Adventure in US proves anything but a breeze

COMMENT

It was always tempting fate for NatWest to post right from the outset a pounds 2.7bn price tag for Bancorp, its US subsidiary. Goldman Sachs, the bank's adviser, appears to have let enthusiasm run away with it in explaining to anybody who would listen that NatWest would walk away with a full price from the sale of its US retail arm. The surge of banking mega-mergers in America drove such expectations.

In the event the sale was anything but a breeze, partly due to NatWest's keenness to take as much cash as possible and get out. The pounds 2.2bn price finally paid by Fleet Financial, the acquisitive US bank holding company, is a poor one. It is just 1.5 times book value, rather than the twice that has been standard in recent US banking mergers.

Moreover, the premium is largely contained in the deferred consideration. That the share price rose so surprisingly strongly yesterday may have something to do with the fact that most analysts were barely back at their desks from NatWest's briefing before the market closed. Investors may take a more critical view when they appreciate the dilutive effect on earnings per share for a full year, which could be around 10 per cent.

That said, this retreat from American retail banking, a venture which has cost NatWest a small fortune to turn around, makes strategic sense. NatWest has decided to abandon those markets and parts of the world where it has little prospect of being anything but a bit player.

Shareholders should not hold their breath for a generous decision to return the capital with a special dividend or a share buyback. Derek Wanless and Lord Alexander have other ideas, and have clearly flagged their ambitions to strengthen NatWest's UK retail position, probably by buying up a life insurance mutual. They would also like a retail fund manager.

And then there is the ambition to thrust NatWest Markets into the global investment banking elite by expansion in London and New York, notably in corporate finance. That is an awful lot of spending opportunity. So far, the NatWest team has erred on the side of the caution it says is the hallmark of the New Age British banker, a sharp contrast to the discredited managers of the 1980s who threw so much of the clearers' capital away on loss-making overseas investments and loans. It is a reputation, however, that still needs to be fully earned - and the further the management strays from the UK businesses it really knows, the more convincing the case it will have to make to investors when it eventually does spend the money.

EMU at the mercy

of intangibles

Of a host of fishy numbers in the OECD forecasts for the next two years, one stands out a mile. The French budget deficit as a percentage of national output is projected at 3 per cent in 1997 - just allowing France to squeeze through the Maastricht conditions and take part in European monetary union. The embarrassment of a higher projection from the Paris-based inter-governmental thinktank would have been de trop for the French elite who are so intent on EMU as a means of containing their over-mighty German neighbour.

The OECD forecast was made after the Juppe plan to slash the social security deficit in November, but before the three-week-long protests that have only just petered out. Official statisticians calculated on Monday that the cost of the first two weeks of strikes amounted to 0.3 to 0.4 per cent of GDP and said that as a result the economy would stall in the final three months of the year. French employers have warned that the repercussions will continue to be felt in 1996, dragging down growth as firms satisfy demand from inventories that have been built up, rather than from new output.

The OECD is forecasting that the French economy will grow by 2.2 per cent in 1996 - 1 per cent less than it was predicting a year ago - and 2.7 per cent in 1997. Several City forecasters warn that France will struggle to make 1.5 per cent next year. As the OECD itself points out, it would only take annual growth of 0.5 per cent less than its projection for the next two years to push the budget deficit in 1997 up to 3.5 per cent - so pushing France into the EMU exclusion zone.

The OECD's projection for French economic growth is itself tempered by some particularly cautious language including the hope that the painful Juppe plan will be the last dose of medicine voters have to swallow.

Come back Dr Pangloss - all is forgiven. This dubious reasoning contrasts markedly with the OECD's projection of an unchanged savings ratio in the UK, even though that was based on the assumption of no fiscal tightening next year. As for lower interest rates, everyone agrees they are necessary to revive the flagging French economy, but as ever, the commitment to the franc fort policy means that France must trail in the wake of the German Bundesbank.

Despite the attempt of European leaders to breathe new life into EMU at Madrid, the OECD's forecast only goes to show how much the project remains at the mercy of intangibles - consumer confidence in France and above all the outlook for the dollar. A renewed strengthening of the German mark against the dollar could prove the last straw by preventing the much- needed loosening of French monetary policy.

First-class result

with Stagecoach

The Government clearly likes offering the best wine first, at least with rail privatisation. Stagecoach's successful bid for South West Trains, the first passenger rail franchise to be formally signed, looks a much better deal that the critics predicted, both on the level of subdisidies agreed and on the assurances given on service levels.

Operators are bidding not to make a cash payment but to receive one. The winners, other things being equal, are the companies that ask the Government for the lowest level of subsidy - in other words, the price for the franchises is a negative one.

The arithmetic is not exactly crystal-clear but it looks as if the bid represents a saving for the Government of well over pounds 10m a year in subsidy compared with the payment to British Rail at the moment. If this were repeated across the 24 other franchises that are on offer or may eventually be put on the block, then it would represent a miraculous transformation of the industry's finances.

The Government hopes so. The subsidy arithmetic published at the time of the Budget implied a fall in the overall bill after privatisation (although the numbers have been deliberately obscured by taking the sale proceeds directly into the Department of Transport's operating budgets). But it is unlikely that all the 25 franchises on offer will attract bids for lower rather than higher subsidies.

Stagecoach brings financial and managerial muscle to the South West Trains franchise, which it will need that to cut costs and raise drivers' working hours. Conflict with the unions is inevitable. Whether the management buyouts that will win many of the other franchises have as much chance of success is another question.