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.

Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
art
News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
Travel
travel
PROMOTED VIDEO
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
News
i100This Instagram photo does not prove Russian army is in Ukraine
News
Morrissey pictured in 2013
people
Sport
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
filmReview: Sometimes the immersive experience was so good it blurred the line between fiction and reality
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Environment
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
News
people
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

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices