Comment : A clever ruse wins the day in the water battle
`For once the bankers earned their crust, and it would be surprising if this sort of conditional bid did not become a regular feature of contested takeovers'
Friday 21 June 1996
By offering a firm 1,050p a share for Water, but promising to come back with up to 1,100p if Electric or anyone else had the audacity to make a counter-bid, Scottish cleverly derived all the benefit of a high knock- out offer without actually having to stump up the pounds 75m it would have cost.
Electric took to the phones yesterday to ridicule the high price Scottish was paying for its new southern customer base, but the fact of the matter is it was outmanoeuvred. For once the bankers earned their crust, and it would be surprising if this sort of conditional bid did not become a regular feature of contested takeovers.
Clever as it is, however, it does put Southern Water's board in an interesting position this morning as it sits down with Scottish to discuss recommending the offer. Having recommended Electric's 975p offer already, directors must on the face of it back the higher Scottish offer.
But can they honestly put their names to a 1,050p bid when the bidder has said in the same breath it is prepared to pay pounds 11. It must be their duty to tell shareholders to do nothing until the end of the bid timetable to give a third party the opportunity at least of provoking the promised higher offer.
With payoffs at stake, there won't be much support on the board for undue boat-rocking and it is clear that Scottish has won the day in some style. The Scottish power company's thinly disguised exercise in empire building will take another giant step forward. Whether the deal can be made to add up for shareholders, customers and employees remains to be seen. The only precedents, United Utilites in the north-west and Hyder in Wales, are too young to provide any sensible guide.
By pandering to the regulators' desire to see at least some of the benefit of the inevitable spate of mergers passed on to customers through lower bills, Scottish should avoid a reference and the deal should be as good as done. It is too early to say, however, whether Southern Water shareholders, with their 50 per cent premium, or ScottishPower, with its new customers, will have the last laugh. The palpable relief that sent Southern Electric's shares higher yesterday was a telling reminder that victories are often Pyrrhic.
Clarke could manage one more rate cut
The ultimate weather-vane for the winds of monetary policy must be Liffe's short sterling futures market, where traders in loud jackets and white socks bet on the future path of base rates. Their money is on increases from now on, with a base rate of 6 per cent priced in for the end of December. The logic of this view is hard to fault. The economy is picking up - there was fresh evidence of an emerging housing boom yesterday - therefore our dear Chancellor will put up rates as swiftly as he has brought them down, the market reasons. After all, he has said so often enough.
Perhaps this is right, and the time will come when Mr Clarke does indeed announce the first increase. But there is no earthly reason to think he will do it before the end of the year. In all the efforts the Treasury and Bank have devoted to the monetary policy arrangements, there has been nothing to determine what level of rates to aim for. The policy framework is all about the direction of change. It leaves acres of room for Mr Clarke's discretion about what level to aim for.
Consider this month's surprise cut in base rates. We do not yet have the minutes of the meeting, but presumably the Chancellor pointed to low inflation and weak manufacturing. Since then we have had more figures showing that inflation is low and manufacturing weak. There is nothing to prevent him cutting base rates again in July if he feels like it. With the Bank of England now effectively tamed, he's not going to get more than a squeak of opposition from Eddie George, who seems increasingly to be coming round to the view that his job is to judge the public mood rather than stick to rigid inflation targets. Not that the Government has publicly announced this as his new role of course, but the shift is certainly implicit.
The way Mr Clarke sees it, he got base rates down to 5.25 per cent in 1994 without bringing the sky crashing down, so why not do it again? Well, there are reasons, such as the greater strength of the housing market now and the intervening two years of liquidity build-up by households and companies. But nothing in the monetary framework sets a limit. Mr Clarke can - and will - move his own goalposts. It seems a reasonable bet that interest rates have got at least another half point to fall before rising once more.
The local pharmacy needs price control
Archie Norman's assault on that last great bastion of retail price maintainance, pharmaceutical products, is generating lots of favourable publicity for him, but it is a cause the competition authorities would be well advised to ignore. Asda's campaign has a superficial attraction, especially for healthy, affluent, busy, car driving types who like to shop in supermarkets. That's why it gets so much support from the press. If you can get all your pharmacy needs from the supermarket, and at half the price to boot, so much the better. But there are good reasons for retail price maintainance in pharmaceuticals, both of the prescription and over-the-counter variety, and they should not be sacrificed to the cause of rampant consumerism.
The local pharmacist performs an essential service in his community. His role goes beyond that of most local small retailing businesses; he is part of the nation's health support system. Retail price maintainance ensures that the nearest Tesco or Asda cannot undercut the Mr Patels of this world and therefore helps them stay in business. Many other small retailers would give their eye teeth for similar protection, but they don't get it. The result is that in some areas the nearest hypermarket has come to take an unhealthily large share of the local grocery trade - 60 per cent in some catchment areas. Now this is something the Office of Fair Trading really should be concerned about. Supermarkets have many virtues, but they are also destoying diversity, consumer choice and decent standards of service on the high street as well as driving many small businesses to the wall.
The Office of Fair Trading should give Mr Norman short shrift. And so should Brussels, should it feel tempted to meddle. This latter possibility seems remote, however. Pharmaceuticals is one of the few industries which appears completely immune to the harmonising instincts of Brussels. From Spain to Denmark, member countries refuse to give the EU a look-in when it comes to the way medical products are regulated. And so they should.
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