Comment: Chisholm's going is odd in more ways than one
Wednesday 18 June 1997
One of the lessons certainly seems to be that though there may be room for a few dependent fiefdoms within the Murdoch empire, ultimately there is only one emperor. Mr Chisholm has been attempting to take more of the credit for BSkyB's staggering success than the boss of bosses would have felt comfortable with. There has been friction between the two over the past year and Mr Chisholm has made apparently deliberate attempts to distance himself from his 40 per cent shareholder. Nothing would annoy Mr Chisholm more than to have his company constantly referred to in the press as "Mr Murdoch's BSkyB".
Whether it is just asthma, or as most people in the City suspect, a rather more serious respiratory disease that Mr Chisholm suffers from, nobody expected his departure quite so soon and certainly nobody expected his anointed heir, David Chance, to go with him. The timing looks odd for another reason too, for it comes on the eve of the ITC's decision on digital terrestrial.
But then Rupert Murdoch is in town and when that happens he rarely departs without a few more executive scalps to add to the collection. This time it was Mr Chisholm, who would not have gone willingly, ill or not ill. At this stage it is hard to know what the demise of the old buccaneer will mean for the pirate ship. The stock market's view yesterday was that it must be bad news, if only because it seems to be Mr Murdoch re-establishing control and probably hastens the nepotistic elevation of his daughter, Elisabeth, into the hot seat. The new chief executive is a complete unknown in the London market.
Furthermore, whatever you might think of Mr Chisholm - and there are plenty of unprintable thoughts out there - it is certainly true that he was responsible for much of the drive and vision behind Sky's recent success. With competitors and regulators closing in on all sides, his going might in the fullness of time come to be seen as marking the high point in the company's extraordinary assent.
A few years ago one of the country's biggest brewers hired a new head of public relations. On his first day in the job he was told to make two announcements. The first was that the company was watering down its beer and the second was that it was increasing the price of a pint. As PR challenges go, this takes some beating. Yesterday Thames Water matched and bettered it.
What business other than a public utility could announce a 19 per cent increase in profits and a 22 per cent increase in dividends on the same day as warning its customers that they face a summer of hosepipe bans?
In fairness to Thames, there are a number of mitigating factors. It has not had a hosepipe ban for six years, it is spending an extra pounds 200m to reduce its appalling leakage rate and the amount of water it can extract from rivers is controlled by the Environment Agency.
That said, Thames' handling of its results must go down as one of the more crass pieces of public relations mismanagement. In the present febrile atmosphere, with a windfall tax around the corner and every public utility fair game for retribution, the company could not have expected anything less than the howls of outrage yesterday's double whammy produced.
The vast bulk of the dividend continues to be financed by monopoly profits. Pointing out that the distribution is higher per share because Thames bought back 10 per cent of its capital last year merely serves as an irritating reminder that shareholders had already benefited to the tune of pounds 226m even before yesterday's top up.
More seriously, Thames has misjudged or mismanaged the regulatory risk it faces. Ian Byatt was on record again yesterday criticising "unjustifiably high" dividend increases. Thames, moreover, is the only company to have ignored a request from Ofwat to cut its bills this year in recognition of previous under-investment.
The good news for shareholders is that the balance sheet can easily support dividends of this size. The bad news is that it is also robust enough to pay a windfall tax of pounds 150m, as the finance director has now blurted out. At this rate Gordon Brown may decide to take that merely as a starting point.
The market managed to shrug off on Monday the apparently well-informed story that pension funds are to lose their coveted tax credit perk in next month's budget. By yesterday, however, the brave face showed signs of cracking as the FTSE100 tumbled 63 points. We told you so, gloated the gloom-mongers who reckon the elimination of ACT is worth a good 10 per cent off the market.
In fact this view is a rather naive one, assuming as it does that none of the ACT hit is already in the market and believing that the actuarial shortfall will be wholly made up by lower share prices and consequently higher dividend yields. But it would be wrong of the market to dismiss the threat completely - it is plainly more concrete than a few days ago and comes on top of a growing list of other reasons to be nervous.
In purely arithmetical terms the market has probably not taken the whole ACT issue on board. When the tax credit's effective rate was reduced from 25 per cent to 20 per cent four years ago, the market fell by 2 per cent. Even if you don't buy the most pessimistic view of total abolition, it would still be reasonable to assume a slide of at least five per cent, which would imply a 250 point fall.
The main worry for the market, however, is to be found in labour market data. Falling unemployment, a rapid increase in job creation and service sector earnings coming to the boil suggest the demise of wage inflation has been exaggerated. The IT sector is notoriously tight, but Logica's profits warning last week is a worrying sign of rising costs.
It is hard to see a combination of higher wage bills and pounds 30bn of windfalls not leading to higher prices on the high street and therefore higher interest rates. An 8 per cent base rate is beginning to look increasingly plausible.
It is not all gloom. Institutional liquidity is still strong and despite the media focus on an expected consumer binge after this summer's windfalls, many of the handouts will be saved. It is also possible to argue that the UK market is cheaper on several measures than its counterparts in the US and continental Europe, especially its smaller constituents whose poor showing this year has been disguised by the boom in banks and pharmaceuticals stocks that dominate the increasingly unrepresentative FTSE100. Even so, it is difficult to raise much enthusiasm for shares at this level.
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