All aboard for a cheap Railtrack excursion
City & Business
Sunday 14 April 1996
Of course, the entire rail privatisation process has been a continual horror story and a shameful waste of public money. The Government has executed U-turn after U-turn; the delays and gaffes could fill a freight car; and still the embarrassments keep coming - last week's debacle was the resignation of Roger Salmon, the official in charge of awarding rail franchises.
Labour has added to the uncertainty. But the threats from Clare Short, the shadow transport secretary, contain more rhetoric than substance. They also, incidentally, reveal alarming gaps in Labour's understanding of the City.
Her proposal last week that a Labour government would somehow take equity in Railtrack in return for a subsidy ignores the fundamental pre-emption rights of existing shareholders, whose claim to the first bite of any share issue is enshrined in law.
What the Government's incompetence and the Opposition's threats do, however, is reduce the likely asking price for the shares. As we report on page 3, the Government is so desperate to make a success of the issue that it is offering an extra dividend to sweeten the flotation. Even if the shares do not budge an inch, shareholders will enjoy a 15 to 20 per cent total return in the first year. That would be attractive at the best of times. With interest rates so low, it is a steal.
But there is more. The shares are being marketed as yield stocks - good for reliable dividend income but with little scope for capital gain. That understates Railtrack's ability to lift its profits and therefore its share price. Its revenues are virtually assured, some of them for up to 15 years. As the track and signal operator it has a cast-iron monopoly, and its track access charge revenues have been agreed with the train operators long into the future. The operating regime for the first five years has been set fairly loosely: track access charges can be raised by inflation minus 2 per cent each year. Railtrack could even build revenues a bit, from the freight and property sides.
The real opportunity is on the costs side. If it can reduce even a fraction of its pounds 475m wages bill, profits will surge. It has 6,000 signalmen and no fewer than 5,500 managers in eight regional centres. There is great scope for centralising management and reducing the head count.
Then there are long-term payments Railtrack makes to the Briscos - the infrastructure service companies that maintain and repair the network. These are its biggest cost and they represent the greatest opportunity for savings. Nine of the 13 Briscos have already been sold to private buyers. As they make efficiency gains (that is, sack some of their 30,000 employees) the theory is that they will start to pass on the savings to Railtrack.
That said, I have three reservations about the flotation. The first and most worrying is management. With the exception of Bob Horton, the part- time chairman, the senior executive ranks are alarmingly short of people with quoted company experience. John Edmonds, the chief executive, is a BR man through and through and unknown in the City. Will they be capable of running large projects like the pounds 1bn modernisation of the west coast main line?
Nor do the non-executive directors - with the exception of Asda chief Archie Norman - inspire very much confidence.
The second worry is industrial relations. To deliver earnings growth Railtrack has to cut costs. That means reducing the workforce. It will take diplomacy, tact and sensitivity to drive through sizeable job cuts without provoking disruption. Mr Horton, profiled on page 7, doubtless has many talents, but his pugnacious approach in the signalmen's strike of 1994 was counter-productive. A prolonged and bitter strike could decimate Railtrack's profits.
The third worry is the performance regime, under which Railtrack makes penalty payments to operators if it is responsible for delays or cancellations. It's a hideously complex schedule of fines and charges, and I suspect the prospectus won't do much to shed light on the matter. But, as I understand it, Railtrack has set aside a horrendous pounds 84m to cover penalties incurred over the last year. At present, the impact of these fines has been softened by offsetting payments, but these will be phased out over the next few years. That will start to be a headache unless Railtrack can radically improve the reliability of its track and signalling.
These concerns will doubtless get plenty of airing over the next few weeks as would-be shareholders purse their lips and shake their heads in an effort to wrest the lowest possible issue price from SBC Warburg. More doubts may be raised in the fine print of the prospectus. But in a couple of years I suspect we will all be lamenting the fact that the company, like so many other sell-offs, was privatised far, far too cheaply.
In for the Rentokil
SURELY nothing now can stop Clive Thompson of Rentokil galloping to victory over BET. Even before raising the bid to pounds 2.1bn last week, he seemed home and dry. His superb track record over 14 years in delivering earnings growth for his shareholders makes John Clark's five-year effort at BET look pathetic. Raising the bid looks unnecessarily generous.
But the mood in the BET camp is surprisingly buoyant. The feeling there is that Thompson could have ended it all with a knock-out bid but didn't. "He's given us a chance," one BET adviser told me.
Clark is still at the start of his defence roadshow, with 38 of 50 institutions still to see. Already he is thought to have the support of Sun Life, Hermes, Britannic Assurance and Morgan Grenfell - institutions accounting for 10 per cent of the shares. And he takes encouragement from Kvaerner's recent tilt at Amec, which failed for the sake of a few pennies on the bid price.
It all looks like wishful thinking. BET is badly holed. The fund management arms of its own advisers, Baring's and BZW, have been bailing out of the shares. Rentokil's final offer document is a convincing and brutal indictment of BET's repeated failure to get to grips with its problems. It looks like curtains for Mr Clark.
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