Searching through my not insubstantial library of engineering and manufacturing company analysis written during the 28 years that I spent as an equity analyst, I came across the file of Lucas Industries and of what, in 1996 would, following the regrettable ‘agreed’ merger with the US based Varity Corporation, lead to Lucas Industries shareholders being in my view sold short. In doing so over the weekend, I was reminded that it is now 20 years since the final round of rape and pillaging of what by then had become LucasVarity began!
For the younger audience allow me at this stage to remind that, founded in the 19th century as a manufacturer of bicycle lamps, Joseph Lucas Ltd and what would later become Lucas Industries plc had grown over the decades to become the largest independent supplier of components for the motor industry. The type of components produced by Lucas automotive factories ranged from starter motors, alternators and dynamos, ignition coils, distributors, wiring harnesses, lamp units, horns, switches, lead-acid batteries, brakes (Girling) and diesel fuel injection systems and later, a large range of aircraft systems including electrical and secondary flying controls, wing actuators, hydraulic systems, ignition, fuel and combustion systems and generation equipment (Lucas CAV) together with a range of industrial products including high pressure hydraulic systems.
Back in 1981 what had by then evolved into Lucas Industries not only operated 60 separate factories in the UK and was one if not the largest employers of skilled electrical engineering staff in Birmingham and other UK locations but also one that had large manufacturing facilities in Continental Europe, USA, Australia, New Zealand, India, South Africa, Canada and other countries.
You get the picture I am sure, a large UK based automotive engineering company making automotive electrical, aerospace and diesel equipment of which approximately half of the revenue derived came either from UK exports or from its manufacturing interests abroad. Profitable it general was although if one is to be honest not by nearly as much as management and shareholders would have liked it to be, Lucas Industries was an FTSE 100 index quoted company.
The reality was that as with most of the quoted engineering and manufacturing companies in the 1980’s and 1990’s during and post Thatcher era, they were out of favour with the investment community. Lucas along perhaps with GKN, were two of the most disliked and yet in my view, most misunderstood of the quoted volume engineering companies within the FTSE 100 index.
During most of the final 20 years that Lucas Industries existed as an independent quoted entity and during the time that I followed the company the CEO was Anthony (Tony) Gill. Primarily a Birmingham based organisation in respect of where senior management were located at the ‘centre of excellence’ in Great King Street, Lucas actually had its head office in Park Street, Mayfair. Over the years, I came to know manufacturing plants such as Great King Street, Great Hampton Street, Shaftsmore Lane, Formans Road, Oozells Street, Dog Kennel Lane and Marshall Lake Road very well indeed. In aircraft components and equipment, suffice to say that Lucas Aerospace whose Wolverhampton site was one that I regularly visited, Lucas was in fact the largest aircraft systems manufacturer outside of North America. The company produced equipment on virtually every European commercial aircraft that was then being built. Already a very successful and growing area of business for the company and one with huge potential as was Lucas involvement in diesel injection equipment and brakes, much of Lucas value hung on these exciting business areas.
But when it came to automotive components of which Lucas was the largest component manufacturer in the UK, the decline of the indigenous UK automotive industry from the 1970’s through the 1980’s was to cause major problems for the company.
Lucas Industries soldiered on bravely almost always failing to please investors with results no matter how hard the company tried. Tony Gill (later Sir Anthony Gill) retired as CEO in November 1993 to be succeeded by George Simpson who had previously been chairman of Rover Group which was, by that time, owned by BAE Systems.
In June 1996 it was announced that Lucas Industries had agreed to merge with Varity Corporation in a deal worth $2.04 billion and that would, we were all told at the time “create the world’s eighth largest automobile parts supplier”. Varity shareholders would get 38% of the new firm which was to be called LucasVarity PLC.
I disliked the deal back then just as I dislike it today. Firstly, negotiations between Lucas Industries management and those from Varity left Lucas shares seriously undervalued. To my mind, Lucas Industries shareholders had in effect been sold down the river. Secondly I disliked the deal because Victor Rice, almost an unknown figure over here in the UK and to whom the investment community liked even less, appointed himself as CEO. George (now Lord) Simpson who had negotiated the deal with Varity along with his chairman Sir Brian Pearse, went off to replace Lord Weinstock as Managing Director (CEO) of GEC, a company that would, following the sale of its defence electronics business to BAE Systems in December 1999, become Marconi plc. The rest, as they say, is history and I’ll save that for another day.
