An unscheduled success in clearing the line

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The Independent Online
There is much wrong with rail privatisation but the sale of the rolling stock leasing companies (Roscos), announced yesterday, is certainly not part of the problem. This is an idea that Labour has toyed with and will probably be happy to leave untouched should it form the next government. Forget threats of a rethink being made yesterday by Opposition spokesmen.

The surprise for ministers in the rail sale is that a year ago they thought pension funds and insurance companies would show the most interest, and venture capitalists would be hard to convince. In the event, it has been the venture capitalists that have been falling over themselves to make offers and the rest of the City has yawned. The price achieved for the Roscos does not look at all bad.

In fact, these are hardly management buyouts. The executives concerned will own one-fifth or less of the equity and the deals look much closer in spirit to a buy-in, where the financiers back managers they put in to run a company. In this case the managers were actually chosen by Hambros before the Roscos were put on the market, but the intention was much the same. The bidders were no doubt encouraged by the fact that so few of the managers came from BR.

The Roscos have been sold debt-free with no direct subsidies and so have been massaged into attractive animals to buy. But this is an industry that will continue to rely on subsidy so it is a matter of choice for the Government which parts bring in the money and which don't. The Government has chosen to pay the subsidy to the train-operating companies, which then hand it over to the leasing companies to pay for rolling stock, and to Railtrack for track access charges. The structure is designed so the main proceeds of privatisation come through the Roscos and Railtrack. The Government must be hoping - probably in vain - that the rest of the rail sale goes as smoothly as Hambros' handling of the Roscos, which may well prove to be worth as much as Railtrack's rapidly shrinking price tag.

Whatever the merits of this rushed disposal of the railways ahead of the election, getting pounds 1.8bn into Treasury coffers now is the watershed in the process. After the Roscos, there is little doubt that the rest of the railways will be sold.

After Gates, which way for DK?

What's the opposite of the "Max factor"? As Dan Wagner, chief executive of MAID, would readily testify, it is the "Gates factor" and it works like this. If Bill Gates of Microsoft does so much as glance in your company's direction, it sends your share price soaring as predictably as Robert Maxwell used to send share prices plunging. So what is going to happen to poor little Dorling Kindersley as it parts company, on the best of terms, with the mighty Microsoft.

When Microsoft, the US software giant, paid pounds 8m for 26 per cent of high- class publishing house nearly five years ago, there was arguably a good case for the link. Microsoft was developing its multimedia business, but it had no "content" to speak of - plenty of technology, but not much product. It also had pots of cash. Dorling, by contrast, had plenty of best-selling book titles, and a growing reputation in the US children's and educational markets. Many of its best-sellers were natural candidates for the multimedia treatment: books such as Musical Instruments would work even better as interactive titles. But Dorling was relatively small and under-financed; building a multimedia business is hellishly expensive, and mistakes easy to make.

A marriage made in heaven, then. And, indeed, the two managed to develop a few titles and to sign some licensing arrangements, some of which will continue even after Microsoft bails out later this month.

In the intervening years, Dorling took the brave but ultimately rewarding decision to develop its own multimedia products independently, ensuring that its hard-won reputation for quality would be maintained and that it would benefit directly from the fat margins CD-Roms continue to fetch.

Microsoft, for its part, charged ahead with its own multimedia ventures. So what had been strategic was beginning to look purely financial, and Microsoft quite rightly decided to cash out (at more than seven times its initial investment).

Dorling has a bright future in an expanding business. There are more than 1 million CD-Rom players in UK homes, and the market is growing exponentially. Dorling may never have got as far as it did without the leg-up received from Microsoft. For its part, the US company has been paid in spades for the help provided. Divorce is never anything but painful and in this case there is bound to be a short-term impact on the share price. Dorling is now well enough established, however, to thrive without the "Gates factor".

Glaxo's long-term prospects look good

A great deal of hope has been invested by the City in the spanking new strategy Glaxo is developing to deal with the aftermath of its merger with Wellcome. What analysts actually got, however, seems to have left many distinctly underwhelmed. Appropriately enough, the venue for announcing the new approach was the company's ultra-modern pounds 700m laboratory complex at Stevenage in Hertfordshire. Heralded as the first big statement on the group's drug pipeline since the pounds 9bn takeover of Wellcome earlier in the year, the shares have done well in the run-up to the event. Judging by yesterday's 18p fall to 857p, the news failed to live up to the splendour of the forum. The market had been hoping for some excitement on new drug prospects. In the event, Glaxo had little more to say about its new drugs than was already known, beyond a long list of prospects which may or may not make it to commercial development.

Today's meeting in New York could provide more fireworks. US analysts have proved enthusiastic about new drugs like the Epivir anti-Aids drug, which received approval from a key Food and Drug Administration committee this week. Even so, short-term prospects are plainly dull while the ferocious pace of change in this industry leaves the future as uncertain as ever.

If nothing else, however, analysts can be certain that with the Wellcome merger and the new research and development strategy outlined at Stevenage, Glaxo is better placed than most to cope with the revolution taking place in pharmaceuticals. The Wellcome merger will eventually yield pounds 700m of annual cost cuts. The little-publicised acquisition of Affymax for $533m (pounds 337m) earlier this year, may also have given Glaxo a crucial competitive edge. This Californian computer simulation and robotics company increases hugely the group's capacity to test new compounds for medical applications and makes its aim of bringing three new drugs to market every year an entirely credible one.

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