Abbey National may now be prey, not predator

Welsh Water; Lloyds of London
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The Independent Online

Predator or prey? Few chief executives would admit they are more likely to be the latter than the former, but it might be something Ian Harley will have to reconcile himself to. The chief executive of Abbey National is keen to be a consolidator rather than the consolidated in the shakeout going on among Britain's banks, but will the City back him in this endeavour? Not a chance, seems to be the answer.

Predator or prey? Few chief executives would admit they are more likely to be the latter than the former, but it might be something Ian Harley will have to reconcile himself to. The chief executive of Abbey National is keen to be a consolidator rather than the consolidated in the shakeout going on among Britain's banks, but will the City back him in this endeavour? Not a chance, seems to be the answer.

To understand why, look no further than yesterday's shenanigans over Abbey's takeover approach to Bank of Scotland. Abbey gleefully confirmed a presumably planted story in the Financial Times that it saw an opportunity to create value for both sets of shareholders and had therefore made an approach that might lead to an offer.

An hour and a half later and Bank of Scotland was pouring cold water all over the idea. Bank of Scotland's Peter Burt thought it unlikely the approach would lead to a satisfactory offer for its shareholders. More embarrassing still, he revealed that talks with Abbey had been held last summer, but that Abbey had terminated them because it wanted to pursue an independent future. What a fiasco. Mr Harley can't seem to decide what his strategy should be - organic growth or a takeover - and having finally taken the plunge, he's now publicly been given the cold shoulder.

The episode only seems to confirm growing doubts in the City about Mr Harley's leadership. Abbey is larger than Bank of Scotland, both in terms of revenues and market capitalisation, but if anyone should be taking over anyone else, it should perhaps be Bank of Scotland acquiring Abbey. The talks earlier this year envisaged a nil-premium merger, with - depending on who you believe - Mr Burt becoming the senior executive and Mr Harley his number two. This proved unacceptable to Abbey, so it is now back with proposals for a full-bodied takeover.

Mr Harley is generally regarded in the City as an excellent operations man, and within his company he commands considerable loyalty. But he is also seen as lacking in charisma and vision, and under his leadership, Abbey has drifted. There have been some smallish, bolt-on acquisitions in life assurance, for which Mr Harley is widely thought to have overpaid, but nothing transforming.

Strategy has meandered. Embarrassingly, Mr Harley famously said he didn't think his customers would be interested in internet banking, and then in lemming-like pursuit of everyone else he launched his own internet bank, cahoot. The on-off talks with Bank of Scotland are the latest example of shilly-shallying. The danger for Mr Harley is that by attempting to bounce Bank of Scotland into a deal, he may have exposed himself to takeover. Both Lloyds TSB and Barclays would dearly like to acquire Abbey, and one of them would almost certainly intervene if Abbey were to launch a hostile bid for Bank of Scotland.

Abbey's approach to Bank of Scotland has backfired. Only the question of just how seriously remains at issue.

Welsh Water

The Welsh are back, and this time they're serious. It must be something about the water in Wales that makes them think no one else is fit to own the stuff. The Japanese tried and failed to get hold of it and now, after just two months of American control, ownership is heading back to the valleys.

It is hard to believe that Glas Cymru could make a worse fist of things than Hyder. But even if it does, the good news for Welsh Water's one million long-suffering customers is that if the takeover does squeeze past the regulator, only the ownership will remain in Wales. Operational management will be contracted out to the Scots, the French, perhaps even the English.

We have been here before, of course. Kelda came up with a similar idea to split the ownership and operation of Yorkshire Water and fund the business with cheap debt as opposed to expensive equity, only to get a drenching from Sir Ian Byatt, the regulator. So Glas Cymru's plan poses two questions. First, can it succeed? And, if so, will it provide a model for the rest of the water industry to follow?

The Kelda plan boiled down to selling back to Yorkshire Water's customers a business they once owned and then using the proceeds to enrich shareholders. Scant surprise that it sank like a stone.

Lord Burns, the Glas Cymru chairman, has got off to a better start. Unlike the Kelda proposal, Glas Cymru would not be a mutually owned company, so customers would be ring-fenced from any potential liabilities. The Welsh Assembly loves the idea and even the new regulator, Philip Fletcher, is making optimistic noises. Welsh Water's customers are promised lower bills without the liability of having to own the pipes at the same time. And Glas Cymru's constitution will prevent it from doing something rash like going off and buying an electricity company.

Whether Glas Cymru is the template the rest of the industry will adopt is harder to judge. Welsh Water invites radical solutions because it has been such a basket case. If, on the other hand, the Welsh succeed in slashing their cost of capital and setting a new benchmark in efficiency, then, come the next regulatory review, the rest of the pack may have no choice but to follow suit.

Lloyds of London

Lloyds of London has been clogging up the British legal system in one way or another for more than two decades now, so it hardly seems likely that yesterday's ruling from Mr Justice Cresswell will mark an end to the debilitating stream of litigation and criminal actions. Even so, Lloyds is right to see this as a landmark ruling that closes a chapter on one of the least savoury periods in its history.

There were harsh words from Mr Cresswell. He found there had been a catalogue of failings and incompetence that had brought disgrace on one of the City's great markets. He might have added negligence and crookery to the list. But it was the underwriters, managing agents, members' agents and others who make up the market for whom he reserved his strictures. He didn't land a single punch on the Society itself.

Many might think this odd, since any club that fails to control its members could be regarded as equally culpable. Nonetheless, the claim that Lloyds had deliberately recruited names under false pretenses in order to fund growing anticipated losses failed to stand up.

It is too late for the devastation wrought among names, but today the market finds itself in relatively good health once more. It is hard to believe, given the degree of hostility and adverse publicity Lloyds of London has generated over the past 20 years, but Lloyds still accounts for more than 50 per cent of the total London insurance market. It also lays claim to a quarter of the world's aviation market and 13 per cent of all maritime business.

Lloyds remains hopelessly antiquated in some respects. There's still a trading floor, and only recently has regulation been put on a fully external basis by being passed to the Financial Services Authority. But yesterday's ruling was about the past, not the present or future, and it is to history that it belongs.

* outlook@independent.co.uk

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