COMMENT: Final orders for a shabby compromise
"Sir Richard faces the classic bidder's dilemma. He wants Wellcome shar eholders to know what a full price he is paying for their company, but he needs to reassure his own investors that the scope for cost-cutting makes the deal a bargain for Glax o."
Wednesday 08 February 1995
Meanwhile the market place has become riddled with distortions and anomalies sufficient to fill a hall of mirrors. Many of these are of the Government's making. Its half baked approach to the brewing monopoly has done almost as much harm as good. Goaded into action by the European Commission, the Office of Fair Trading now plans to address one of them. This is the issue of the price charged by brewers to their tied estates. In some cases it has become as much as 40 per cent more than that charged to thefree trade.
Some brewers have been raising rents to what landlords regard as draconian levels. Nor is this a problem confined to Inntrepreneur, the Grand Met/Courage estate. When the Commission began investigating it found the complaint common to the industry.
Go back a little in time and landlords used to pay what was called a "wet rent". What that meant was that the brewers charged a relatively high wholesale price for their beer but in many cases kept rents artificially low. As brewers adapted to the modernworld, they began acting as property companies as well as brewers. Rents were raised and beer prices have been left either unchanged or increased. Meanwhile, cut throat competition from the free trade has created wide price differentials. It is hardly surprising that tied landlords feel aggrieved.
Whether the OFT can do anything about it is another matter. What remains of the tie has survived thanks only to the shabby compromise agreed by the Government in the early 1990s. If this investigation hastens its ultimate demise, many would regard that as a thoroughly good thing. Certainly the Commission would think so. Britain is alone in Europe in having any form of tie. To abolish it entirely, however, would create a severe problem for small regional brewers, some of which survive thanks to the tie alone.
Zantac running out of juice Glaxo's interim figures make the message plain - the company needs to buy Wellcome and would be prepared to pay a deal more than its current offer.
The reported figures confirm that Zantac, the ulcer drug which represents 40 per cent of group sales, is running out of steam fast. The growth treatments are doing well but as long as Glaxo remains so dependent on one income stream, its future looks bleak.
To his credit, Sir Richard Sykes, Glaxo's chief executive, has never tried to hide the fact. Many of the right things are already being done to correct or combat the problem, but there is a limit to the extent to which costs can be pared down internally.Buying Wellcome gives him another bite at the cherry as well as providing huge areas of overlap and duplication to strip out.
Sir Richard faces the classic bidder's dilemma. He wants Wellcome shareholders to know what a full price he is paying for their company, but he needs to reassure his own investors that the scope for cost-cutting makes the deal a bargain for Glaxo.
In order to keep both camps happy at this early stage of the bid, he remains coy on the extent to which the cost-base can be slimmed, but there is a quiet confidence in the Glaxo camp that the potential is mouth-watering. Given this background the enthusiasm of the Wellcome Trust to bite Glaxo's hand off in its hurry to accept the offer remains a mystery. It rarely makes sense in a bid situation to make an early decision one way or the other. Flemings, which advises the Trust, is as aware of that as any. Its advice that the Trust accepts without giving Wellcome a fair chance to come up with a white knight remains one of the unexplained curiosities of this takeover.
Boldly flying planet Sterling A US/Soviet link-up in space looks like a doddle compared with the task now facing Ken and Eddie. They are trying to achieve a safe re-entry for the UK economy after a year in which it has been travelling at an unsustainablespeed. The Russian and American astronauts are at least flying by wire, using measurements calculated by Mission Control.
The Chancellor and Governor by their own admission are flying the economy by the seat of their pants, attempting to steer it through a looming patch of inflationary turbulence without there being anyone reassuring on the ground to talk them down. The instruments meanwhile are throwing up some distinctly ambiguous data.
Yesterday's figures are a case in point. They seem to be sending conflicting signals to the Treasury and Bank. Industrial production recovered sharply in December, but much of the acceleration was due to increased output of energy as a mild November gaveway to a cool, wet December.
For the fourth quarter the industrial and manufacturing sectors of the economy grew faster than the analysts had expected, but slower than in the year as a whole. For the Treasury spokesman it was a welcome slowdown to a more sustainable rate of future growth. The City chose to see it from the same perspective.
But for some analysts it was evidence of something potentially more important - the first hint of a distinct slow-down due to the tightening of policy.
Rising taxes, rising interest rates and a sense that the authorities are determined to fire the retro-rockets far earlier than they did the last time the economy went into orbit may already be having an impact in dampening down economic activity.
Nobody will know for certain whether - and how fast - the economy is slowing down until the early summer. The Chancellor and Governor's problem is that they must decide before then whether to let the economy glide or fire another interest rate retro-rocket instead.
As in space, the risks are high and the margin for error very narrow.
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