25th August 2022
Dear Shareholder,
I want to set out the extraordinary background that has led to the special General Meeting being called and our reasons for calling it.
Background
In April we were contacted by another significant shareholder, Slater Investments, who were very unhappy with the management of R&Q and in particular the deal agreed by management to sell the company to Brickell for 175p a share. We exchanged views and although like Slater we were not happy with the terms of the proposed sale, we said were not prepared to get involved unless there was a management change and Ken Randall came back. Slater asked us to approach Ken Randall and ask him if he would consider coming back which I did. Following a series of meetings with Ken, who cares passionately about R&Q, he agreed to do that for a short period to help stabilise the business. I believe Slater and others also wrote to him and were pleased that he was willing to return. Upon the takeover failing, Brickell also agreed to work with other shareholders to recapitalize the business and work with the board to make the necessary changes to management.
The Brickell Takeover
The deal put forward with Brickell was due to be put to a vote on 20th May 2022. On 27th April 2022, Phoenix tabled an alternative proposal to the R&Q board under which Phoenix would put up the capital needed by the company on the condition that William Spiegel stepped down from the board and Ken Randall replaced him. This proposal was rejected.
The company was confident that the vote on the Brickell offer would succeed whereas Slater informed us that they believed there was enough support to block it. At that point Phoenix’s votes had been cast in favour of the bid. We had a real concern that if the deal went to a vote and it was lost that this could result in the company being in breach of its covenants which could set off a potentially damaging series of events. We were concerned that the board had not made any backup plans and did not seem to be engaging with its existing shareholders who were offering to provide the capital.
We therefore changed our vote and that was enough to ensure that the focus turned to an alternative solution. I asked Brickell and Slater to work together with us to provide the company with the capital it needed in a way that would be open to all shareholders. I was later informed by the company’s advisors that the deal would have passed without our switching, the objecting vote had not been enough to stop the deal going through until we switched.
We were always clear in our view that Ken Randall should return for an interim period, but we appreciated the board's need to separate the issues and deal with the company's financial position first and then address the removal of William. We were clear with all parties who engaged with us throughout this period, which they can confirm, that our intervention and support was always based on a management change from William Spiegel to Ken Randall. That was made clear to the board and all other parties throughout.
William Spiegel
From what we have heard, if there is a difference of opinion with other shareholders it is not about whether William Spiegel should go, it’s about how his exit should be achieved. Either cleanly in one vote at this meeting or by appointing new non-executives to the board and allowing the board to remove him. We think the latter approach will be more disruptive internally and externally and may do more harm to the company, risking the loss of valuable employees.
I have a unique perspective in discussing R&Q because for nearly 10 years my wife and I have counted as controllers of R&Q by virtue of our stake in the business and our ultimate ownership of Phoenix. That has meant that we have had to review and sign scores of documents related to specific R&Q transactions. This has meant that I would have to understand these transactions well enough to explain them to my wife. This necessity required that I have had more than a superficial understanding of the business and its’ mechanics for years. During this period, I built an appreciation for Ken Randall’s capability and a trust and admiration for the painstaking detail he would provide as a means of explaining the very complex transactions my wife and I would have to sign our names to.
Seeing the company from this angle led me to form a view on what I consider to be William Spiegel’s shortcomings. As a result of that we decided to sell our entire holding in R&Q, a process which we started in June 2021 and at the time of the Brickell bid we were down to 10.14%. We got involved in current events because we were asked and we do care, and we believe that there is great value in R&Q under the right leadership.
If shareholders should choose to keep William Spiegel, then we will respect that and go back to where we were, disengaging from the company. We didn’t seek the role of activist here, it found us. We were quietly on our way, exiting stage left, before this came along and that is why our initial reaction was to just accept the Brickell bid.
I should explain what I mean by shortcomings. At Phoenix we think of these assessments in three categories: competence, alignment and integrity in ascending order. We find William wanting in all three.
From our first dealings with him we realised that he struggled with intelligent capital allocation at a company level. He couldn’t work out the impact of the dilutive capital raise he had just foisted on us. He couldn’t grasp that he needed to understand the value of what he was giving up, not just the return on the capital he was raising. We have other examples and have picked up as part of our research monitoring process other anecdotal evidence of a person who does not have a good grasp of the details. We won’t name sources but if any of them come forward as part of this process then we will share them. The underlying point though is that R&Q is not competently led, this is known internally and by key stakeholders and this is damaging the business which will ultimately have detrimental consequences.
The next factor is alignment, we don’t find William aligned with the interests of R&Q’s shareholders. An example of a misalignment is the management’s action during this latest saga. We had become aware that Brickell’s initial bid for the company was £2.20. The bid was accepted and the very next day, William disclosed to the bidder that the company would be posting a 160m pre-tax loss and needed over 100m of emergency funding in order to prevent breaches of financial covenants and rating downgrades. We can only assume that Brickell did not take this lightly and from what we have observed began to take a far more defensive posture to help the company prevent further damage. Shockingly, the moment the Brickell deal was signed, we believe the executives awarded themselves over $6m of bonuses which were not explicitly disclosed to Brickell.
