City & Business : Just wait till China picks up the phone

The euphoric stock market reaction to Cable & Wireless's deal with the Chinese over its Hong Kong Telecom subsidiary on Friday was driven by relief and anticipation.

It had been a worry for some time that when Hong Kong reverted to Chinese control at the end of the month, the new owners would merely rip away the jewel in C&W's tarnished crown. That worry has been removed. The Chinese are pragmatic and know it is better to work with C&W rather than against it in a field where mainland China will need considerable support in the coming years. The deal struck is reasonable and responsible.

Apart from the relief, the market was also quite animated about the toehold the deal gives C&W in the Chinese telecoms market. It has in effect been granted most favoured corporation status. C&W will be in a good position to capitalise on the enormous opportunities in China.

The market's enthusiasm, which saw 15 per cent added to C&W's share price, was not shared by all commentators, some of whom have been sniffy about how real the opportunities in China will be. However, just because you cannot immediately quantify the potential is no reason to ignore it. Only about 5 per cent of the Chinese population have access to a telephone. That suggests enormous growth potential.

Friday's deal suggests C&W will be one of the few telecoms companies which will have the ability to tap into that growth. It is pertinent to remember at this stage that C&W has had a presence in China for 125 years and its Sinophile credentials are well known. This is important. The Chinese rely extensively on trust when crafting commercial relationships, especially in a "sensitive" area such as telecoms.

The deal is a clear indication that C&W has won Chinese trust. As co- investors in Hong Kong Telecom the two parties have a mutual interest in its success and also in the longer-term success of their relationship. It is good news for C&W and also for the colony. If the deal reflects Beijing's thinking on how to manage the "one country, two systems" philosophy,then Hong Kong's post-handover prospects look attractive.

Grand plan

AS AN AVID conspiracy theorist I am always susceptible to imaginative interpretation of the past, present and future. You can imagine then how taken I was with the the suggestion that Grand Metropolitan is actually taking over Guinness rather than merging with it. The theory that mergers never work but takeovers sometimes do has much to commend it. The real meat comes from the key board appointments which have been made. It is intriguing that the three key points of contact which Guinness has with the City, investors and the media have all been signed up for the GMG Brands merger programme. The Guinness chief executive, finance director and communications director have all been appointed to the pro forma GMG board. If the Grand Met objective was to secretly turn the merger into a takeover then they have in effect silenced the three most influential sources of resistance.

The theory is hotly denied, but it would not be such a bad thing. The deal would progress much more smoothly under takeover terms than under a commitment to making appointments on merit and on an even distribution basis - principles which seem mutually exclusive.

It will be much easier to establish a new corporate culture if there is a template to work to. It will also be much easier to make line management choices if one company is clearly running the show.

The implementation impediments to the merger are some way in the future. Of more pressing concern is the opposition of Bernard Arnault, the LVMH chairman. The partnership Guinness has with LVMH is regarded as a key element of GMG Brands, so it is unlikely that any concessions will be made to find an easy exit route. Guinness is determined to hold on to its 34 per cent stake in Moet Hennessy, which represents a crucial blocking stake.

However, Mr Arnault will not be short of friendly drinks companies offering the hand of friendship. Allied Domecq, which notably lacks a champagne in its portfolio, would love to offer him a chance to build a new relationship. Although Allied is being pushed by the pundits into the arms of Seagram, there are many other options it can pursue.

It is notable that Allied will not directly oppose the GMG deal in its preliminary submissions to the European competition authorities. Who knows when it will be seeking clearance for its own expansionary plans? If Guinness cannot usher Mr Arnault back into the fold and LVMH threatens to be a deal breaker, no doubt Allied will stand ready to assist.

Enough soundbites

CHRIS SMITH, the Heritage Secretary, has buried the hatchet with Camelot, the National Lottery operator, in the nick of time. "Fat cat" soundbites are all very well when you are in opposition but tend to have more far- reaching repercussions in government. Mr Smith's ill-judged demand that Camelot directors hand over their bonuses to charity demonstrated a worrying naivety and sent out confusing signals to a business community which is still trying to get a handle on New Labour's true thinking. The implication of Mr Smith's outburst is that it is entirely appropriate for government to have a say in setting private sector pay levels. This was surely not intended, as witnessed by the haste to kiss and make up and Friday's gushing praise from Mr Smith for Camelot's achievements.

John Prescott, the Deputy Prime Minister, is also demonstrating a disturbing opposition soundbite mentality. Last week's assault on Railtrack was interpreted as an unwarranted attack on its levels of profitability, particularly for a business with such a hefty investment programme. This came hard on the heels of his dressing down for the water companies.

These may have been popular targets for opposition party ridicule, but politicians need to be a little more circumspect when in power.