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The Financial Director Interview – Catching up with our mutual acquaintance

Financial Director isn’t in the habit of profiling individual FDs more than once – it’s an unnecessary extravagance for the most part. But in Eric Anstee’s case, it seemed worth making an exception.

We first interviewed Anstee in December 1994, when he was FD at Eastern Group, the privatised regional electricity company (REC) which was widely hailed as a model for the UK utilities sector. Under Anstee’s guiding hand, Eastern had transformed its funding (through intelligent use of the debt markets), prioritised shareholder value (evidenced by large-scale share buy-backs) and moved decisively in the direction of becoming an independent power company with the purchase of upstream generation assets.

Ongoing changes in the shape of the utilities market show that Anstee really was a pioneer in the sector. And that, one could argue, might have been that: the reputation was assured. But in the five years since that last interview, Anstee has been anything but complacent about his place in the sun. “It’s been incredibly busy – where do I start?” he asks at the beginning of our conversation at Old Mutual’s Berkeley Square headquarters.

A good place is probably where we left off last time, and for Anstee things changed quite markedly in the months after the FD profile.

“In 1995, we sold the business to Hanson,” he begins. “They acquired us, and we had a lot of plans to work with Gordon White; but unfortunately Gordon died, and then James Hanson looked at doing the first de-mergers amongst the conglomerates. So I moved to Grosvenor Place with him. I came out with the Energy part, picking up the coal mines (Peabody Mining) as well.”

It seems somehow appropriate that Anstee should have been part of the Hanson set-up at such a tumultuous time for the conglomerate: earlier on in his consulting career with Ernst & Young, he had become involved with the energy sector privatisations in the UK and later in the Czech Republic which was emerging from decades of communist rule into a free market.

“It was very sad when we all effectively moved out of 1 Grosvenor Place,” Anstee laments. “It was clearly the end of an era, and some of the staff found that hard.” And during the demerger, there was a tremendous amount of work to do. “You’re forced to launch the company with new strategies, and that’s the part that really interested me. And obviously, we had to make sure that we weren’t too vulnerable in the early days because the (share) price didn’t necessarily represent what the whole was worth.” Energy Group was to float at £5.25-a-share.

“We went into upstream gas and coal and bought the power stations, and that worked as a strategy for moving us out of Hanson,” he continues.

(In fact, Anstee had wanted Hanson to bid for British Gas: he calculated TransCo could be spun off for the cost of the deal, leaving Hanson’s energy assets much bolstered by the gas operation. But it was a sensitive time for the conglomerate – the failed ICI bid turned Hanson off doing such publicly sensitive deals.) But Anstee’s career is nothing if not eventful, and the negotiations for generating assets were halted by a fresh intervention from the US in 1997.

“Initially we accepted a bid from PacifiCorp; it was really more in the context of a merger between the two businesses, and we would have ended up with more of the management of the combined operation,” Anstee explains.

“But in the process, of course, Margaret Beckett did the shareholders a favour in a perverse sort of way by sending it to the Monopolies Commission.” Anstee and the Energy team had a chance to look harder at the value of Peabody as the MMC deliberated, and they concluded that the Americans were getting the group on the cheap at £6.90 a share. “So we then started to look at what other buyers were there, and at that point found Nomura who were keen to look at us in whole or in part.”

The Japanese investment bank was a welcome rival that boosted the eventual price attained for the shareholders. “Back in the US, Lehman Brothers was keen to take the coal in on a management buyout agreement; but that quickly reversed and Lehman took it to Texas Utilities because they thought they could get the coal end cheaper by getting someone to acquire the UK electricity business.”

When PacifiCorp re-opened the bidding at the start of 1998, it had barely increased its offer, but Anstee had decided to look for a price between £7.40 and £7.75-a-share. “The three-way auction process was rather unusual and an enormous amount of work,” Anstee admits. Ultimately, Nomura, as a financial buyer, couldn’t create the synergies needed to make the deal work above £7.62 – and PacifiCorp had by February bid £7.65. With two trade buyers, the bidding became fierce, and in March Texas eventually won with a blockbuster £8.40 offer. The whole process had seen Energy’s value soar from £2.5bn to £4.5bn in 15 months, a value creation exercise of which Anstee was incredibly proud.

But in career terms, the deal with Texas proved to be a mixed blessing.

