The Financial Director interview - Flame & Fortune

After a range of accounting positions in industry and 10 years at Fisons, John Nicholas’ burning ambitions were realised in 1992. After putting himself through an open learning MBA in his spare time, Nicholas was approached by support services giant Williams to become divisional FD of its fire protection division. Eight years later, Nicholas was group FD of Kidde, newly demerged from Williams, ready to go it alone in the FTSE-250.

Williams was formed by Sir Nigel Rudd in 1982 and quickly became one of the heavyweight conglomerates of the decade. But over-diversification and expansion took its toll on Williams’ market performance in the 1990s.

In 2000, Williams, like Hanson before it, began to break up. It sold off its Yale locks business to Sweden’s Assa Abloy for over £800m in March 2000, then it demerged its fire protection division under the name Kidde and its support services group Chubb in November 2000.

Nicholas had to make a speedy transition from divisional FD to financial head of a standalone public company. He has little experience of either corporate governance or City and shareholder relations, but has had to convince institutional investors and analysts that, with a turnover of £821.3m in 2001 but a short trading history, £300m of debt and a techMARK listing, Kidde is a sure bet for growth.

“I find the public exposure quite refreshing,” says Nicholas. “As part of Williams the public exposure and communication with the outside world was done by other people. To have the opportunity to convey the qualities and attributes of Kidde first hand is enjoyable. But we have work to do to educate the investment community about Kidde. We were an unknown quantity at demerger and we still meet people who do not understand our business.”

DEMERGER
The business learning curve really began for Nicholas when he went head-to-head with divisional FD of Chubb, Roy Brown, to carve up the spoils of the demerger in early 2000. Once amicable business relationships between Williams FDs became strained. “I knew all the divisional FDs within Williams through commercial relationships but then had to negotiate aspects of the demerger with them. The relationship was part negotiation, part cooperation, but I don’t think I could say we held each other hands – at all. It wasn’t adversarial like a takeover or an acquisition but we were dividing the Williams cake. And, yes, we argued how big the slices should be,” he says.

The biggest sticking point was carving up the debt mountain caused by Williams’ aggressive acquisition strategy. “The debt allocation was worked out by a group of people including Chubb and Kidde representatives,” says Nicholas. “The result was a factor of the future capacity of the two independent business, how they could service the debt and their potential profitability.

We all agreed on a fundamental split. But after that we (Nicholas and Brown) had discussions to refine how much each company took. They were very interesting.”

Kidde exited the negotiations with a £300m slice of debt – a “fair share” according to Nicholas. But after Kidde successfully demerged, the real work started. Preparing for listing on the FTSE is one of the most rigorous and challenging experiences for a finance director. Chubb’s Brown did not stay the distance, being replaced by Enodis’ Jonathan Findler in July 2000. But Nicholas stayed on as group FD, taking the reins of Kidde’s operational and financial future. Beancounting was put on hold while preparing listing particulars, building relationships with advisers and securing the future of Kidde as a public company.

“I knew it was going to be a lot of work but I didn’t appreciate how much,” says Nicholas. “In many ways we ran the business along the same lines as we did before the demerger. We tried to keep the best parts of how Williams ran the business – the financial disciplines and controls I managed as divisional finance director. But the responsibility for the operational aspects of those controls had to be delegated. My responsibilities now include tax, treasury, investor relations, insurance and pensions, which I previously had no responsibility for.”

GOOD ADVICE
Nicholas was guided through the legal and technical minefield by Kidde’s advisers. Some, such as PwC and CSFB were inherited from Williams, but elsewhere Nicholas made changes. “We wanted different investment bankers, lawyers and pension advisers,” says Nicholas. “Williams’ investment banker was SSSB. We chose ABN Amro. The driver for this change was that SSSB masterminded the demerger process and became adviser to both Chubb and Kidde. We did not want to be exposed to any potential conflict of interest.

We chose Baker McKenzie as our lawyer over Slaughter & May, because of its US presence, where over 50% of our business is based.”

To a certain extent a finance director preparing for listing for the first time is at the mercy of his hired hands. Without the benefit of experience, Nicholas had to take a lot of advice on trust. “You are given the options and get advice about the various alternatives and implications.

But it’s only over time that you find if your advisers are good. Initially, the key test is the personal relationship you have with them. Can you share problems and concerns? It is mostly gut feeling,” he says.

While regulations are disruptive to business (Nicholas is still tying up loose ends from the demerger), the detail involved in the legal preparations for listing, especially the listing particulars, proved invaluable for shaping Kidde’s business model. “We had to produce a thorough description of what the business does. Having this validated by lawyers forced us to look at the business objectively. Some of the market share information and our position in the market had not been thoroughly researched before the demerger. Being forced to go through the rigour of that process was very valuable,” says Nicholas.

