We cannot call for free markets, then pull up the drawbridge when it suits us

There has been a great deal of emotional noise around the new passport contract awarded to Gemalto by the Government, with patriotic chest-beating. While, of course, it would be nice if the contract went to a British-registered firm, this is one of those scenarios where we do not want to have our cake and try to eat it. We cannot espouse free markets and look forward to being an outward-facing global Britain, and simultaneously pull up the drawbridge on government contracts to make what is essentially a paper document.

Possibly more important, though, is that no one has focused on whether De La Rue is financially suitable to do this passport contract for the next 10 years. It already makes all our banknotes for the Bank of England, so is a government partner of strategic national importance.

It is only a few months since the Government was heavily criticised for giving contracts to Carillion while knowing it had financial difficulties. I said on BBC Radio 4’s 
Any Questions recently that this passport 
contract should be split in two, to maintain competitive tension, and this would reduce 
risk to the Government.

An hour spent over Easter looking at the De La Rue accounts and recent financial performance in the last five years made me splutter on my chocolate. The share price has halved. Turnover has fallen by over £65m, being almost 13pc. 
The company now has negative shareholders’ funds of £110m (in 2011 it was a positive £13m), mainly because of a pension fund deficit of £191m, which has grown from a deficit of £146m in 2012. Yet over the last six years, De La Rue has paid dividends to City shareholders of £214m, which is more than the total profits it made over this period.

This is the stuff that Jeremy Corbyn’s dreams are made of, if London listed bastions of free markets look after their own, while allowing the workers’ pensions to be put at risk. Meanwhile, the company’s net debt has risen by more than five times, from £25m to £137m.

A cynic might say that the company has been borrowing to pay dividends, while being happy to let the pensioners swing.

Management clearly don’t believe in the 
firm’s prospects either; between the CEO and CFO, they own a relatively modest £250,000 worth of shares, despite earning almost £3m between them over the last two years. This is a very low shareholding for a FTSE 250 management team. Mind you, the shares have delivered a zero total shareholder return over five years, even after including dividends, while the comparable FTSE 250 average total return is almost 400pc.

Other parts of the accounts make me 
nervous. Occasionally companies make an exceptional profit or 
loss, which is shown separately in the accounts because it is a one-off. De La Rue has made an exceptional loss in each of the last nine years. In my view, that is not exceptional, nor a one-off, but ongoing trading problems that management 
are trying to present in a different manner.

Despite revenues falling by £65m in the last 
five years, outstanding payments, called receivables, due from customers have risen by £26m to £110m. At best their credit control appears casual, at worst woeful. Are the payments really coming?De La Rue’s recent financial performance made me splutter on my chocolate

In February, De La Rue sold the paper division of the group, for £61m, to a divisional management buyout. What the firm’s management present as a strategic partnership appears to me a necessary sale to prop up 
the group. This profitable part of the group 
will reduce revenues by some £70m and 
lower profits too, making it harder to generate funds to repay the banks and fund the pension deficit. The group has not said how it will spend the net cash received, but regulators must 
surely insist that the lion’s share of it goes to reduce the pension deficit. I have written to the chairman of the work and pensions select committee to look at this matter.

Finally, it seems to me that the group’s banks may not be that happy. Although the debt facility is due to run until 2021, it is shown in the accounts as a current liability. This means, in accounting speak, that actually borrowings are due for repayment within 12 months.

This mismatch could indicate that the banks have imposed some conditions, which the accounts allude to, which mean that they can 
call in the debts within a year. Hardly reassuring for the company producing the nation’s banknotes, that now wants to make all our passports.

Is it possible that the management doth protest too much over losing the contract? Jumping on to Radio 4’s Today programme straight after the contract announcement and then going to the courts to appeal against the Government’s decision is unusual corporate behaviour. Perhaps management have promised they would win this contract to the banks, who may insist on alternative action if it is not won?

Missing a tender by a few per cent is a fact of life, missing it by some 20pc is of a different order. Perhaps they thought they would win almost irrespective of price, on emotional patriotic grounds, and thus pumped up their bid?

Melrose, I know you may be a bit busy at 
the moment with GKN, but any chance you 
could step in to help sort out this important British company before something more 
drastic happens?