Furthermore, in the middle of the process of putting the deal to shareholders, a special board meeting was convened to award a new executive pay deal for the coming year despite their already being a heavily pre-negotiated Management Incentive Plan as part of the takeover. We believe Brickell, the acquiring company, asked that this not happen ahead of the deal and yet it was still pushed through and resulted in Brickell suing the company for breach of the agreement and the company making a payment in settlement.
Once the deal failed, the company and its advisors knew that existing shareholders were prepared to put up the entire amount of capital needed. Instead of reaching to engage shareholders and mend fences, William Spiegel set about trying to raise money from third parties at a deeply discounted price that would have diluted existing shareholders as he perceived they did not support him. Meetings were held and it was only with the intervention of Phoenix and other shareholders, and the NOMAD that this process was stopped. He seemed unable to see how these actions were so counter to the interests of existing shareholders.
The final factor is integrity, the quality of being honest. Essential in any business we invest in, but incredibly important in a business-like R&Q which is very opaque and where we must rely upon the communication from directors to make our judgements. The weakest form of integrity in our assessment is someone who will not lie to you but will be willing to let you form the wrong view without correcting you. We don’t find that William achieves even that level.
We feel that important and especially negative information is not disclosed when it should be, this makes interpreting the company’s communications extremely difficult for shareholders who need the opposite with a company like R&Q. To illustrate the problem, take the recent statement from the company on 8th August 2022 titled Q2 Programme Management Update. It ended with this paragraph:
"Additionally, despite rising interest rates and volatile financial markets, we note that our investment portfolio is well positioned with our assets significantly shorter in duration than our liabilities and over 95% comprising liquid, investment grade fixed income securities and cash. Our portfolio has not experienced any credit impairments."
How should we interpret this? No prior Programme Management Updates have contained information about the investment portfolio. It seems reassuring, but why draw attention to something like the duration mismatch which is a given as R&Q always expects to commute liabilities before they fall due so the assets need to be shorter than liabilities. Our experience of William Spiegel is to suspect that this statement flags something negative although it doesn’t say so explicitly. We assume it means that the duration of the investment portfolio was extended which would mean given how longer dated bonds have performed that losses have resulted. We don’t know that but we do know that there isn’t really enough information in this communication to make an informed judgement on the matter which it speaks of.
It is management’s prerogative to make investment mistakes, we do it all the time, but what shareholders deserve is open and honest communication.
Governance
We have been clear to the company all along that we think the board should be chaired by a non-executive and needs strengthening. We support the appointment of Robert Leggert as a NED who we know and respect, and we are also supportive of a candidate for Non-Exec Chairman introduced to us by Slater Investments who we can see has the right skill sets and experience to run a proper board that holds the executive to account. That executive should be Ken Randall working with current CEO Alan Quilter.
Phoenix’s Position on Strategy
I would like to correct misinformation being given about Phoenix’s intentions especially with regard to strategy. At no point in any of our discussions with the board, their advisors or other shareholders have we expressed any opinion or preference about strategy. We are not seeking a change of strategy, just a change of leadership. This has never been about the strategy which I hope the above makes clear and we have not engaged the company on it. We think strategy is a matter for the executive and the board and not for shareholders. We were not consulted in the past on strategy changes, and we are not seeking any change to that. The company is seeking to characterise this vote as being about strategy whilst fully knowing from their dealings with us that this isn’t the case. We don’t want you to be misled when you make your voting decision.
Phoenix, Brickell and Randall
There is no formal or informal agreement between Phoenix and Brickell or Ken Randall with regards to any of these matters regarding R&Q.
William and the board have attempted to portray this as William Spiegel vs Ken Randall saga. That could not be further from the truth. The exigency is in removing an executive that is impairing the business and not acting faithfully and in shareholders’ best interests. Ken Randall was simply engaged as he is a trusted and highly knowledgeable former custodian of the business and in our view the perfect interim steward.
Ken never discussed any financial matters with us about his return and we don’t seek to involve ourselves, it would be a matter between him and the board. His motivation is helping R&Q, the business he and Alan founded, it's not financial. We have been careful in our conduct throughout this process to ensure we didn’t act in concert with those we engaged with.
Brickell was gracious enough to continue talking to us when the deal looked as though it wouldn’t succeed after our intervention, and then worked constructively to help the company recapitalise. They more than any other shareholder understand the business of R&Q and through their due diligence process have the ability to assess the conduct and capability of William Spiegel and so their opinion carries a lot of weight in this matter. There are no commercial agreements between Phoenix and Brickell.
Conclusion
My 15 years of involvement in R&Q made me believe it was worth trying to help. I have attempted to share with you the background to what has been going on so that you can understand our motivations. It's a failure of governance that has led us to this point but now at least all shareholders have an opportunity to do something to save the company they own. Anyone who has had dealings with Phoenix in our history knows that we put our reputation for honesty and acting with integrity ahead of all else, even the discomfort of occasionally operating in the public domain.
It is my strong personal, and Phoenix’s professional view that William Spiegel is not the right person to be running R&Q and that he is doing damage to the intrinsic value. I also believe that there is not a better person in the world that we know of to step into the complexity of the R&Q business now and work with Alan to bring stability and confidence so that it can achieve its true potential, than Ken Randall.
Therefore, I ask that you support our motions at the special General Meeting.
Gary Channon
Posted on 25 August 2022