Havas pays a full price but WPP can pay more

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So what's Sir Martin Sorrell, chief executive of the world's largest advertising and marketing group, WPP, going to do? Chris Ingham's Tempus Group should have been his by rights – he's got 22 per cent of the stock – but now Havas is attempting to steal the prize from under his nose, and a pretty full price the French advertising group seems to be paying, too.

Only last week, UBS dramatically downgraded its price target for the shares, and although that judgement now looks ill timed, the reasoning still seems fair enough. You'd have to have been on a different planet not to have noticed that the advertising market is already deep in the doldrums with very likely worse to come before it gets better.

In its statement yesterday, Tempus admitted to a "particularly challenging" trading environment with "a pronounced lack of near-term visibility". Roughly translated, that means that Mr Ingham has absolutely no idea what's going to happen to the market in media buying next but, just in case, he's already embarked on an "aggressive" programme of cost cuts. Him and just about everyone else in the media business, it would seem.

All in all it looks an odd time for Havas to be paying top dollar – or 36 times this year's earnings for Tempus – to consolidate its position in the media buying market. No wonder Mr Ingham virtually bit its hand off in his hurry to accept. He's achieved a price close to Tempus's all-time high and he's escaped Sir Martin's clutches to boot. OK, so it's still a little unclear whether it will be him running Havas's combined media buying operation or his Spanish counterpart, but he gets a boardroom seat and he's largely taking Havas stock for his shares, so he must see some sort of a future with the company.

In the circumstances, you would expect Sir Martin to slope off to lick his wounds and count his not inconsiderable profits. But as the stock market correctly surmised by marking the shares up beyond Havas's bid price yesterday, Sir Martin is a poor loser, and if there's a way of outmanoeuvring Havas, he will. WPP's purchase price for its Tempus stake is so low that it can pay up to 650p a share for the rest and still end up paying not a penny more than Havas for the whole.

Tempus makes as neat a fit for WPP's own Mindshare and Media Edge buying operations as it does for Havas, and the synergies might be as great. At the very least, Sir Martin will want to have a good look at the books, which is why he has already exercised his rights under the Takeover Code to have the same access to information as Havas has enjoyed during its period of "exclusive" negotiations with Tempus. For Mr Ingham – focused but dull, as one rival rudely describes him – it promises to be a long, hot summer.

Economic worries

Economic forecasting is a notoriously hit and miss business, but the National Institute for Economic and Social Research seems to get it about right more than most. So when the NIESR says that British interest rates need to be cut as a matter of urgency to avoid recession, it's time to sit up and take notice, the more so since its view contrasts so markedly with that of both the Treasury and the Bank of England's Monetary Policy Committee.

Neither of these two latter organisations can be described as complacent about the outlook, but they do seem to possess a remarkable faith in the British economy's ability to muddle through largely unaffected by the economic downturn going on elsewhere. Exports may be down and manufacturing in recession, but thanks to the strength of the domestic economy, overall growth will hold up and interest rates should stay on hold, is the MPC's majority view. The Treasury likewise sees absolutely no reason to adjust its growth forecast for this year of 2.25 per cent to 2.75 per cent.

The NIESR, by contrast, believes that the manufacturing recession on its own would be enough to create a more broadly based recession were it to continue for the rest of this year. It also challenges the idea that high consumer spending will see the economy through. In fact, says the NIESR, consumer spending is not growing unusually fast while even house prices are not nearly as overvalued now relative to earnings as they were in the late 1980s.

Of course it is the MPC's job to be cautious. It is still much more worried about creating an inflationary boom than it is a deflationary bust, even though its remit to to avoid both of them. The point that the National Institute makes is that it is all a question of balancing the risks. In a nutshell, which policy action would do less harm if it turned out to be wrong?

The National Institute view is that a rate cut is the least risky option. With inflation below target, a rate cut could be quickly reversed if it turned out to be inflationary. On the other hand a failure to cut rates could deliver a recession, which would be much harder to correct. It all seems terribly logical, but it also runs completely counter to the line adopted by the Monetary Policy Committee at its meeting two weeks ago.

The minutes of that meeting stated that some members believed that the next move in rates was now less likely to be down, against a background of concern of inflationary pressures in the domestic economy. A hawkish cabal has emerged on the MPC, presumably led by Mervyn King, the deputy governor, and its mantra is that in an economy as prone to repeated bouts of high inflation as Britain, inflation is still the bigger enemy.

Well, they may be right, but there is also a danger of the available data being judged by reference to particular pet theories about the workings of the UK economy. The National Institute analysis certainly provides plenty of food for alternative thought.

NTL on the ropes

For as long as most of us can remember, the UK cable industry has been about jam tomorrow but, for one reason or another, tomorrow never comes. There's always some excuse for failure to reach the ever-receding horizon of profitability, but to judge by the collapse in the NTL share price over the past couple of weeks, the industry may finally be running out of road and investors out of patience.

Barclay Knapp, NTL's American born chief executive, is a great financier, empire builder and apostle for the industry, but can he actually produce a viable business? Up until now he's been given the benefit of the doubt and it is certainly fair to say that both NTL and its cable neighbour, Telewest, are operationally much better businesses today than they were a year ago. So there's progress of sorts. The trouble is that in getting to this position, Mr Knapp may have so overburdened his company with debt, that there is now no escape from the vicious circle of spiralling interest payments.

As fast as Mr Knapp fills one financing hole, another seems to open up. The structure of debt has become so complex that it would be a wonder if even Mr Knapp has a full appreciation any longer of the scale of the problem. The bottom line is that investors sense a massive dilution of their shares coming down the road towards them, and if that's going to happen, bondholders know they will be forced to share in the pain too. NTL denies that a big debt for equity swop is on the cards, but the parallels with Eurotunnel in the mid 1990s are too obvious to ignore.

The jam tomorrow story is no longer believed, and there is a growing realisation that NTL will never achieve sustainable profitability without a substantial balance sheet restructuring.

j.warner@independent.co.uk

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