Boardroom battle leaves Cable wide open to bid

COMMENT: 'The chief executive's public act of mutiny, however justified, could never have resulted in anything other than court martial and a frog-march to the gallows'
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As so often happens in a bare knuckles fight, there have been no victors in the dramatic boardroom bust-up between the chairman and chief executive at Cable & Wireless; both were last night unceremoniously fired, presumably with the usual telephone number figures in compensation. Meanwhile, the company is left wide open to the long-rumoured hostile takeover bid.

It is, however, hard to see how Win Bischoff, deputy chairman and head of the group of non-executive directors that decided Lord Young's fate, could have done anything else. Lord Young's reputation has been so thoroughly demolished by the war of words mounted by James Ross and friends over the past couple of weeks that he could not have remained as a credible chairman. By the same count, the chief executive's public act of mutiny, however justified, could never have resulted in anything other than court marshal and a frog-march to the gallows.

The old problem of what to do once you have thrown the captain overboard - in this case with the first mate - remains the same, however. Bringing back Dr Brian Smith, a former director of C & W, as non-executive chairman, is hardly a solution. Nor is the company's urgent search for a new chief executive. With the vultures gathering overhead, finding a convincing strategy for this oddball collection of telecommunications interests remains as problematic as ever. As befits a company with Mr Bischoff, chairman of Schroders, as its deputy chairman, a plan of action to repel hostile boarders has already been drawn up. However, with the alternative strategies of Lord Young and Mr Ross by implication thrown to the winds and no chief executive at the helm, the company is plainly left pretty much defenceless.

Hedge your bets before the Budget

The single most important force behind the surge in share prices to a new all-time record - the fall in long-term interest rates - looks set to continue, as signs of weakness in the British and European economies multiply. The only question about the next interest rate move by the Bank of England is not its direction - down - but just how early it will be made. For shares, however, the next movement is a lot harder to call.

Until Kenneth Clarke sits down next Tuesday, the shape of the Budget will remain a wild card. Yet the City has already discounted some fiscal laxness. If anything, the Budget could surprise the markets by being tougher on spending and by not giving away as much in taxes as expected.

The economic case for some fiscal relaxation, to relieve the pressure for consumers, seems to mount by the day. Manufacturing stocks showed the biggest increase for 20 years. This mountain of inventories, combined with the rise in the trade gap, seems likely to depress economic activity in the months ahead, prompting further rate cuts.

It is not just falling gilt yields that are driving the equity market. A company sector flush with cash is feeding a takeover boom. So far, this has mainly been in electricity, banking and pharmaceuticals, but bulls hope the frenzy will spread. Buy while stocks last, and get your takeovers through before a Labour government slams the door. That highlights the lurking political risk of an election in which the Tories will be shot down in flames. Historically, Labour governments have not been the grim reaper of market lore for share prices but investors and traders tend to take a different view, at least in the early stages.

Political uncertainty will in any case tend to drive up gilt yields, so dragging down share prices, as worries about higher inflation come to the fore, no matter what promises Tony Blair makes about keeping to the straight and narrow.

Another cloud on the horizon is the prospect of a sustained fall on Wall Street, which has risen by almost a third this year. There has been one shock in recent weeks, when high tech stocks fell off a cliff, only to find a convenient ledge just below. Although the FTSE 100-share index hasn't risen by anything as much as the Dow Jones, it remains as sensitive as ever to the tremors of Wall Street.

Until the Budget, bets should be hedged. A repeat of Norman Lamont's ACT ploy, which reduced the tax privileges of pension funds, would knock share prices for six. But provided the Chancellor doesn't push his luck too far, the stock market probably has some steam left yet before it is beaten back by the gathering political headwinds.

Camelot shareholders picked a winner

The argument about the size of Camelot's Lottery profits is a dialogue of the deaf. One side says a pounds 23.6m attributable profit is obscene and ought to be cut back or given to charity; the company points out that it represents just 0.9 per cent return on sales.

Moreover, Camelot says the licence agreement will keep the average at under 1 per cent over the entire seven-year period, which is hardly a licence to print money. The company will make more than most people expected, but mainly because sales are likely to be at or above the top end of predictions. There are no easy British profit comparisons for Camelot or its political critics to use to establish their cases either way.

The Lottery profits do not look greedy compared with the pools, probably the nearest corporate animal. Supermarket margins are higher than Camelot's, but they are far more complex than a Lottery with two products. In some ways, the business resembles an old fashioned savings bank that takes in money but does not lend it, except to the Government - which in Camelot's case passes the bulk on to charity. A return of 1 per cent on money raked in would indeed be generous for a savings bank, but Camelot does not fit the bill there, either. It has had to face potentially expensive risks, including penalties for late start-up - which were not invoked - and has lodged what amounts to a pounds 40m performance bond with the Government.

The return on capital is nevertheless substantial, however you measure it. Investors put in pounds 50m equity and pounds 10m prebid costs last year but have already received their first dividend of pounds 9.5m at the interim stage and retained profits are a further pounds 14.1m. As venture capital projects go, this has proved one of the best performers around.

But the really big venture capital payback, through a flotation, does not look feasible for political reasons. By the time the company has a three-year track record to satisfy the Stock Exchange it is more likely to be facing a Labour government which - judging by its front benchers' remarks about lottery profits - would let its licence expire in 2001.

No wonder Camelot is toying with ideas about using its cash to expand into managing foreign lotteries. That would require government permission, which the Tories might well grant. The need to find new outlets for its money confirms that Camelot's shareholders certainly picked a winner.

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