Marlborough men and the price of life

How much is a life worth? Not an ordinary life; the life of a senior executive who is bringing his company to the market? Marlborough International, the recruitment agency which will see its shares quoted this week, seems to consider its chief executive, David McKenna, is worth £5 million. That is the value of a Keyman life assurance policy on his life while six other senior executives have values placed on them ranging from £183,750 to £375,000. In what is very much a people business, such policies make a lot of sense. But there is a somewhat strange short sentence in the prospectus. It says "the policies in respect of Mr McKenna and Mr McGennis (he is insured for £210,000) have been assigned to Allied Irish Banks as part of its security arrangements". That means that in the event of death, the benefits would go to the group's bankers and not to the shareholders. That begs the question; is AIB not sufficiently secured for the company's borrowings? So flick over to page 32 of the prospectus for the answer. That is revealing; indeed a little mind boggling. The bank loans amounting to £480,000 are secured as follows:

a first charge on 11-13 Tara Street, Dublin;

a legal charge over property at Kinsealy, Malahide, Co Dublin;

a legal charge over property at Christchurch, Dublin;

an assignment of Keyman policies;

guarantees from directors.

The group's land and buildings are valued at £950,000 which includes a revaluation amounting to £514,000 carried out by Sherry Fitzgerald last month.

So AIB looks substantially over-secured. Not only that but AIB is benefiting from the running of the business, other than from normal bank transactions. Marlborough is heavily into invoice discounting through AIB. The latest balance sheet, to August 31st 1997, shows invoice discounting advances of £1.2 million. This is an expensive form of financing. It can also be dangerous. Some may argue that it might have a place when a company is expanding so fast that it has insufficient cash flow to develop.

Marlborough had, in the past, insufficient finance to expand. This is reflected in the negative cash generated, and this is growing. Indeed, the business appears to be very cash hungry. And the group has had a negative net worth right up to February 1996. However, the £5.5 million raised in the placing - it was four times oversubscribed - prior to the share listings on the DCM in Dublin and the AIM in London should be used to get rid of invoice discounting.

Talking about acquisitions while this form of finance is in existence does not make sense. Indeed, it needs to build up a positive cash flow before it is in a position to pay a dividend. And by its own admission that prospect is unlikely until well into 1999. The group should also reduce the securities it has given to AIB. Industry sources have indicated that the personal guarantees given by the directors have since been extinguished, but they should never have appeared in the prospectus in the first place as they indicate an over-variciousness by AIB. There are, of course, plenty of positive points about Marlborough. While it has a short profit record and the big boost only came in the past 18 months - half year profits of £1.3 million in the six months ended August 31st 1997 are twice that earned in the previous 12 months - the immediate future, mirroring the booming economy, looks promising. Also, a scheme in the form of share options, based on performance, should provide the senior executives with an incentive, though this did not stop the resignation of one senior executive, Mr John Doupe, former manager of Marlborough Computing (his life was insured for £210,000), from leaving and going into competition. Surprisingly no options have yet been granted. It would be in the company's interest to grant them immediately. Two of the most senior executives, Mr John Nolan and Mr McGennis have 1 million shares each (valued at £0.96 million) but if they leave, or die, within five years, these revert to Mr McKenna, at the price they paid Mr McKenna two years ago. Recruitment agencies are notoriously prone to economic cycles. But having 73 per cent of the salaries under contract would make it less painful to react to a downturn. The shares placed at 96p are on a p/e of 14.57 which are at a discount to their British counterparts.

There are no comparable Irish shares but SBS on AIM is on a p/e of 25.5 while in the full listings in London, the p/e ranges from 15.6 for Whitehead to 29.7 for Select Appointments. Clearly these disparities should ensure a useful premium when the shares are quoted later this week.