Jeremy Warner's Outlook: Benign outlook of Sir Martin's crystal ball

UBM may buck the cycle too; Moulton stirs it up in private equity; Rank's pensions transfer to Goldman
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The Independent Online

Forget WPP's profits for last year. Nobody is interested in those. What does Sir Martin Sorrell's crystal ball say about the future? The ageless advertising guru's trading updates are awaited not so much for what they have to say about the past but chiefly for his musings on the outlook, which are always engaging even when they ultimately turn out to be wrong.

Yet ever since the scalding he received in the early 1990s, when over-expansion brought him to the edge of bankruptcy, he has been largely right. So when he pronounced himself the only man in Davos this year to have a positive view on the immediate outlook for the world economy, he plainly needed to be listened to.

Normally, advertising is one of the key lead indicators of troubled times ahead. When business leaders start to anticipate a downturn, it is invariably the marketing budget that is chopped first. Yet Sir Martin anticipates a buoyant 2008, supported by the Beijing Olympics and what has already been one of the most exciting US presidential races ever. The group's high exposure to the developing markets of Asia plainly helps, but even sclerotic old Europe and the fast imploding US economy don't look too bad.

It's all very puzzling. Everyone seems to be saying batten down the hatches for economic storms to come, but the corporate world sails on as if bathed in glorious sunshine. It's not just advertising. It's hard to find an industry outside the gloom of the capital markets where forward orders are anything but robust. At WPP, like-for-like revenues for January are up 5 per cent, with Sir Martin budgeting for an even better year in 2008 than he was a year ago for 2007, when the boom was still in full swing.

Sir Martin is much more cautious about 2009, when there is a dearth of the big events that advertisers like to spend around. This is the year he expects to see the credit crisis fully come home to roost in the real economy, with the effect compounded by a new US President trying to address the excesses of the past in public finances. No matter. Things pick up again in 2010 with the World Cup in South Africa, the Winter Olympics in Vancouver and the mid-term US congressional elections. Let's hope he's right.

UBM may buck the cycle too

The stock market can sometimes seem a perverse place. The magazines and exhibitions group United Business Media has more than delivered on the consensus estimate of earnings that ruled a year ago, when the shares were trading at more than £8, yet today, with the shares down at 536p, the stock is now apparently considered a sell. To David Levin, the chief executive, it must seem there is no justice in the world. The strategy has been delivered as promised, with the company's reliance on printed magazines down from more than 50 per cent of revenues two years ago to 27 per cent today, and the exhibitions and events side of the group now in robust health.

Yet still the market seems inclined to value the company as if it were an old-fashioned print media group highly exposed to cyclical advertising and the structural challenges of the internet. True, the exhibitions business cannot hope to remain entirely immune to an economic downturn. In these circumstances, profits from exhibitions, data, distribution and marketing services would take a battering alongside the print – but perhaps not by quite as much. There is no sign yet of any downturn in forward bookings for the exhibitions business – a curiosity that seems to reign across a myriad of industries from leisure to aerospace. If there is an economic crash coming towards us, we seem to be doing our level best to ignore it.

Revenues from last week's Games Development Conference in California were 15 per cent ahead of the same event a year ago. Most exhibitors book for the following year immediately after an event, a pattern being repeated right now despite reports of gathering economic gloom. Is this just momentum after the long boom, with the slowdown taking its time to show through? We'll see.

In the meantime, Mr Levin is on the hunt for acquisitions, now that private equity is largely out of the game. Yet he is not in the least bit interested in the trade press titles put up for sale last week by Reed Elsevier. These are being sold minus the exhibitions business, which Reed intends to keep, and therefore lack the opportunity for cross-promotion between the two. Mr Levin calls them "orphaned print assets" and therefore unattractive to UBM. If the trade is uninterested and private equity is out of the game, Reed may struggle to sell, at least for the hoped-for £1.1bn price tag.

Moulton stirs it up in private equity

Bitter? Moi? One of the highlights of the week was Jon Moulton's lacerating of the industry he helped to found – private equity – and, in particular, the organisation meant to represent it in the UK, the British Venture Capital Association. At this week's annual Super Return private equity fest in Munich, deep in the heart of "locust"-hating Germany, Mr Moulton seemed to suggest the industry has only itself to blame for the criticism with which it is bombarded. Yet he reserved his harshest comments for the BVCA, which he accused of using "dodgy" statistics to argue its case.

Mr Moulton likes to create a stir. It's in his nature. He has been equally vicious with the Bank of England, which he accused of not having the foggiest idea of what a Collateralised Debt Obligation or a Credit Default Swap were when he went for lunch earlier this year. He had to explain these debt securities and the danger they posed with a diagram on the back of his napkin.

His comments in Munich, though applauded by the press, went down like a lead balloon with his audience. It was as if he had farted in church. As Simon Walker, chief executive of the BVCA has observed, private equity has quite enough enemies massed outside its gates without having to deal with them from within its own ranks too. The trouble with Jon (one of the industry's leading practitioners tells me) is that, having been in at the start of some of the biggest names in the industry – Citicorp Venture Capital (CVC as it is today), Schroder Ventures (now Permira) and Apax Partners – he has seen people much less clever than him end up a good deal wealthier and more successful. He's just bitter and twisted. Ouch!

But what of his C4 Dispatches programme on the credit crunch, which I personally found compelling TV, if a little self-congratulatory in the "I told you so" mould? His extraordinarily wealthy rival opines: "I've got better things to do with my time than watch Jon's particular brand of apocalyptic nonsense". Over to you, Mr Moulton.

Rank's pensions transfer to Goldman

Yesterday's sale by Rank of its £700m pension scheme to Rothesay Life, the insurer set up by Goldman Sachs, is the largest so far in the British pensions market and could prompt a run of similarly sized deals. Yet the potential size of the market is limited by the individual characteristics of the defined benefit schemes identified. For a start, the fund must be at or close to surplus. Nobody in their right mind would freely take on a big deficit, however adept they considered themselves to be at investment and hedging. For those companies lucky enough to have defined benefit schemes in surplus, the advantages of offloading on to someone else are far from obvious.

The risk of liabilities exceeding assets is removed and so too is the hassle and cost of administering a scheme highly likely to be closed to new members, and therefore of no use in hiring or retaining staff. Yet buyout companies are not doing it for altruistic reasons. They expect to make a good return. Inevitably, therefore, value is being transferred to someone else. Is this really such a no-brainer for shareholders?