Comment: Shareholders give Costain one last chance

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The Independent Online
Costain has been written off so many times, and received such a torrent of bad press along the way, that yesterday's petulant refusal to allow anyone other than shareholders into its extraordinary meeting smacked of slamming the barn door well after the horse had bolted. In the event the resolution to approve a proposed rescue of the once great construction and engineering group (market value pounds 20m at the recent suspension price) was passed through more or less on the nod, despite an unlikely alliance between environmentalists and small shareholders.

Three-quarters of the 83 per cent of shareholders who bothered to have a view agreed that a heavily diluted shareholding in something was a preferable alternative to a bigger slice of nothing at all, well in excess of the simple majority the company needed.

So Costain has stepped back from the brink yet again, out of the hands of two potential Middle Eastern saviours (Kharafi of Kuwait and Raymond International of Saudi Arabia) and into the willing arms of a new Far Eastern sugar daddy in the form of Intria of Malaysia, which will end up with a 40 per cent stake in return for underwriting a three-for-one rights issue to raise pounds 73m.

The company may long since have been written off by the financial community, which has lost 90 per cent of the value of its investment in the past 10 years, but in the booming construction markets of Asia and the Gulf, the Costain name still punches well above its weight.

Shareholders were probably right then to give the company one last chance to pull something from the wreckage. Alan Lovell says he is already talking to Intria about joint contracts both in Malaysia and elsewhere. If potential clients can be reassured by a patched-up balance sheet that Costain will still be around to honour its contracts, there is plenty of work in places like Kuala Lumpur and, unlike in Britain, the prospect of making a profit doing it.

If it all goes horribly wrong, as things tend to with this company, then shareholders can at least console themselves that, this time, someone else wrote the cheque.

OFT lets BSkyB off lightly

The Office of Fair Trading is in danger of missing a trick by accepting undertakings from BSkyB over its trading relationships with the cable companies in place of a full-scale referral to the Monopolies and Mergers Commission.

Whatever BSkyB might suggest to the contrary, the prospect of a reference would hardly be good news for the company when it is gearing up to invest considerable sums on the launch of up to 200 digital satellite television channels.

The OFT, therefore, had a powerful weapon in its armoury with which to confront BSkyB's dominance of the subscription television market. We will have to wait for the fine print of the undertakings extracted from BSkyB but the danger is that the OFT will fail to maximise its firepower.

The undertakings cover so-called bundling - BSkyB's ability to force cable operators to take a package of programming to qualify for discounts - and the wholesale price at which those programmes are supplied, which is fixed at 60 per cent of the price paid by dish owners.

These have been two of the biggest bones of contention with the cable companies because of the way they are inhibited from pricing and packaging their offerings in response to market conditions.

Action to prevent BSkyB abusing its dominant position in these two areas is to be welcomed. But it looks as if the OFT has missed the opportunity to strike decisively by tackling the whole area of encryption - the little black boxes that enable viewers to convert scrambed signals into a night's entertainment.

Encryption services are available only from News DataCom, a subsidiary of Rupert Murdoch's News Corp which also owns 40 per cent of BSkyB. In theory, any cable operator could develop its own encryption system. In practice, it would be punitively expensive, meaning that the only access to encryption is through BSkyB. The OFT could have insisted that encryption systems be licensed and available on transparent terms to all programme providers.

Encryption lies at the heart of profitabilty of pay television and, in the absence of any action from the OFT, there is every prospect of BSkyB's privileged position migrating from analogue to digital services.

The one crumb of comfort for the cable companies is that more than half of BSkyB's net new customers are now being supplied by cable, not satellite dish, increasing their bargaining power. When BSkyB launches its digital satellite, however, the tables will be turned once more. The OFT looks like missing out on the chance to put a regulatory framework in place that will provide for tomorrow as well as today.

Flaws in the rosy economic outlook

When something becomes the conventional wisdom it is time to start thinking about why and how it might be proved wrong.

The current consensus about the world economy is that it is picking up in nice and sustainable fashion, with a near-synchronised upturn under way in the US, Japan and Europe. Germany is lagging a bit, so there will be another cut in short-term interest rates there. Rates in Japan and the US are expected to rise sooner or later, but probably later as inflation is still subdued.

This is unexceptional stuff, so what is the flaw in this rosy outlook? One clue lies in Wall Street's tantalising brush with a crash. The man who dropped a bombshell on the US market a fortnight ago, by pointing out that the ratio of stock market valuation to the replacement cost of corporate assets - Tobin's "q" - is at an all-time high reckons that the Federal Reserve faces an unappetising choice. It can either do nothing, in which case overvalued asset prices will trigger higher inflation. Or it can raise interest rates and choke off the signs of recovery in the world economy.

According to the investment guru Andrew Smithers, one way or another there will be a price to be paid for allowing the Wall Street bubble to blow so long. The choice, he reckons, is between inflation and recession,pointing out in a new report that previous US crashes from similar peaks have been followed by recessions. The fact that there was a boom instead after October 1987 has made us complacent. The risk of recession has increased with the huge rise in the exposure of American households' savings to the stock market since then.

The length and depth of Japan's post-bubble recession this decade highlights the danger. A big fall in shares on Wall Street would probably send the Japanese economy under again too. There would be scant hope then for the German economy's fragile recovery.

Those who find this prognosis all too gloomy and subscribe instead to conventional wisdom should bear in mind that ships have been known to run aground in open waters.

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