City & Business : Corks pop as bodies fly past the window
Sunday 13 August 1995
The latest round of company results has done little to dispel the confusion. One moment last week we were listening to a grim profits warning from the packaging group Rexam; the next GKN unveiled a sparkling set of results. While Unilever was making distinctly cautious noises, Glynwed, the engineering conglomerate, has never had it so good.
The City seems pretty confused, too. There is a contradiction in that while the latest company results are coming inslightly ahead of brokers' forecasts - Warburg calculates the gap at 4 per cent - analysts continue to downgrade future profits forecasts. Downgrades outnumber upgrades by about six to four.
The warning from Rexam (formerly Bowater) may prove a milestone in the corporate calendar. Rexam complained that its customers were running down their stocks of packaging. The rocketing of packaging costs last year panicked many customers into stockpiling; the levelling-off of prices more recently is now persuading them to run down stocks.
Rexam's experience is probably an extreme case, but "de-stocking", as it is called, may well prove to be one of the more significant corporate stories of the year. Stock levels - both of raw materials and components and of finished goods - had been declining for almost 20 years, as companies learnt to manage their cash better and introduce just-in-time methods of stock control. But stock levels in recent times have been ticking up again. There is now a significant stock overhang in many parts of the economy.
Any further economic slowdown and companies may choose to dig into their stocks rather than put in fresh orders or step up production. My guess is that de-stocking will be the excuse wheeled out for a lot of disappointing results over the next 12 months.
SOUTHERN Electric's U-turn on Friday - it abandoned takeover talks with neighbouring South Western Electricity just nine hours after confirming them - is acutely embarrassing for both sides. And they are seething about it.
For Sweb, which faces a hostile bid from the confusingly named Southern Electricity International of the US, chances of independence look slimmer by the hour. Finding another white knight will be much harder this far into the battle.
Meanwhile, Southern (the British one) is left with egg on face. Its friends might claim that it was getting cold feet about the deal anyway. The plunge in its share price when the talks became known can hardly have encouraged it.
But as I understand it, the two sides were all the way up the aisle and nine-tenths of the way through their vows. The price was agreed - pounds 1.2bn; the terms were set - 75 per cent cash, 25 per cent Southern shares; the deal announcement was drafted. Then like a scene out of Jane Eyre, up pops Professor Stephen Littlechild to forbid the banns.
It seems Professor Littlechild, the industry regulator, would not agree to treat the two bids in the same way. Southern wanted both cleared, or failing that, both referred to the Monopolies and Mergers Commission.
Sweb will now try to stir up some political pressure. The story will be that the four million households served by Southern and Sweb will miss out on rebates that been planned to follow the takeover.
Meanwhile, the problem remains that no one quite knows what kind of vision Professor Littlechild has for the industry. He has hinted he is not averse to consolidation, suitably regulated of course. Yet he offers no indication of how that can be achieved. Until he plainly sets out his stall, there will be more cock-ups like last Friday's.
Take it easy
THE latest froth in the shares of the regional electricity companies underlines just how cheaply they were sold off five years ago, as we describe in our cover story. NM Rothschild, the merchant bank which advised the 12 RECs, played a key role. It did not put a foot wrong. It would have been failing in its duty to its clients had it not pushed for the lowest possible float price. It did a wonderful job for the REC managers - and a terrible disservice to taxpayers.
There's a simple solution to prevent the Exchequer being so humiliatingly shortchanged in future. Privatise gradually. The Government has already partly learned its lesson, selling only half its shares in the electricity generators. That wisdom saved it hundreds of millions of pounds when the remaining rumps were sold for much higher prices. It's a lesson the Department of Transport should take on board as it prepares to sell off Railtrack.
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