loss of cross-Channel passengers due to Brexit, higher interest rates and rising costs, running a ferry service to the UK is tough. P&O Ferries owner Dubai Ports has had to pump £400 million into the company just to keep it afloat.
I’m going to include Guernsey-owned Aurigny in this analysis because if ignorance is bliss it must be lovely to be an Aurigny investor.
I’ve never seen a set of accounts quite like Aurigny’s 2022 results before – they don’t add up the expenditure in the Consolidated Statement of Comprehensive Income, and stick an EBITDA figure in instead (Earnings Before Interest, Taxes, Depreciation and Amortisation). In my opinion, it is an earnings measure which does have some value, but it is largely used by private equity to over inflate the value of a business and mislead.
Renowned US investor Warren Buffet said: “Beware of geeks bearing formulas.” His partner at Berkshire Hathaway, Charlie Munger, said: “I think that, every time you see the word EBITDA, you should substitute the word ‘bullsh*t’ earnings.”
A lot was made of Aurigny returning to profit in 2022, but if you take off the £5.2m notional gain on their financial derivatives, an illusionary gain largely for accounting purposes, and the £1.95 million cash injection by the Guernsey taxpayer, they made a loss of £3m – rather different to the impression a gullible Guernsey public have.
Their financial opaqueness is shared by Brittany Ferries. Neither entity has publicly issued its 2023 accounts, but both have said they made profits in 2022 and 2023 – claims probably more based on financial wizardry than a reflection of trading surpluses after all costs.
We have been told Condor is partly owned by private equity and is drowning in debt, and Brittany Ferries is owned by French farmers and with the French government as a quasi backer.
Like Aurigny, Brittany Ferries announced a profit in 2022 (of £22.6m). However, just because you announce a profit does not necessarily mean you are profitable.
As they don’t publish the accounts, it is difficult not to rule out that they made a trading loss and the profit figure was achieved through the exceptional gain on the disposal of the Cap Finistère, a 50m-euro ferry they sold.
Maybe the Aurigny 2023 accounts were boosted in the same way by aircraft sales, I don’t know. The opaqueness of the financials of government-owned Aurigny is worrisome.
The other problem I have with Brittany Ferries is that we are told it is owned by Brittany farmers, but on 14 March 2023 the newspaper Le Figaro reported that French logistics company CMA CGM was converting its 25m-euro loan into a 12% stake in Brittany Ferries, giving the company an approximate value of 208m euros.
The CMA CGM dilutes the historical 96% Breton shareholding, 4% is already held by external parties, down to 84%. The article finishes, “with the contribution of 25 million, the Roscoff Company no longer has a knife at its throat”.
Reports in the French media suggest Brittany Ferries had been looking for as much as 50 million euros in additional investments and is still looking for an additional 15 million euros.
By contrast, the other player in this saga, DFDS, publishes very comprehensive quarterly results on its website and, with a market capitalisation of over 1 billion euros, looks like a well-run company.
I would give the contract to DFDS, for the very reasons that Guernsey rejected them. It’s a 15-year contract, and no one knows what the future holds, especially in the ferry industry. If the operator is to be profitable, so it can reinvest in new ships and reward investors, it has two main levers – price and schedule – and its ability to use these levers wisely shall determine its success. An agile company will also be incentivised to grow the market.
Guernsey excluded DFDS for the following reasons: “The bidder also introduced a number of commercial levers, in fact, derogations in the event that its profit requirements were not achieved. These levers included introducing a unilateral right for the operator to i) adjust freight and passenger pricing; ii), adjust the sailing schedule, and; iii) adjust the minimum-service requirements.”
DFDS were not willing to sign up to operate in a difficult market with its hands tied behind its back. Rather worryingly, loss-making zombie company Condor were, which is why they shall probably be a zombie until debt finally kills them. With my investment manager hat on, there can only be one choice.
In 1998, when the contract was up for grabs, P&O Ferries expressed an interest but a Guernsey bias for Condor forced Jersey’s hand.
In 2011, when tenders were invited for the contract expiring in 2025, a P&O spokesman said the Channel Islands market was too small and fuel had become too expensive for the route to be profitable. If the Channel Islands market is too small, then the Guernsey market must be minuscule.
The superior financial strength and, on the face of it, better management of DFDS, means we should leave Guernsey with a partner whose financial opaqueness fits in well with their troubled airline investment.
I realise that many call for closer ties with our smaller sister island, but, to be honest, if Guernsey were a business I’d be very hesitant to deal with them, and I certainly would not invest in them.
Ben Shenton is a senior investment director. He is a former politician and Senator, who held positions such as minister, chair of the Public Accounts Committee and chair of Scrutiny. He also assists a number of local charities on an honorary basis.