After securing a FTSE-250 listing in November 2000 with a market cap of £576m, Nicholas had to readjust his attention onto operations. But the £300m of debt Nicholas inherited from Williams was a major obstacle to growth. From the start Nicholas knew Williams-style wholesale acquisitions were out of the question – Kidde, a focused and streamlined company had become the antithesis of its giant parent. Organic growth was Kidde’s initial priority, followed by allocating £50m of investment for infill acquisitions in 2001.

INVESTOR RELATIONS
But communicating the Kidde proposition to the City has been a struggle. After the demerger, Kidde was overshadowed by Chubb’s higher profile and £2bn debut market cap. “Williams shareholders got one engineering Kidde stock and one support services stock from Chubb,” says Nicholas. “But a number of investors decided to sell the Kidde share immediately because we were not support services. However, we were successful at generating enough interest for other shareholders to take up those shares, supporting the share price.”

Nevertheless, Nicholas has not been able to encourage the wider investment community that Kidde is a bankable stock. At the end of 2001 its market cap hovered around £550m, a little under its initial value of the previous year.

Economic slowdown and exposure to North American markets hasn’t helped Kidde and, just as the company was finding its feet, two aircraft, probably carrying Kidde fire safety equipment, ploughed into the World Trade Center.

“11 September completely changed our priorities. We decided to ensure the existing business had the appropriate cost structure and capacity to cope with changing market circumstances. So we are spending £8m in financial year 2001 on exceptional costs to integrate activities, save overheads and improve margins. We recognise our capacity to do anything more fundamental is limited,” says Nicholas.

Nicholas has held seminars with analysts post-11 September to dispel doubts about Kidde’s ability to weather the storm. And although he admits Kidde is still relatively inexperienced when it comes to corporate communications, he has begun to get to grips with the investment community. “We have found sell-side analysts receptive,” he says. “As Kidde is relatively new it is helpful to give them an understanding of the characteristics of the company. We have had a good audience from institutional investors, too.

But it is more difficult to gauge the level of interest from them because they make their decisions without telling us what they have decided.”

As Kidde’s core business is in the US, Nicholas has noticed a difference in the way institutional investors behave either side of the Atlantic. “US investors tend to do more research in advance of meetings, so we have to deal with question and answer sessions. In London, they are more willing to listen to a pre-prepared presentation,” he says.

LISTING PARTICULARS
Post demerger, Nicholas took steps to ensure Kidde was on the investors’ radar screen, and one of his personal coups was succeeding in having Kidde listed on the technology index, the techMARK 100. “I don’t think anyone considers Kidde a typical engineering company,” says Nicholas. “We have a lot of high technology in applications to protect aircraft, oilrigs and industrial plant from fire. So I thought the company might be a good candidate to join techMARK. At the time our advisers didn’t think we had a good chance. But with their help we pursued an application, made a presentation at the London Stock Exchange and were accepted. We are one of only two engineering companies on the index.”

Unfortunately, 2001 was not the best year for technology investors and Nicholas is unsure whether the index now carries enough weight. Subsequently, Kidde has also been accepted onto the FTSE4Good ethical index.

In 2002, Nicholas’ priority is to drive the business, rather than watching the shareprice and pandering to the markets. “We need to develop a track record of delivering results in line with expectations. Investors are interested in strategy, prospects, market conditions and our position relative to competitors,” he says. “I monitor the share price every day, but I don’t worry about it too much. It does not influence the way we run the business. It is important for us to demonstrate that the business is well run and has potential to grow. The share price will then take care of itself.”

The investment banks are slowly coming round to the growth opportunities in fire protection, especially in these times of increased health and safety regulation. And while Nicholas’ fingers are still crossed, he is confident that his handling of the demerger and listing process was good enough to provide a solid basis for business development.

But it is no surprise that corporate fire-fighting and public exposure has taken its toll on Nicholas. If he could turn the clock back a year or so he would change one thing. “In hindsight I would have tried to recruit some of the key people, the company secretary and treasurer for example, earlier in the process to help spread the workload,” he says. “My advice to other FDs in a similar position is: don’t underestimate the amount of work.”

CURRICULUM VITAE

Name: John Nicholas
Age: 45
Qualifications: MBA FCCA
Salary: £167,888 (basic); £185,460 (bonus)

CAREER 2000-: Group finance director, Kidde
1992-2000: Divisional finance director, fire protection, Williams
1988-1992: Divisional finance director, scientific equipment, Fisons
1982-1988: Various accounting and FC positions, Fisons
1976-1982: Various management accountant positions: Bishops Group, BAT, Ladbroke Group, Warner-Lambert
1974-1976: Service engineer and sales clerk, Warner-Lambert