COMMENT: This brewing merger will not be waved through
'Whoopee, thought Bass, which until S&N overtook it with the Courage takeover was number one in the market. Anything goes now'
Wednesday 20 March 1996
When S&N acquired Courage the Government just waved it through with minimum conditions attached. This despite the fact that it breached an important benchmark - that any merger resulting in a market share above 25 per cent should at least be examined by the Monopolies and Mergers Commission. ,Whoopee, thought Bass, which until S&N overtook it with the Courage takeover, was number one in the market. Anything goes now.
Well, not quite. Bass may now be front-runner in protracted talks over the future of Carlsberg Tetley (Whitbread is hovering in the wings too), but any deal would be frought with regulatory difficulties. The combined market share of Bass and Carlsberg Tetley would be somewhere in the region of 40 per cent and in some areas - the Midlands and Yorkshire - it could be as high as 70 per cent. Even a Government as relaxed about private sector monopolies as this one might have some difficulty with that.
If Bass is going to be allowed to do this deal at all, therefore, the competition authorities are going to want to extract a high price. Some breweries are clearly going to have to be sold and there is even a chance Bass could be forced to cede at least some of what remains of its tied estate. With such a wide-ranging carve-up in prospect, is it all going to end up being worthwhile? That really depends on how much the Government is prepared to let Bass keep. Looked at from a businessman's perspective, what Bass is trying to do makes obvious sense. There's far too much capacity left in this industry. We simply do not need as many big breweries as we used to. This way, Bass would argue, you get a clean solution to the problem, returning the industry swiftly to economic equilibrium. The alternative is death by a thousand cuts, at least for one of the players.
Most ordinary people would not share that view, however. To them, fewer breweries and greater concentration of ownership can only mean less choice and higher prices. One thing is for sure. If Sir Ian Prosser, chairman of Bass, is going to do this deal at all, he needs to do it soon. His window of opportunity is fast disappearing. With an election looming, even Michael (national champions) Heseltine might balk at the prospect of another big job-cutting merger.
A breath of spring on the world economy
Do economists suffer from Seasonal Affective Disorder? As the first day of spring looms, there is a new optimism to the experts' assessment of various parts of the world economy. Yesterday it was Japan's turn. The fourth-quarter rise in GDP was the biggest since 1991. It followed two earlier quarters of decent growth, and has started to lift the pervasive gloom about the Japanese economy.
There has also been a wave of better news about the US. Although manufacturing remains static at best - witness the 50,000 fall in employment in industry in February, a month which saw the creation of 705,000 new jobs in America - other parts of the economy are evidently doing pretty well.
That leaves Continental Europe in the doldrums. In the major European economies growth has slowed or started to fall and unemployment has risen to unacceptable levels. But at least the authorities in Germany, France and elsewhere have started to press their foot down hard on the monetary accelerator. The series of reductions in the cost of borrowing should help to avoid outright recession.
The constellation of evidence suggests a promising outlook for growth in Britain this year too. The more pessimistic economists - those most in need of a winter break in a sunny resort - have made much of the deterioration in export prospects. They have overdone it. True, the trend in the balance of trade has been flat at best in recent months, reflecting the slowdown in export markets. True, this has hit manufacturing output, especially in Britain's engineering heartland as a new survey is expected to confirm today. But it is likely to be no more than a pause.
Even if the Continent is stuck in the doldrums until much later this year, trade with the US is likely to pick up again. The value of Britain's exports to North America last year, at pounds 20.4bn, was slightly higher than exports to Germany. When growth in Asian markets is taken into account too, export prospects look very decent. Before long even the pessimists will be forced to admit that the world economy has not been as depressed as they thought.
A serious risk for nuclear investors
Every time something untoward happens at a nuclear power station, it conjures up images of Chernobyl and Three Mile Island. In the case of the latest upset at British Energy, any such thoughts are probably exaggerated. But there are critical implications for this company's privatisation. The issue is whether it is safe to refuel some of British Energy's power stations when they are working at full load. This is a problem that does not apply to the new pressurised water reactor at Sizewell B, which must be refuelled off-load, whatever happens. But it does matter for a number of the AGRs (which are built to four different designs and are thus far from uniform in their operational methods.)
If it turns out that refuelling at high electricity output has to be stopped, then the average annual output of the AGRs is likely to be significantly reduced. It so happens that British Energy's load factor - the percentage of available time that its plants are actually generating - last year averaged 74.5 per cent.
Analysts at BZW, which is advising the Government, have assumed in their calculations of the value of British Energy that this load factor rises to 82.5 per cent quite soon as improvements are brought in. But they also concede that a difference of 2.5 percentage points either side of this target - from 80 to 85 per cent - represents a variation of pounds 700m in the value of the company. Looked at another way, a 1 per cent increase in load factor adds pounds 140m to operating profits.
The refuelling problems are probably soluble. But they underline the extreme sensitivity of nuclear plant performance to minor problems of lost output - be they from refuelling or faulty welds, the cause of serious losses of output at two of the AGRs last year. The sensitivity to shutdowns is particularly high because nuclear stations are only economic if they are run as near flat out as possible.
Potential investors should take this seriously, because it is one of the biggest risks they will be buying in the privatisation. Indeed, if the refuelling problem turns out to be worse than the company now claims, it will call into question the entire sell-off, scheduled for midsummer.
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