“I don’t really want to go and work in the US,” Anstee explains. “I didn’t really see myself working for them, because we’re so far ahead in the utility context compared to the US, so we were having to go back and teach them things that we’d been through three or four years previously,” Anstee says. “Equally, we couldn’t get them to focus, having bought a business here, on the fact that our real focus was back there on their home territory – what they should have been focusing on was buying some of the assets in New England and coming out of Texas; they really needed to think in a bigger way about where that was going. But it was hard for us to go and tell them what to do on their own patch, so at that point I decided that it was time to look around at other things.”

At this point in the story Anstee jumps ahead to his conversations with head-hunters and the approach of Old Mutual. But that’s missing out on other, rather interesting, events that took place before he joined the financial services industry.

Anstee had an excellent working relationship with Eastern chief executive John Devaney, who had brought him into the company and shared his views on shareholder value and the obvious opportunities the sector offered.

“As the Energy Group thing was coming to an end, you inevitably look on your existing sector and say you must be able to do some better things here,” Anstee recalls. “So we looked at two things, and we had them both running simultaneously: one was trying to acquire London Electricity, which was then up for sale by its American owners. I managed to get that bid financed to a level of £1.5bn on a £100 company on the basis of John’s and my reputations. We’d certainly spotted the opportunity first. The annoying thing is that when we went to inquire about the sale, we put the thought into the Americans’ minds to hold an auction. The French came in and paid £400m over the top of that £1.5bn, and it’s very difficult to do a management buy-in type project if there’s a big trade player involved.

The other option was National Power: “There was an opportunity there, and there probably still is an opportunity there, where management clearly has destroyed value,” he insists. “There is a point at which you can recover that position. The numbers worked at the time we looked at it – unfortunately I think that the press somehow got hold of it and destroyed the opportunity.” Publicity not only ignited interest in the generator, pushing up the likely bid value, but also made some members of Anstee’s backing consortium feel uneasy about the deal. It fell apart.

“You get these pressures coming on (from the Takeover Panel, for example), so once the press had put the story out that killed it. Certainly, there was a lot of value on the table: we knew what we could do with National Power and we put together a consortium of people who liked the assets, and to some extent it would have been a splitting of the thing.” Anstee doesn’t pull his punches when it comes to his views on the current management there. “They seem to have taken six months to come up with the idea of splitting it on a national and international basis, which is so obvious, that even from day one … I blink sometimes and wonder why it has taken so long.” (Incidentally, only one of the executive board at National Power will be staying with either company post-split.)

Just when the stories of the energy sector seem to be drying up, Anstee slips one more in: “I also listed the National Grid in the middle of that, and we stopped them selling Energis,” he remembers in the last minutes of the interview. “They’d come up with a deal to sell Energis to AT&T which put a value on it of £500m; this was back in 1995, and is still one of my proudest achievements.” Today, Energis is worth £5bn to £6bn.

And so to Old Mutual, although in a slightly roundabout way. “I tend to look in sectors, and to my mind the whole area of IT and support services was one potential area I was keen on,” Anstee explains. “Another area I thought had a lot to offer was financial services, because there were a lot of myths around the process of what happens in financial services, and there was also a lot of need for consolidation; and demutualisation plays to my strengths of having done a lot of privatisations.”

Aside from the challenge of demutualisation and consolidation – more on that later – Anstee also relished the prospects of taking one of South Africa’s biggest financial players and introducing it to a wider world.

“I like businesses where I know I can add value, and looking at this business, I saw that (Old Mutual) needed, if you like, the London expertise,” he claims. “Also, this is all about working relationships, and I found I could work with the team here, and that’s the key, really.”

Anstee is quick to warm to this theme: “A finance director has to identify that he can work with the chairman and chief executive, and feel comfortable that he’s going to be allowed to contribute – which is not always the case with the FD. People are still sometimes concerned about a finance director who is not just straight up and down figures but wants a wider platform both in terms of helping to run the business and also including the strategy. That’s where the modern-day finance director’s role is, to impact the businesses as well as to help run the strategy.”

Old Mutual has a very small executive board: Jim Sutcliffe, ex-managing director at the Prudential, has just joined as chief executive, life operations; and Michael Levett, the chairman and chief executive in a combined role.

Along with Anstee, who also takes responsibility for the other financial services and asset management businesses, that’s it.

This might suggest a problem with corporate governance – certainly with respect to the roles Levett holds – but Anstee is adamant that the strong team of non-executives is more than adequate to keep control of the board.

