Business View: I'll eat my mobile if ECS beats Vodafone

It looks like a classic David against Goliath scrap. Efficient Capital Structures, the outfit that is trying to force Vodafone to release additional shareholder value, is tiny in comparison with the telecoms giant. I will quite happily eat my mobile if ECS gets anywhere close to winning any of the resolutions it has submitted to Vodafone's forthcoming AGM. M&G, Vodafone's third largest investor, has already said it will support the company.

But winning the AGM vote is not ECS's real aim. What it has succeeded in doing - and what it will continue to do - is stimulate a debate about the shape of Vodafone's balance sheet. The mobile giant, like many of its FTSE 100 peers, is lightly geared. PLCs are more risk-averse than private equity run companies. In broad terms, this means they retain financial flexibility while sacrificing short-term returns for shareholders.

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By comparison, private equity companies seek out lightly geared, publicly listed companies as acquisition targets. They then put as much debt as possible on the balance sheet to pay for the acquisition and to produce stellar short-term returns.

And with so much private equity money looking for a home, can any company, no matter how large, afford to remain under leveraged?

What is certain is that if Vodafone got a bid approach from a private equity consortium tomorrow, then its defence would be to ramp up its balance sheet. So why wait for that to happen? But lets not dwell on what the future may hold.

It is irrefutable that Vodafone's shares have significantly underperformed the FTSE in the past year, despite recent impressive rises. The company is in the good books with its investors simply because its financial performance and corporate governance have improved significantly in recent months compared with the previous year. This was mainly due to the arrival of Sir John Bond as chairman and a cessation in boardroom rows.

But Vodafone can't afford to rest on its laurels. Can it afford to pay an extra dividend to shareholders and put on a bit more debt? Absolutely. The trouble is that if it does, it will look as if it has been browbeaten by an investor that nobody had heard of until last week.

But Vodafone is not unique in being lightly geared. And if an investor as weeny as ECS can effectively clamour for change, then the underperforming big guns of the FTSE really have nowhere to hide. GlaxoSmithKline, Prudential, Lloyds TSB and Unilever are all household names that have disappointed their shareholders over the past year. The other thing they have in common is that their size no longer grants them any sort of immunity from impatient investors.

Activist fund managers are only going to get more vocal and that has to be regarded as a welcome development for London.

Cleaners' soaring pay

Nick Ferguson, the chairman of SVG Capital, is quite possibly the most unpopular figure in the world of private equity right now. On Monday, he proclaimed to the world that cleaning ladies pay more tax than private equity companies. Remember, this is coming from an executive whose company is 80 per cent invested in Permira - a private equity group.

Assuming his comments were not about the soaring salaries of cleaning ladies, Mr Ferguson's remarks are possibly the most important thing that has been said on the subject of private equity this year.

Gordon Brown, the soon-to-be Prime Minister, now has a clear mandate to alter the tax regime to make private equity investment less attractive. I used to be of the view that there was no need to legislate against private equity, but I have to confess that I am changing my mind. I am not convinced by the smoke and mirror arguments put forward by unions who oppose private equity company takeovers on the grounds that the buyouts lead to asset-stripping. In most cases, this is poppycock.

But in a healthy market, buyout groups such as Permira, CVC and the rest, are there to pick off the limping members of the FTSE herd which fail their shareholders and only create employment opportunities for dullard directors. But in this current climate - and I hope you forgive this appalling mixing of metaphors - private equity is the tail waging the plc dog.

There must be some way of tweaking the tax regime to restore some balance without punishing an industry that plays a vital role in the City.

Anyone who accuses Mr Brown of not being "business friendly" if he makes life slightly harder for private equity need only be reminded of Mr Ferguson's comments.

An end to leaks

So Thames Water is finally going to meet its leakage target. Its about time. The company was let off lightly last year when Ofwat, the water regulator, insisted only that it invest a bit more cash in patching up its pipes, rather than imposing a hefty fine. The industry watchdog has to keep pushing Thames for improvement. The company should be kept on a short leash for the foreseeable future. Water companies are, after all, regional monopolies. Ofwat has to give them no quarter if it is to remain a credible regulator.

In the meantime, consumers will have to accept that a changing climate and a continuing need to upgrade the nation's network of water pipes will result in higher bills.