Arnault's battle of self-interest with the Brits
COMMENT; 'The bottom line is he ends up with stewardship of the most valuable and exciting part of the action and completely out of the lower-value, demerged businesses of fast food, processed food and brewing'
Thursday 17 July 1997
Here's why. It is possible to argue until the cows come home about the basis for Mr Arnault's claim that he would be entitled to 35 per cent of the drinks company created by his proposals. However, the bottom line is he ends up with stewardship of the most valuable and exciting part of the action and completely out of the lower-value, demerged businesses of fast food, processed food and brewing.
Furthermore, the new drinks company where he concentrates his value is the part where all the resulting cost cuts of the Guinness/GrandMet merger are derived. So he gets a disproportionate share of the cost cutting upside of the merger as well.
Clearly this is all very much in Mr Arnault's interests, but it is far from clear that it is in anybody else's. Nor is it obvious that Mr Arnault's "merger and four-way demerger" plan would create any extra value over and above what Guinness and GrandMet are already proposing. For a start it would be exceptionally costly. As far as can be seen, LVMH hasn't even begun to consider the tax implications.
In any case, the recent history of demergers is that they do not in themselves create value for shareholders. The new drinks company would plainly be a better business if it included Moet Hennessy, but the extra cost-cutting potential over and above that already proposed is not great. Nor would the company necessarily derive any industrial benefits not already catered for in joint ventures and through co-operation.
For all these reasons, Mr Arnault is unlikely to get much of a hearing from Guinness and GrandMet shareholders. This would be the case even if he were to reduce his demands to a rather more realistic level - say just 30 per cent of the new drinks company. Though that would certainly be a more tempting proposition, it would still represent control, for which normally an outside party would be expected to pay a very sizeable premium. The possibility of becoming subservient to Mr Arnault's wider commercial priorities and interests would ensure that in Anglo-Saxon markets the shares would trade at a discount.
Harder to see is how this stand-off is going to resolve itself. Mr Arnault is a fighter and he is not going to give up. If his proposals are a non- starter, it is by no means proven that the original GrandMet/Guinness merger plan is such a great idea either. We don't yet know what bonuses Guinness and GrandMet directors have got riding on their own merger proposal going through. That little gem will have to await publication of their circular to shareholders. But it is a fair bet they are substantial. A long hot summer is in prospect in this battle of self interest.
Lights are flashing amber for markets
These are either nerve-wracking or exciting times in the financial markets, depending on your point of view. With the FTSE 100 a breath away from 5,000 and the Dow actually touching 8,000 yesterday the bulls are being sorted from the bears as never before. Either you believe that both the Anglo-Saxon economies have undergone fundamental improvements that promise at least another year of non-inflationary, above-trend growth. Or you think that Wall Street and London, like the pound and dollar, are chronically overvalued, with a sharp correction just a matter of time.
So far the parallels with the late 1980s seem stronger than the prospects for economic nirvana. All over the place the lights are flashing amber. Buoyant consumer confidence fuelled by faster growth in after-tax and after-inflation income; financial deregulation - this time, the building society flotations; soaring asset prices and rapid monetary growth; a strong currency; big falls in unemployment and reports of skill shortages, even unskilled labour shortages.
Since the 1980s, the underlying structure of the economy has almost certainly changed for the better, meaning unemployment can fall further without triggering inflation. But one month's slightly better than expected figures for earnings growth does not mean the laws of economics have been entirely suspended.
There are special factors driving the FTSE 100 higher at the moment, notably the fact that building society flotations have made institutional investors underweight in financials. That and the fact that overseas stock markets keep rising too. When the market finally runs out of special factors, we will still get the ultimate parallel with the late 1980s - a big stock market correction.
Opportunism at British Borneo
It is perhaps unfair to make comparison between the biotech and oil exploration sectors. One makes losses from alchemy and the other from holes in the ground. But both tend to eat capital and ride the wave of stock market fashion. Certainly there are some uncanny parallels between British Biotech's top-of-the-wave rights issue last year and the one launched yesterday by British Borneo Petroleum.
Chaired by the indomitable Sir Bob Reid of British Rail fame, British Borneo is an admittedly quite profitable company which has demonstrated a foresight lacking in some of its bigger rivals in identifying the potential of the deep waters of the Gulf of Mexico. Furthermore the pounds 167m being raised is not just for sticking the in the bank. Some $200m has been earmarked for the Morpeth oil and gas field in the Gulf, an investment that should eventually put the company well on the way to joining the ranks of substantial second-liners like Lasmo and Enterprise, where production tops 200,000 barrels a day.
However, apart from this and a projected $55m-$60m spend on the newly acquired half share in the King Kong field, also in the Gulf, British Borneo is unspecific about where it will be spending its money. The latest rights issue brings to pounds 221m the amount the company has raised from shareholders over the last 18 months, or around a quarter of the company's pre-rights market capitalisation of pounds 900m.
The general statement that pounds 500m is to be spent over the next four years won't make anyone feel any easier about it all. Since the beginning of last year, British Borneo's share price has climbed from around 200p to pounds 14. There is more than a hint of opportunism in this rights issue. Nor do the parallels with British Biotech end there. Two of British Borneo's directors netted pounds 3.3m from option sales earlier this year.
British Borneo's rights issue may not suffer quite the same fate as British Biotech's, which flopped in spectacular fashion. None the less, this could easily mark the company's high point.
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