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'

Come off it, Mr Arnault. You are going to have to do rather better than that. Industrial and commercial logic certainly seems to be on the Frenchman's side in his battle to rework the Guinness/Grand Metropolitan merger, but that's not going to make his proposals any more palatable to City investors. It is hard to disagree with Guinness's initial reaction - these proposals would represent a substantial transfer of value to LVMH, giving Mr Arnault control of the new drinks company without having to pay any kind of a premium for it.

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.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine