COMMENT: A takeover that highlights a lack of purpose
"The market's indifferent reaction to the biggest corporate deal since Glaxo swooped on Wellcome underlines the sense that Hanson has become another boring conglomerate"
Tuesday 01 August 1995
The commercial logic of the deal is pretty compelling also, fitting well with Hanson's focus on basic industries - light, heat and cigarettes - that are relatively unconcerned by the irritating ups and downs of economic cycles with which most companies contend.
Hanson already has some knowledge of the energy business through Peabody Coal and Suburban Propane, and its aborted tilt at PowerGen five years ago shows its interest in the sector is no flash in the pan. The deal will make Hanson less cyclical, which will come as a comfort ahead of the imminent slowing of the US and UK economies.
But the market's indifferent reaction to the biggest corporate deal since Glaxo swooped on Wellcome underlines the sense that Hanson has become just another boring conglomerate. The good Lords Hanson and White are going out more with a whimper than a bang, putting together a high-risk, defensive deal at an un-Hanson-like price.
Paying 13 times last year's earnings at Eastern compares with the 11 times the Southern Group thinks Sweb is worth and the p/e of 10 Scottish Power has put on Manweb's head. It is a sign of the high price that Hanson is willing to pay to ensure a recommendation from Eastern's board and so avoid the mud-slinging that a hostile bid would attract.
The deal also looks unlikely to yield the sort of benefits that Hanson usually seeks to squeeze out of its acquisitions. Picking on the best- managed REC guarantees a stream of cash and earnings but leaves little scope for hacking at an already pretty lean cost base. It also means that Hanson is left with its highest level of gearing for a decade; twitchy debt rating agencies are already muttering about possible downgrades of the company's credit-worthiness. The high degree of financial risk is compounded by political concerns, with profits ultimately determined by a regulator likely to answer in a couple of years to a Labour government.
It is ironic that Hanson's unwanted intentions towards ICI four years ago should have persuaded that once-clumsy giant to break itself up to the enormous subsequent benefit of shareholders. Hanson has been underperforming the rest of the market for ten years, a lumbering industrial behemoth for which the rapid earnings and share price growth of the early Eighties are a closed chapter. It is hard to fault much of the thinking behind Hanson's latest move, but the unfortunate effect is only to highlight the company's all too apparent lack of corporate purpose.
That does not mean, however, that the Government should start meddling with the market's right to determine Eastern's fate. The regulator was unexpectedly given effective power of veto by the Monopolies and Mergers Commission over the French bid for Northumbrian Water. Is the stock market right to worry that other utility bids including the three bids now outstanding for regional electricity companies might go the same way? Certainly, there is a risk - you never can tell with politicians - but it is probably exaggerated in the various share prices concerned. There is little case for reference either of the Hanson bid or the other two, despite knee-jerk calls from the Labour Party. In the Northumbrian case, the argument was over the effective merger of three adjacent water companies leading to considerable cost efficiencies and erosion of comparative competition. In such circumstances, it seemed only fair that the customer through the regulator should get a quid pro quo. The three bids for regional electricity companies are unrelated; comparative competition is in no way harmed and if there are cost benefits, they depend solely on the bidders' ability better to manage the companies than present incumbents.
If the impression at the moment is of something of a feeding frenzy, that does not in itself seem reason to refer. The ownership of public utilities by conglomerates is commonplace in the US and certain other European countries; there is no logical reason for believing it is any worse a form of ownership than the present - a diffuse mass of outside investors. If there is cause for concern, it perhaps lies with the degree of financial engineering behind such bids. Hanson makes no secret of the fact that a primary motivation is to reduce its problem of unrelieved advance corporation tax. If the Exchequer is as a consequence harmed, so too is the public interest. Here again, however, the correct remedy is not the MMC but a reform of the tax system.
Hanson might to many still seem the very epitome of an evil, Eighties, asset-stripping organisation (the perception lives on even though it may no longer be true), but this is such a highly regulated industry that it is hard to believe Hanson could in truth be allowed to run Eastern to the detriment of its customers; even if that is what Hanson would like to do, too many safeguards exist to prevent it. Hanson's shareholders might have good reason to be underwhelmed by this takeover, but the Government and the regulator hardly need to concern themselves.
Japanese must act on credit union crisis
There is nothing quite like a run on banks to concentrate the minds of governments. The precedents of the collapse of entire financial systems in the early Thirties act as an awful warning. The effect of the dramatic run on the Cosmo credit union may be to get a sluggish Japanese government to come up at long last with a real solution to the bad debts that have plagued the economy in the 1990s.
Until now, the policy has essentially been to allow the passage of time to heal the patient, with profits put aside every year against the bad debts. One difficulty this gradualist approach has encountered is that the very fragility of the financial system has contributed to the continuing recession. This has prevented the generation of the scale of profits needed to make inroads on bad debts.
The significance of the run on Cosmo is that it comes at a time when the Japanese government is already undertaking a sweeping review of a strategy that has clearly failed. One sign of this was that it has come clean about the full scale of bad debts, only last week increasing its estimate of the problem to Y50,000bn.
The Japanese government is now actively considering the policies adopted by the US government in tackling the crisis that beset the Savings & Loans in the Eighties and the Bank of England "lifeboat" operation in dealing with the secondary banking crisis in the Seventies. For such policies to work, banks must be allowed to go bust but the banking system must be preserved. Above all, the authorities have to give a lead - and provide public money to finance the orderly run-down of insolvent institutions. Fear of public disapproval has made the Japanese government shy away from such activism. The Cosmo collapse could make it grasp the nettle.
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