Comment: Yet another disaster for the Keswick brothers

`As recently as 1993 Kwik Save was flying high and Dairy Farm (part of Jardine's), which had built up a 29 per cent stake since 1987, had seen its investment double'
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The Independent Online
This has not been a happy few years for the brothers Keswick and their sprawling Jardine Matheson international trading empire. First came their disastrous investment in Trafalgar House, which gobbled up pounds 300m of Jardine's money before the Keswicks finally saw the light and bailed out. Then came the Jardine Fleming debacle. If it is possible to blame Robert Fleming for the neglect and culture of non compliance which allowed this to happen, it must fall doubly so on Jardine Matheson. Robert Fleming, the other partner in this Hong Kong based securities operation, at least had the excuse of being 10,000 miles away on the other side of the world. Jardine's, on the other hand, is not only based in the same building as Jardine Fleming, it occupies the floor immediately above.

And now we have Kwik Save, another of Jardine's ill-researched and then neglected investment strategies. It was not always so. As recently as 1993 the supermarket group was flying high and Dairy Farm (part of Jardine's), which had built up a 29 per cent stake since 1987, had seen its investment double. Return on investment was around 50 per cent. Crucially, Kwik Save had virtually no competition.

But in the early 1990s continental discounters like Aldi and Netto came in, cutting prices to levels Kwik Save could never match. At the same time, Tesco, Sainsbury, et al, were introducing value lines of their own. If you wanted to save money you could do so in a swanky superstore, not a tired, neglected branch of Kwik Save. For reasons we can only guess at, Kwik Save management chose to do nothing. Instead of improving their existing stores, they spent their time opening more and more outlets. Too many of its stores are now under-invested and in the wrong location. The shares have halved in the last year and the enviable return on capital figures has been squandered.

For Dairy Farm, the problems are acute. Simon Keswick may have been putting a brave face on it yesterday, but the UK is not his only headache. Dairy Farm's supermarket businesses in Australia and Spain are also struggling. Yesterday's review is a step in the right direction. Brightening up the shops and removing their terrible clutter will make them seem less like a Polish discounter. Introducing an own-label will help margins. For the time being, however, the Keswicks are going to have to resign themselves to the fact that their hoped for exit of a bid from the continental discounters is not going to materialise.

Meanwhile what to do about Jardine's more generally? Mind your own business, might be the Keswicks' answer, for this is a company registered in Bermuda, controlled by the Keswicks and without any significant following in the London-based investment community. The fact that it is also a company seemingly devoid of all corporate purpose or focus is really neither here nor there, apart, that is, to those unfortunate enough to be outside shareholders in a Jardine controlled enterprise such as Kwik Save.

A worrying policy shift from Japan?

Interpreting the Delphic remarks of overseas finance officials is always a harzardous business, particularly when the gentleman in question happens to be Japanese. All the same it does appear from comments made yesterday by Eisuke Sakakibara, head of Japan's International Finance Bureau, that a potentially very dramatic shift has occurred in Japan's exchange rate policy. Mr Sakakibara said that Japan's economic recovery was now sufficient to bring an end to the trend of yen depreciation.

This is, of course, only a statement of opinion but the fact that it comes from the man known as "Mr Yen", the official credited with arresting the yen's devastating appreciation against the dollar in the mid-1990s, lends it a certain weight. If indeed policy has shifted, if indeed support for the dollar is going to be abandoned, and if Japanese interest rates are going to be heading higher again, does this fundamentally alter the investment landscape? The answer has to be an emphatic yes, notwithstanding the relatively sanguine reaction of markets yesterday.

For the effect will be to remove the prop that Japanese money has been providing to the US bond market. That in turn will mean that more American money is going to have to flow into funding the US deficit. That's going to require higher US interest rates which means less money for equities. Everyone knows that Wall Street is inflated and over-valued but nobody seems yet prepared to call the party to a halt. The Dow's euphoric reaction to President Clinton's half-victory may yet prove to have been the last all too frenzied dance. And if that is the case the hangover is going to be a mighty one. But then again Mr Sakakibara may not have meant that at all.

Waiting for sheriff Lang to make a move

The Virginians rode into town yesterday and did the boys from Nebraska a big favour. Dominion Resources' miserly valuation of East Midlands Electricity makes CalEnergy's offer for Northern Electric look positively generous. Until sheriff Lang puts on his six-guns, however, we will not know whether it has done either of them any good.

When it comes to sharp-shooting, the President of the Board of Trade might as well be Jimmy Stewart in The Man Who Shot Liberty Vallance. But, as he has shown before in blocking electricity bids, he is lethal with a sawn-off shotgun, for he seems able to make almost anything pass for competition policy these days. On the face of it, there are few policy issues here Mr Lang could use as an excuse for reference to the Monopolies and Mergers Commission. He has already allowed a number of other American bids for regional distribution companies, so he might be hard-pressed to deny these two. CalEnergy's junk bond rating does the company no favours but since its core gearing is typical of the US power sector, this should not stop it from being allowed to bid.

The real question, as ever, is a political one. Ian Byatt, the water regulator, persuaded Mr Lang to block both bids for South West Water on the grounds that it would reduce the number of comparators in the sector from 28 to 27. Since the number of stock market comparators in the electricity distribution sector would fall from a dozen at privatisation to just three if the two US bids are allowed, Mr Lang would have no difficulty in using this as a pretext for sending both the Nebraskans and the Virginians packing.

However, such a move would send all the wrong signals to the re-elected Clinton administration. It would also give the Americans ample scope for exacting their revenge on BT, which needs US regulatory approval for its pounds 12bn tilt at MCI. But it is nearing election time here as well so there is always room for the rogue card. Watching the Americans ride off with nearly half the electricity industry might be too much even for Mr Lang.

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