In 1998 LucasVarity announced an intention to shift the company’s head office and primary listing to the US but in the process it suffered an embarrassing defeat in the shareholder vote. With the feeling that Lucas Group shareholders had been sold a bad deal in 1996 Mr. Rice was to suffer the ignominy of a barrage of criticism in press and media and from shareholders. Surprise, surprise, and hard on the heels of this defeat by shareholders, in March 1999 an all cash offer was received for Lucas Varity from the US based company TRW Corporation!
So who was Victor Rice? Son of an English chimney sweep, Victor Rice started his working life at Ford in Dagenham before making his way up mainly on the other side of the pond where he joined Massey Ferguson, whose own history was that of a merger between a British and Canadian company and with whose UK subsidiary Perkins Diesel, Rice would for a time work in Peterborough. Quickly rising through the ranks, so successful was Rice in a very short time that in 1980 he became Chairman of the parent Massey Ferguson, a company that was then headquartered in Toronto, Canada.
Saved from bankruptcy in 1981 by a $200 million rescue package put together by the Ontario Government and which was apparently written off by the company in 1986 when it shuffled its way off to Buffalo, New York State in the USA – a move that angered many in Canada and that was condemned by Canadian politicians at the time who called it an act of betrayal – Rice set about moving the company away from agricultural products and into auto components. Having changed the name of the company to Varity Corporation, the link here thought to be that VAR are his initials, during this period of intense activity apart from moving the company from Canada to the US and in the process reneging on part of the renegotiated loan agreement that required Varity to retain its headquarters in Canada, he disposed of Massey Ferguson and all other agricultural product companies and in 1989 acquired US auto components manufacturer Kelsey-Hayes through an agreed bid for Detroit based Fruehauf at a cost of $770 million.
With the Ontario Premier, Bob Rae calling Varity’s decision to move out of Canada ‘an act of corporate irresponsibility’ it isn’t that hard to imagine what Lucas Varity shareholders felt very concerned at the attempt by Mr. Rice to move the company’s domicile from the UK to the US. I well recall in the aftermath of the Lucas Varity shareholder vote affair after he retired the former Lucas Industries CEO Sir Anthony Gill who I knew well personally saying after Victor Rice lost the shareholder vote to move Lucas Varity to the US that ‘Lucas shareholders have been raped twice – firstly when the company merged with Varity Corporation and secondly, with the proposal to move it to the US’.
These days it matters less where a company’s domicile is but when large numbers of shareholders [there were 18,000 small Lucas Varity shareholders at the time many of whom had bought into the deal with Varity because they had little choice] also happened to be former Lucas workers and had become very worried about what might happen to their pensions and indeed, the pension fund, it did matter rather a lot. Worth noting that for most of the 1980’s and well into the 1990’s Lucas Industries had taken a pensions holiday meaning that it made no annual payments into its overfunded pension fund.
Bar a few parts of the aerospace business, most Lucas Industries businesses that went into Lucas Varity in that appalling 1996 merger are lost to us in the UK now. I am not for a moment suggesting that Lucas Industries or its management was perfect – far from it in some aspects – or that because of this the company had to an extent been left behind by its global competitors. It had been left behind but part of the reason for that is that like many other quoted engineering/manufacturing businesses, management was forced to look over its shoulder at investors looking for a quick buck and in no mood to countenance medium or long term investment let alone finance it.
As I watch GKN which now finds itself under attack from a unsolicited and unwelcome £7 billion bid from a company called Melrose, one that seriously undervalues the business strengths and potential of GKN, I am bound to wonder whether history isn’t about to repeat itself all over again. Yes, I believe that there are significant lessons on the disappearance of all those Lucas Industries jobs and the value that the company used to bring to the UK economy in this for GKN shareholders just as there also are for any sensible government that realises the value and importance that a global company like GKN, one that is looking to further develop and grow as opposed to being broken up and raped, are to the UK economy, to skills and jobs.
(Commentary will return on Wednesday 14th February)
CHW (London – 12th February 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785