From IPO To Suspension In Two Years!

Published in Company Comment on 20 February 2012

Card-protection firm CPP suspends its shares as it faces a regulatory backlash.

On 24 March 2010, CPPGroup (LSE: CPP) floated on the London Stock Exchange by issuing nearly 169 million shares at 235p each. This valued the UK's leading provider of credit-card and identity-theft protection at £396 million, large enough for it to enter the ranks of the mid-cap FTSE 250 index.

CPP = Collapsing Price, Panic

As a result of its initial public offering, CPP raised £30 million to reduce its net debt. In addition, entrepreneur Hamish Ogston, who founded the group in 1980, pocketed around £120 million by reducing his dominant holding in the York-based firm from 91% to 62%.

At first, shares in CPP (which has around 10 million protection policies in force) performed very nicely indeed. In January 2011, they hit an all-time closing high of 329p, up 40% in just 10 months. Alas, it was all downhill from then onwards.

In March 2011, CPP's share price halved in a single day, knocking £250 million from its market value. This came after news that it was being investigated by the Financial Services Authority (FSA) for mis-selling insurance policies. As a result, CPP immediately suspended telephone sales of its identity-protection contracts.

Shares suspended

Having worked in the insurance industry from the Eighties to the Noughties, I've long been a critic of CPP and its products. Just three months ago, I identified CPP as one of three companies with bad business models. At that time, I raised a red flag over CPP and its shares (then trading at 117p), warning that they could have further to fall.

On Monday, the problems of CPP's struggling shareholders went up by an order of magnitude, as the company announced that it was temporarily suspending its shares at Friday's closing price of 103p. This followed "communications from the FSA over the weekend concerning its investigation into certain issues surrounding the sale of the Group's Card Protection and Identity Protection products."

The FSA has ordered CPP to undertake a comprehensive review of previous sales, and to make changes to its renewals process. Clearly, the financial regulator remains unhappy with the firm's high-pressure sales practices.

What's more, CPP warned that the FSA's requirements "are disproportionate and threaten the viability of the business," which employs 1,341 people in the UK and a further 1,969 in 16 other countries. In its defence, CPP argues that it "has taken significant and successful steps in recent months to make changes, move the business forward and to adopt a more customer-centric culture."

A smaller survivor

Given that CPP has no idea how wide-ranging and prolonged the FSA's investigation will be, the firm's directors had no choice but to suspend its shares. Indeed, it warned, "CPP is currently unable to assess accurately its financial position and inform the market accordingly, and as such considers an immediate suspension to be appropriate."

Although all CPP shareholders will be shocked at this latest development, the biggest loser from today's announcement is founder Hamish Ogston, thanks to his majority stake in the firm.

Of course, I take no pleasure in CPP's situation. Indeed, I am gravely concerned for CPP's workers, many of whom will also be investors in their employer through various employee share schemes. In the worst-case scenario, many of these folk could lose their jobs and what money they have tucked away in CPP shares.

Nevertheless, following on from the regulatory clean-up of payment protection insurance, this demonstrates the dangers of investing in businesses selling products of debatable value. Eventually, when the balloon goes up, it is the firm's shareholders and employees who pay the price.

In short, while I expect CPP to survive this existential threat, I suspect that it will be a leaner, less profitable business in the years to come. This can only be good news for British consumers.

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Comments

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CunningCliff 20 Feb 2012 , 3:40pm

As a long-term critic of CPP, my translation of today's attack on the FSA would be:

"After 32 years of over-charging for our life-assistance products, we've finally been rumbled by our regulator. Now we are under the cosh, we'll do whatever it takes to keep this gravy train on the tracks!"

Cliff :o)

CunningCliff 20 Feb 2012 , 3:43pm

Also, note that Barclays parted company with CPP last week. How many more of its major clients will sever their ties with the troubled firm? Can CPP survive a mass exodus of leading British banks from its ranks?

Cliff

CunningCliff 21 Feb 2012 , 3:43pm

According to the FT, CPP could be in bad shape already, see:

CPP says it could go bust in week
http://www.ft.com/cms/s/0/61cb67c2-5bb0-11e1-a447-00144feabdc0.html

Cliff

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