Comment: Day of reckoning looms for Trafalgar House
Friday 04 August 1995
If next week comes and goes without a follow-up offer to the bid that launched the electricity-sector feeding frenzy, Nigel Rich and his paymasters, the Keswicks, will be hard-pushed to put a plausible gloss on what has been one of the most disastrous investments of all time for Hong Kong Land and everyone else involved in Trafalgar House. Attempting to buy Northern was a last throw of the dice for Trafalgar House.
Where the Keswicks come from, the loss of enormous amounts of time and money is bad enough, but it is the loss of face that really hurts. Trafalgar was to be the vital UK base of the Jardine empire after Hong Kong reverted to China in 1997. It has all gone horribly wrong.
The irony is that, had the original bid gone through as planned, we might never have realised the true extent of the shambles that Trafalgar has become. Attention would at least have been diverted to Northern's cash flow, its steady, non-cyclical earnings and the way in which it would have soaked up Trafalgar House's huge tax losses.
As it was, May's announcement of losses well in excess of anyone's worst fears blew the gaff, scuppering any chance the company might have had of raising the best part of a billion pounds - an engineering business in disarray, a cruise business in the wrong part of the market, and the frank admission that turning the ship round would take years rather than months.
That was the final blow for a share price that has been heading steadily south ever since the first bid was launched. Trading at 76p in December, the shares have slumped to 43p, valuing the whole company at little more than the pounds 335m the Keswicks have poured in over the past two years. During that time three cash calls have soaked up more than pounds 900m, and persuading shareholders to stump up any more cash is going to be too great a challenge even for the likes of Swiss Bank Corporation.
Bidding for Northern, the first hostile move on a REC, was a brave move. But, as Hanson's generous 975p bid for Eastern showed earlier this week, tax relief comes at a heavy price. Trafalgar's pockets are no longer deep enough.
"Wall of money" from Japan may materialise
For London dealers languishing in the dog days of August, there is nothing quite like gazing into the distance at the shimmering prospect of a Japanese "wall of money". A day is a long time for stock markets, however, and what so excited traders on Wednesday seemed more like a mirage yesterday as doubts grew about the effectiveness of Japan's measures to encourage foreign investment by its investment institutions.
Yet on this occasion scepticism may be overdone. What matters is what happens to the yen. It is the yen bubble that has kept Japanese money at home. Investing overseas is a mug's game when your currency is rising at the rate the yen did earlier this year. It is also the yen bubble that has pole-axed the Japanese stock market. Even the most efficient companies have found themselves unable to make money on foreign sales. And it is the yen bubble that has created a mini-bubble in the Japanese bond market, which, according to Yamaichi International, has narrowly out-performed even the US Treasury market so far this year.
There are now growing signs that the yen bubble may have burst and reasons for supposing that the dollar will continue to gain ground. For one thing, even at 90 to the dollar, the yen still remains ridiculously over- valued on calculations that equalise purchasing power in the US and Japan. Foreign exchange dealers pay little heed to such valuations but they do know that "the trend is my friend" - and the dollar has now been picking up against the yen since mid-April.
Furthermore, there has clearly been a profound change of heart on the part of the US administration against using a strong yen to bash the Japanese into submission over trade. The turning point came in late June when the US Treasury became alarmed at the danger that a further blow to confidence might deal Japan's fragile financial system. Hence the welcome decision to back down on the threatened trade war.
Since then, there have been two very public episodes of joint intervention, the first after the US Fed cut rates in early July, the second this week. The intervention in itself was neither here nor there. What mattered was the signal that it carried about the overall thrust of policy in both the US and Japan on exchange rates. The Japanese "wall of money" may remain an illusion. Even if it does not, it seems doubtful that it will be heading in Europe's direction. Even so, it seems possible we have finally passed the high point for the yen.
Through a tunnel, darkly
It is that time of year again: the start of the annual Eurotunnel financial crisis. Negotiations over the latest refinancing will start as soon as chief executive Sir Alastair Morton returns from his extended summer break. All the signs are that they will be every bit as difficult as similar exercises in the past. There is a difference, however. Past refinancings have been dominated by debate over who among bankers and shareholders coughs up what to complete the project. The tunnel is now finished and well into its first full summer season. Pay time has arrived; this time round the refinancing is about how to service the loans taken on in construction. Already it is apparent that there is no possibility of Eurotunnel reaching cash break- even by 1998, the projection contained in the last prospectus. Indeed, the tunnel may now be insolvent in all but name, with interest on its mountain of debt being clocked up at a rate that may stop revenues ever catching up.
Certainly the evidence of yesterday's traffic figures hardly gave cause for encouragement. Traffic in July was up nearly a quarter on June, but even so it remains at a fraction of the level expected for peak summer months and hugely short of the level needed to make the tunnel work financially.
This time round there is no possibility of asking shareholders to stump up more money. Within three months of the last rights issue it was already apparent that the prospectus had been optimistic to the point of fantasy. Nobody is going to believe Eurotunnel's claims after that.
But although shareholders can hardly be expected to reach for their wallets again, their stakes can be diluted. With admirable bravado, Sir Alastair insists that bankers will not be getting their pound of flesh. It is difficult to see how he can avoid it, however. Bankers are certain to demand that at least an element of the interest they are being asked to forego be converted into equity. It is anyone's guess what will be left for present shareholders once the process of dilution has been completed - possibly not a lot.
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