All aboard for the mother of all takeovers

COMMENT: `BT's Sir Iain Vallance is just desperate to do this deal. At one stroke it gives BT the scale in international markets it needs as well as filling an obvious hole in its international spread - the Far East'
Click to follow
The Independent Online
Stock market rumours as strong as those swirling around Cable & Wireless yesterday usually turn out to be true. Notwithstanding persistent denials of talks with BT over the past two weeks, C&W was last night forced to confirm that the market was indeed right all along. Talks over the mother of all takeovers are underway, and, by all accounts, quite near to fruition.

This is a deal that makes eminent sense for both BT and C & W. Plainly there are very substantial regulatory barriers, but none of them are insurmountable in the case of an agreed deal with ministerial backing. Mercury must be sold, or it will make a nonsense of a decade of attempts to increase competition in the UK domestic market. But there are bound to be willing buyers, including, probably, AT&T, whose presence would step up, not undermine, competition.

The chief obstacle is not in any case the regulators, but the power vacuum at the top of C&W. The chairman is new to the job and the chief executive only a caretaker. Perhaps understandably, neither is inclined to take responsibility for such a fundamental decision.

BT's Sir Iain Vallance is just desperate to do this deal. At a stroke it gives BT the scale in international markets it needs as well as filling an obvious hole in its international spread - the Far East. With luck, it should also revive BT's flagging share price by giving the company new impetus outside the UK's regulatory yoke.

The terms talked of in the stock market yesterday - three BT shares and 60p in cash for every C&W share - could easily be made to add up to 600p a share if the market takes a shine to the deal. That in turn would allow C&W to agree the takeover with honour.

Valdes leaves the British unimpressed

It was hard for British investors to know whether to laugh or cry yesterday at an attempt by Charles Valdes of Calpers, the $100bn California pension fund, to ginger up British corporate governance.

After the Cadbury and Greenbury reports, not to speak of the Hampel Committee, which is just starting its work, Mr Valdes seems to have descended from another planet. Or as one big institution preferred to put it, "Has this guy been in a submarine for three years?"

Nobody would pretend that corporate governance in the UK is anywhere near perfect. Governance fatigue, as the CBI puts it, has more to do with the amount of verbiage expended on it in the last five years than with actual results.

In that respect, at least, Britain must now be the most active exponent of corporate governance in the world.

Mr Valdes is head of investment at Calpers, a celebrated pioneer of the use of shareholder pressure against underperforming companies, and publisher of a blacklist of those at the bottom of the class.

Mr Valdes said stock prices of companies targeted by Calpers trailed the index by 75 per cent in the previous five years, and outperformed in the subsequent five years by 54 per cent, an annual return of $150m for the effort.

Calpers has more money abroad - $20bn by the end of next year - than any other US pension fund, mainly in Japan, the UK, France and Germany. So it is extending its corporate governance policies overseas, and that includes us.

After careful study Mr Valdes has thankfully come to the conclusion that policy should be tailored separately to the customs of each of these markets. But it is hard to believe that Mr Valdes is yet in touch with what is happening in the UK.

He wants UK institutions to set up a corporate governance body to improve underperforming companies. This is is unlikely to impress the investment committees of the National Association of Pension Funds and the Association of British Insurers, which between them cover half of UK equities. They have been in the thick of Cadbury and Greenbury for five years.

Mr Valdes' specially tailored proposal for the UK is that a set of corporate governance principles should be developed here, including "a statement that all UK corporations should adhere to the Cadbury and Greenbury code of best practices." Since the Stock Exchange yellow book already incorporate chunks of both, this sounded quaintly out of touch to his listeners at a London conference.

UK institutions have a deep dislike of public action against companies, so it is often hard to tell whether their role is all they crack it up to be. But substantial numbers have for years done behind the scenes exactly what Calpers does so very publicly.

The UK can certainly improve its methods in this area, but it is not clear from yesterday's contribution that Calpers' advice is what it needs.

A lot of splashing at United Utilities

Since when did the announcement of 2,500 job losses become an occasion for cheer-leading self-congratulation? Since North West Water took over its contiguous electricity distribution company, Norweb, seems to be the answer.

Yes - proclaims Sir Desmond Pitcher, chairman of the merged company, now grandly renamed United Utilities - the scope for job losses and cost cuts is even greater than we had anticipated. Another 1,700 jobs are to go on top of the 800 already planned.

Needless to say, the glee with which Sir Desmond delivered this message was not aimed at United's hapless workforce, but at the City, where there is still some scepticism about the supposed benefits of this merger. All you sceptics are going to be proved wrong, was his breathless message. By the turn of the century, earnings enhancement will be a whopping pounds 140m per annum, 40 per cent higher than foreseen when the acquisition of Norweb was being planned. And as a consequence, we can now commit to 11 per cent real dividend growth, Sir Desmond says.

On the face of it, impressive stuff. But let's have a look at the figures again. Once the tax and interest charge benefit is stripped out of the pounds 140m, operating savings are only pounds 95m. Furthermore, the takeover involved huge amounts of new equity so earnings per share enhancement is at best only 12 per cent, a bonus the regulator will almost certainly gobble up at the time of the next price review, if not before. You have to wonder whether it's all worth the management effort.

In Sir Desmond's mind there's no doubt about it. If the City lets him, there will be another utility acquisition before too long. There is one heartening aspect to all this empire-building, however - a strategic backdown from non-core businesses. Out goes retailing, contracting, process equipment and generation. Instead, the company is to focus entirely on being a utility service provider. An even narrower focus, on water, might ultimately have served shareholders better.

Comments