And there are benefits. “You can move quicker,” he explains. “We know that part of our strategy is to make acquisitions. In my experience you need to be able to move quite rapidly, particularly on transactions where you’re not in a formal process. The recent Gerrard situation was classic for that.”

Gerrard, a UK-based mid-tier investment bank, was acquired in January for £525m to bolster Old Mutual’s asset management operation. “We’d started to talk to them and then suddenly you see the share price start to move away because investors have taken a more bullish view on the company,” Anstee says. “You know that within days if you don’t move the deal would not be there because you can’t pay the premium. In that case, I diverted a taxi out of Waterloo to their lawyers, we called the meetings and we were able to get our board together in very short space of time. So I’m a fan of smaller boards.”

Notwithstanding the presence of influential and expert non-executives, corporate governance is still an issue. South Africa was a closed economy under Apartheid, and deals forged between executives in smoke-filled rooms were the norm. This is understandable, especially in the financial services sector, where companies like Old Mutual would have to invest in almost anything going within the confines of the regime.

On Anstee’s watch – with the listing in London, for example – this is changing, and international funds are coming into South Africa. But the hang-over from the old era is still consuming management time. Nedcor, a South African bank 51% owned by Old Mutual, is bidding for Standard Bank – 2% owned by Old Mutual, with another sizeable share owned by OM’s life funds.

Anstee has been very public in his condemnation of the Standard board, which he claims is harming shareholder value by preventing the creation of a clearing bank capable of competing on a world stage, and one that, with the combination of Nedcor’s back-office and Standard’s customer-facing IT systems, would be a global player in e-banking.

“That’s the vision we’ve been pushing out to the Standard management,” he points out. “Now unfortunately, the personalities there are such that we weren’t able to have a constructive dialogue with them, and unlike in the UK, despite the fact that we are the biggest shareholder, they just broke the negotiations off. And at that point I guess I felt it was easier for me stand up and critique that decision than it would be for anyone in South Africa because of the closeness of the community there. But that’s part of the role.” The spat has naturally attracted the attentions of politicians in South Africa, and Anstee is keen to reinforce the point that the merger would be good for the nation. Meanwhile Old Mutual has spent only half its £1bn war-chest for acquisitions, and Anstee is happy to point out that the company is still under-geared for the sector – so expect some more little gems to be bought.

In some respects, it could be said that he’s more than an FD. “It may have been described in the old days as a ‘commercial director’ and it is wider than putting figures together and doing the annual reporting – for me, that’s around 10% of the job,” he says. “Driving businesses forward does depend a lot on financial capacity and that means it inevitably comes back to the questions of what capabilities there are in the business, and what values there are in the business.”

Anstee’s other interests include involvement with the Urgent Issue Task Force (“It’s what I term the academic side of the job, but it’s important and I felt it would be a good discipline to help me keep up-to-date and ahead of the game”), IT management, banking, risk management and e-commerce; his views are soundly put, and it’s hard to argue given his track record.

But he has fairly simple priorities. “I come to work for fun and excitement,” he says. “But I still don’t get enough time to go to the gym.” He’s got to burn off some of that energy, you see.

Age: 49
Qualification: FCA (member of senate of ICAEW)
1998-1997-98: Group FD, Old Mutual Group
1995-97: Finance director, The Energy Group plc
1993-95: Demerger advisor to Lord Hanson, Hanson plc
1977-93: Group FD, Eastern Group plc
1969-76: Consulting and advisory career at Ernst & Young Accountant
Anstee on Turnbull:
Maybe all these things just act as a good reminder to boards. If you can explain what you’re doing about risk management to the shareholders, they will give you credit for that, and it will reduce your cost of capital.

Anstee on Y2K spending:
A lot of people talk about spending on Y2K, but actually it was putting in new, modern systems. Y2K was a good reason to spend on technology.
For a finance director looking after budgets, it was very difficult not to approve the computer spend in the last few years.

Anstee on dot.coms:
They’re working out new ways of doing business. You will get to a point where government boundaries and legislation between countries will be a hindrance to the way the Internet works. We’re already starting to see it: if we were able to start selling a life product out of our Internet capability in South Africa, what about the regulatory boundaries here?

Anstee on South Africa:
People fail to realise that this is a country with first world infrastructure, unlike most emerging markets. It’s got some good, educated senior management, it’s got a lot of population expectation. The skill base still has to be improved, but that should be an opportunity: if you can get the skills into that population where there is, effectively, 30% unemployment, the country is going to be phenomenal.

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