The company destroyed by its pension scheme

MoneyMany times over the years, we've highlighted the dangers of investing in companies with large pension deficits here at the Fool. Today, we saw an extreme example of what can happen when a pension scheme comes to dominate a company's financial affairs.
Dawson International is a small firm these days, with sales of around £40m, but its history stretches back 140 years and it's been listed on the stock market since the early 1970s. It produces cashmere from its base in Scotland, and it also has a US cashmere distribution business. It's perhaps still best known for its former ownership of Pringle of Scotland, which it bought in 1967 and sold in 2000.
This morning, Dawson revealed that discussions over whether its pension scheme could enter the Pension Protection Fund had broken down, after its offer of a cash payment, loan note plus an equity stake has been rejected. Dawson warned that if no satisfactory agreement could be reached then "the Board would have no alternative but to consider appointing administrators for all or part of the Group", and that this would put up to 200 jobs at risk. Forlornly, it added that "the Company simply has no more to offer".

Dawson's shares plunged by 46% to 0.62p on the news, valuing it at just £1.4m. Ten years ago, the shares were trading at 30p. Worse still, in early 2001, the company turned down an 85p per share cash offer from Guinness Peat Group.

There are numerous FTSE 100 stocks with big pension issues, most notably BT Group, BAE Systems, Royal Bank of Scotland and Marks & Spencer.

Like Dawson, due to the history of their operations, all these companies have schemes where the number of pensioners is very large compared to the current workforce.

Dawson's pension deficit, measured at £50m last year, dwarfs its market value. Although none of these blue chips are in the same dire position, it is reckoned that their pension deficit is larger than the value of their equity right now. That's a classic warning sign.

Hopefully, a satisfactory solution for all involved can be found for the Dawson situation, although the omens do not look good right now. Uniq was a business in a similar predicament last year, and it managed to pull off a miraculous escape. For us as investors, it's a salutary lesson about investing in older, more established businesses, to make sure you fully understand the situation with regards to its pension scheme.

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