Comment: The quiet hum of a privatisation without protest
Saturday 08 June 1996
The likely sale price has been cut back to a range of between pounds 1.5bn and pounds 2bn (some City houses believe it worth even less but this is little more than a try-on). Moreover, since this is an industry which over the next 40 years will be progressively run down, British Energy can afford to be very generous in its dividend policy. It won't be needing that whopping great depreciation charge shown in the accounts, so it makes sense to pay an uncovered dividend.
This coming year, British Energy plans to pay out twice its net profits in dividends. Most companies would regard such apparent extravagance as tantamount to a death wish. But in British Energy's case, it looks justifiable; although the payout is twice profits, it is also only half cash flow. You can argue about the ethics of this since British Energy's largesse amounts to payment of dividends out of capital originally put up at vast cost by the taxpayer. But from the company's point of view it makes sense.
The upshot is that these shares are going to be sold on a prospective first-year yield of between 7 and 8 per cent, with more to come as the years progress. To the retail market that's worth getting on for 20 per cent in the first year because of the partly paid nature of the stock and the discount available to private investors.
This is a company not without risk. It is highly vulnerable to any drop in the pool price for electricity, or any capacity shutdown. On the other hand management has established an enviable record, and reprocessing costs have been capped for the first seven years through fixed-price contracts with British Nuclear Fuels. Furthermore, the regulatory risk that bedevils Railtrack and other privatised utilities is virtually non-existent. The Railtrack float confounded the sceptics; British Energy, as it turns out, is going to be even more of a doddle.
The economic club remains secure
Even the Treasury seems to be succumbing to the mania for economic league tables. It is scratching its head over the possibility that Britain will have only the world's 10th biggest economy by 2015, down from sixth now and, let us not forget, first more than a century ago. In theory, that means Britain would also have to suffer the ignominy of dropping out of the Group of Seven.
Being part of G7 plainly has an importance that goes beyond that of sitting at the top table, for in so far as there is any attempt to coordinate economic policy on a global scale these days it comes from this organisation. It can be safely assumed that policy is coordinated to benefit member countries first and foremost. So being a part of it does matter.
If Britain, France and Italy were ousted and replaced by China, India and Korea, say, then policy would presumably be distorted accordingly. Which is why it is probably silly to worry about it. In fact, both China and India have both already overtaken the Swiss level of GDP. Even so Switzerland remains far more influential in international organisations by virtue of its importance in world financial markets and trade.
It is equally premature to worry that Britain will soon be excluded from the key international policy-making groups. Although Britain's economic performance has been disappointing in many respects over the decades, the UK presence in financial markets will preserve its influence for a long time to come.
The US and Japan will continue to have more in common with Britain and Europe than they do with China and India long after these latter countries have overtaken us in terms of GDP. The purpose of a club is to bring together like-minded people in their own interests. There is no doubt that international organisations will have to change to recognise the growth of economies outside the existing Western elite, and the transition of a few countries from developing to developed status. But beyond a few, like Korea, which have clearly made that leap, bigger size will not mean greater influence for most of those that outstrip us.
Rewards for the Premier League losers
There was no hiding the disappointment of the losers in Thursday's epic battle for the rights to the Premier League. But with a day's reflection in hand, the also-rans can be justly proud that they forced Rupert Murdoch and his lieutenant, Sam Chisholm, to cough up far more than either had intended even a few months ago.
When the bidding looked like a one-horse race, with BSkyB set to renew its lucrative contract without a whimper from rivals, Messrs Murdoch and Chisholm thought they might get away with pounds 100m a year, or pounds 500m in total, for the right to coin it for another five years.
In the end, the winners were forced to pay pounds 670m, thanks to the emergence of two rival - and serious - bids, from Lord Hollick's MAI/United News & Media and Mirror Group with Carlton Communications. Both sorely wanted to win, by all accounts. They understood the high stakes as Britain's most popular sport rushed headlong toward the age of digital television, with its promise of billions of pounds for players, club chairmen and broadcasters.
But squeezing more money out of Mr Murdoch brings them some consolation. The economics of BSkyB are simple. It must earn big money to buy expensive sport and film rights to entice new subscribers. If it can achieve a virtuous circle, whereby every new programming strand added brings in more money from subscribers, then the profits mount. That is how Sky has grown to date, regularly clocking up modest subscription fee increases year-on- year.
By spending so much on the Premier League rights, BSkyB will have to charge subscribers considerably more money come the autumn or see its returns to shareholders decline. Given the company's heady multiple in the stock market (and the lucrative share options held by senior management) you can guess which of the two Mr Chisholm will choose.
The market is already a bit nervous that subscribers may not be so quick to accept the extra costs, and that churn rates might rise. There is certainly a risk, and the rival bidders can take the credit for creating it.
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