Another bad day on the railway as ABN strikes

Railtrack; Lattice fight looms; Sir Geoff's demise
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The Independent Online

If there was ever any doubt about Railtrack's ejection from the FTSE 100 index, then the final coup de grâce was delivered by ABN Amro yesterday. No pussy footing around the recommendation here. Sell, said the investment bank; the shares are worth no more than 58p each and are more likely worth nothing once you take into account the risk that the Government won't cough up the extra £2.6bn the company needs to deal with the Hatfield rail crash aftermath.

Everyone knows that Railtrack is deep in the mire, but can things really be as bad as ABN paints them? Maybe not. Phil Oakley, ABN's analyst, has used a seductively simple but controversial methodology in arriving at his valuation. Essentially he's taken the regulatory asset base and subtracted the debt. What's left is the value of the equity, he says. Rising debt could easily wipe out even this, he adds.

Well, this is one way of valuing a company, but as Mr Oakley's competitors were quick to point out, if you applied the same valuation method to BAA, the airports operator where ABN is house broker and presumably recommends a buy, BAA's share price would be trading at 251p less than it is. Even so, the research note would not have had such a spectacular downward effect on the share price unless it had struck some sort of a chord, and the truth of the matter is that things are quite bad enough at Railtrack without the shares necessarily being worth nothing at all.

Fact: Railtrack needs substantial extra Government support over and above the £1.5bn already promised. Fact: the £3bn property portfolio may not be available to support the valuation, with Downing Street hinting that it would expect these assets to be disposed of to finance renewal before any further Government support is forthcoming. Fact: Railtrack needs on top to continue tapping both the debt and equity markets to meet its post Hatfield renewal commitments. Fact: the company remains a political football subject to a degree of Government interference not seen anywhere else in the listed company sector.

Alastair Campbell notwithstanding, Railtrack's shareholders are likely to be denied even the possibility of the derisory terms available in any renationalisation. The Government could buy back the equity for a lot less than it sold it for and still be trampled in the rush to accept but what would be the point? Taking Railtrack back into state ownership would bring only grief for the Government ­ even heavier financial cost, endless blame for poor service and culpability in any accident. Whatever its frustrations with the railway, Labour needs renationalisation like a hole in the head.

No, Railtrack's beleaguered investors are unfortunately much more likely to be left to stew, and eventually they will be forced to dig deep into their pockets to help get the company out of the hole it has dug for itself. Shareholders cannot say they weren't warned. The Railtrack prospectus was the first privatisation document to contain a health warning from the Labour Party on what it might do when it got into power. In fact, Labour has proved kinder than it promised, but Railtrack has still been a disaster for investors and passengers alike.

Lattice fight looms

Sir John Parker must be thanking his lucky stars that he decided not to accept the poisoned chalice of chairing Railtrack. However, his present berth at the gas pipeline company Lattice is hardly proving a bed of roses either. The shares have been heading south ever since the demerger from BG last October and may have further to fall now that the energy regulator Callum McCarthy is about to get his teeth into the core regulated business, Transco.

Mr McCarthy is limbering up for a new review of how much Transco is allowed to charge for transporting gas through its network. The charges make up around a third of the typical domestic bill. The last review, carried out by his predecessor Clare Spottiswoode in 1997, was memorably described by British Gas as the "biggest smash and grab raid in history". For good measure BG warned that the price curbs would endanger its ability to finance the network and force it to sack 10,000 of its workers, putting the safety of the system at risk.

History proved otherwise. Not only was Transco able to outperformed its regulatory settlement, returning more than £1bn to shareholders in the process, but job losses have been held to a fraction of its apocalyptic forecasts back in 1997. Mr McCarthy will no doubt bear all this in mind when he publishes his draft proposals at the end of this month.

Top of the regulator's agenda is some unfinished business from the last review ­ which is to decide on the valuation of Transco's regulatory asset base. Mr McCarthy has already indicated he may slice £2bn off the figure ­ to reflect the discount at which British Gas was originally sold to investors in 1986. He may then turn the screw again by reducing the return Transco is allowed to earn on those assets.

Transco has decided to get its retaliation in first and is already warning of the meltdown in customer service standards which would follow. Its case is being presented by a gamekeeper turned poacher, Chris Bolt, the former Rail Regulator. Mr McCarthy's final determination is due in September. An entertaining fight is in prospect.

Sir Geoff's demise

Sir Geoff Mulcahy, chief executive of Kingfisher, has had the last rights read to him so many times over the years only to come bouncing back, that most people long ago gave up trying to predict his final demise. If there is one executive talent that Sir Geoff excels at, it is survival.

None the less, yesterday's admission that the group is giving up on the attempt to find trade purchasers for the General Merchandising businesses of Woolworths and Superdrug, and having failed to find anyone willing to pay a halfway decent price will instead demerge them, must mark at least the beginning of the end of his long, long reign. It could have been worse. Sir Geoff might have reverted to a previous plan and announced he was keeping the group intact. But that would have guaranteed his final execution, and he's not that stupid.

It is hard to know what sort of value General Merchandise might command once demerged from the bulk of the Kingfisher group, but that it won't be much is guaranteed.

As for the rest, Darty, Kingfisher's French electricals retailer, is a good business, as is B & Q, but once the principle has been conceded that there is no benefit to be had from having a series of different retailing formats under the same corporate roof, then it is hard to see the point of New Kingfisher either.

Sir Geoff has more than served his time before the mast, and Kingfisher has long outstayed its corporate welcome. Both should be consigned to the dustbin of history. Darty would find an excellent home in Dixons, which has gone as far as it can in Britain and needs to expand onto the Continent, while B & Q would make a perfectly credible standalone business.

For Sir Geoff, final capitulation to his old sparing partner, Sir Stanley Kalms, chairman of Dixons, would be a deeply humiliating experience, but then that's the cut and thrust of business for you.

j.warner@independent.co.uk

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