City & Business: A cynical split designed to limit gas liabilities

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IT'S HARD to see the point of the proposed break-up of British Gas. It will cost pounds 50m in fees. It will lead to a whole raft of additional costs - two lots of head-office costs, two sets of advisers, two boards of directors. And it will distract senior management for the next year from the urgent task of sorting out the company's myriad problems.

In itself, the break-up won't make the take-or-pay contracts debacle go away. It won't reverse the rocketing numbers of customer complaints. On the evidence so far, it won't do much to prop up the limp share price. And it won't strengthen the company's hand in the crucial and imminent regulatory review of its pipeline operations.

British Gas is somehow suggesting that the injection of its crippling take-or-pay contracts into the smaller of the two new companies will help it to renegotiate them. Yet at the same time, it insists the new company, British Gas Energy, is in no danger of going bust.

It cannot have it both ways. Only if it seriously looks like being tipped into receivership will BGE be able to threaten its suppliers to the negotiating table. Why else should they want to renegotiate perfectly legal and highly lucrative contracts?

And if going bust is the unspoken plan - Columbia Gas in the US did just that to force suppliers to renegotiate crippling take-or-pay arrangements - then the ethics of the arrangement look dubious in the extreme.

Suppliers who signed contracts confident they were dealing with a mighty organisation with reserves of pounds 19bn will shortly discover that the counter- party has shrunk to a business with footling assets of just pounds 2.6bn. If things go wrong for the ring-fenced BGE, suppliers will have no claim on the larger "son-of-British Gas" - TransCo International.

Even the Gas Consumers' Council, which at first responded positively to the break-up, is now starting to have second thoughts, fearing that the financial pressure on BGE could lead to higher prices. One energy analyst, Daniel Martin at BZW, reckons the total cost of take-or-pay could reach pounds 4.5bn. On that worst-case basis, BGE shares would be worthless.

Institutional stand

THREE cheers for Standard Life, Flemings, Legal & General and any other institutional investor that lifted its head above the parapet last week to offer its views on the Farnell affair.

Flemings has come out in strong support of Farnell. Standard Life and Legal & General are opposed. And as we report opposite, there is a good chance that the Norwich Union will join the rebellion.

The most interesting thing about the dispute it is not the merits and drawbacks of Farnell's pounds 1.8bn bid for Premier, but that our biggest investment institutions are prepared to speak their minds about it on the record.

Admittedly, Farnell is a relatively small company. Institutional investors would certainly have been more reticent if the company had been bigger or more influential. The golden rule about fund management is to never ever offend anyone who might one day be able to offer you some pension fund business. This usually translates into: never ever offend anyone, full stop.

If Alastair Ross-Goobey of Hermes was the founder member of FMA - Fund Managers With Attitude - others now seem prepared to follow his pioneering steps. Dick Barfield at Standard Life and David Rough at Legal & General are two with the courage to speak their minds.

This is a good thing. Investment institutions are enormuosly powerful, yet strangely anonymous and scandalously unaccountable. If we are to have any faith in their ability to invest our money wisely, they need to come out of the shadows and explain what they are doing and why.

Jack of flannel trade

FLANNEL of the week came from Michael Jackaman. The outgoing chairman of Allied Domecq, the drinks group, opened his remarks to the annual meeting last week with the following claim: "Since I became chairman almost five years ago, I have enjoyed the honour and privilege of leading a team which has accomplished a great deal."

Not for shareholders, it hasn't. Allied shares are at almost exactly the same price as when Mr Jackaman stepped into the chair five years ago. They have underperformed the market by a horrendous 38 per cent.

With gargantuan chutzpa Mr Jackaman made his boast at the very same meeting that he was obliged to issue a profits warning - the company's second in seven months. He is living on another planet if he expects shareholders to tolerate this kind of double-think.

Luckily for him, so is the remuneration committee of non-executive directors, who decide his pay. In the 18 months to 31 August 1995 - a period when the Allied share price slumped from 620p to 503p - Mr Jackaman received not only pounds 535,000 in pay and benefits and a pounds 152,000 pension contribution, but also pounds 122,000 of what the company laughably calls "performance-related bonuses".

Interestingly, Mr Jackaman will collect next to nothing from share options, that now unfashionable method of executive reward. The Allied share price performance has been so lamentable that virtually all his options are worthless.

Business feels the blast

THIS section was produced under unusual circumstances this week. The bomb badly disrupted us. Elsewhere in the paper you will find detailed analysis of the implications for the peace process. The business impact is trivial in comparison, but worth considering.

It is almost all bad news, though the queue of window replacement vans trying to get in to Docklands on Friday night as we were evacuated was a reminder that even the most monstrous crimes yield business opportunities.

It is too early to be sure, but if the IRA is back in operation, the chances are that insurance premiums will go up for all businesses, especially in London. And worldwide media coverage of the explosion can only damage tourist income, especially from Americans, who are notoriously sensitive to terrorism.

Then there are the extra costs of tightened security. Bad news all round.

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