Jeremy Warner's Outlook: Another British disaster in America as ScottishPower sells PacifiCorp to Buffett

Vodafone: just show us the money - Is the corner turned at Marks & Spencer?
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The Independent Online

ScottishPower couldn't say it wasn't warned. Bitter experience over many decades has shown America to be a graveyard of British corporate ambition. Many have tried. Regrettably, ScottishPower was never destined to be one of the very few that have succeeded. According to the American baseball rule, three strikes and you're out. The sale of the group's US business, PacifiCorp, after six miserable years of profit warnings and management upheavals, leaves ScottishPower's chief executive Ian Russell on two.

ScottishPower couldn't say it wasn't warned. Bitter experience over many decades has shown America to be a graveyard of British corporate ambition. Many have tried. Regrettably, ScottishPower was never destined to be one of the very few that have succeeded. According to the American baseball rule, three strikes and you're out. The sale of the group's US business, PacifiCorp, after six miserable years of profit warnings and management upheavals, leaves ScottishPower's chief executive Ian Russell on two.

This is the second time that the company's diversification strategy has come badly off the rails. The near £1bn write-off ScottishPower is obliged to take on the sale of PacifiCorp to Warren Buffett neatly mirrors the £1bn hit the group took three years ago to extricate itself from Southern Water after finally acknowledging that water and electricity do not indeed mix.

The PacifiCorp purchase in 1998 always looked like a deal too far. The West Coast company cost $10bn, which was equivalent to ScottishPower's market capitalisation at the time, and it was simply too distant for Mr Russell to be able to exert proper management control from his Edinburgh headquarters.

PacifiCorp's first Scottish chief executive went not long after the first profits warning and since then Mr Russell has been obliged to spend a week in each month living out of a suitcase in the wilds of Oregon trying to sort the business out. First the Californian energy crisis kiboshed the company, leaving it short of power which it had to import at vast expense from other generators. Then the rains failed to fall on the West Coast, leaving its hydro-electric stations dry. Then the dollar surged, doing nasty things to profits earned in greenbacks.

ScottishPower bought PacifiCorp for 23 times its earnings and has now sold it for 19 times. But Mr Buffett was too polite yesterday to point out what everyone knows: when corporate Britain goes shopping in the US it nearly always ends up getting its pocket felt.

The upshot is that ScottishPower's stock market rating lags a mile behind that of its counterpart Scottish & Southern Energy, which has stayed at home and stuck to its knitting. Yesterday's 6 per cent rise in ScottishPower's shares began the re-rating.

The decision to sell PacifiCorp and hand back $4.5bn to ScottishPower shareholders rather than throw more good money after bad is undoubtedly the correct one, albeit belated. But Mr Russell ought perhaps to have considered bowing out of ScottishPower at the same time as he said farewell to his West Coast adventure.

Vodafone: just show us the money

Long gone are the days when investors would cheer from the sidelines as Vodafone's Sir Christopher Gent plunged into his latest mega-deal. In today's more cash hungry times, the task confronting his successor as chief executive, Arun Sarin, is from a management perspective the more depressing one of handing back the dosh and facing up to the possibility that eventually the empire that Sir Christopher built may have to be dismantled altogether. Shareholders don't seem to be interested in growth anymore, either organic or pursued through acquisition; they just want the money.

Yet even on this front, they seem hard to please. At least £7.2bn in share buy-backs and dividends has been promised for this year, equal to more than 8 per cent of the company's market capitalisation. It doesn't seem to have done any good.

The shares tumbled nearly 5 per cent yesterday on news that despite anticipated revenue growth of 6-9 per cent for the current financial year, earnings before interest, taxation depreciation and amortisation (Ebitda) will be either flat or slightly down. Plainly its costing money to acquire that growth. In that case, say some investors, why bother? Why not just gear up the balance sheet, run the business for cash, and return even more to shareholders?

Mr Sarin thinks prospects for 3G and One Vodafone, the latter being the ability to deliver product and service synergies from Vodafone's collection of different national networks, should make the company a continuing growth story, yet he's finding it harder than ever to convince the stock market, which focuses instead on the likelihood of further margin erosion for traditional voice telephony..

What's more, the claimed benefits of One Vodafone are contradicted by experience in Japan, where attempts to impose the Vodafone brand on a resistant local market proved utterly disastrous.

Mr Sarin wants to hold back some of his balance sheet strength so as to be able to mop up outside interests in his French and Italian networks. For choice, he'd also like to buy out the other partner of Verizon Wireless in the US. Many shareholders would simply prefer him to sell it.

The only reason he's not being forced to is that most investors accept there may be something in the argument that they stand to gain more by waiting. Verizon's other partner has cancelled dividend payments out of the business, which in theory makes its equity worth more as debt is paid down. Yet long term, it's hard to see the point of keeping an asset that Vodafone has no management control over, nor as things stand, any prospect of getting it.

It can't be much fun as chief executive of Vodafone any longer. The stock market won't be satisfied. Sir Christopher chose the timing of his departure well. His new charge, GlaxoSmithKline, seems to be well through its dark night of the soul and out on to the bright upland pastures of another strong growth phase. A nifty change of horse if ever there was one.

Is the corner turned at Marks & Spencer?

Only £124 to dress Stuart Rose from head to toe in Marks & Spencer gear, including a silk tie and shoes. Is that value for money, or what? Few would disagree with the M&S chief executive's contention that it is, even if some of us might not entirely share his sartorial tastes. Yet although it is again possible to buy good value goods at M&S, across the piste, this one time doyen of the high street is still quite a bit more expensive, especially in foods, where according to rivals it is 25 per cent costlier. But this is not just any old food, reply M&S's marketing men. Maybe not. Unfortunately that's what the customers thought last year. Underlying sales were down 5 per cent in clothing, foods and housewares combined, and profits a stomach churning 19 per cent.

Few expected better. The absence of another profits warning with yesterday's numbers give some reason for encouragement that the corner is being turned. Accepting that one year into the job it is still too early to expect the new chief executive to have shown clear signs of a turnaround, how does the Rose scorecard look? His chief achievements to date have been to slash stocks - by some £1.3bn - and the prices charged by suppliers. That should reduce the need for stock clearance through heavy discounting. He's also cut his own operating costs quite substantially. Yet he hasn't yet persuaded the shoppers back into the stores.

The Rose strategy for doing this is to increase the competitiveness of his opening price points so that he can re-establish M&S's value for money proposition. At the height of M&S's success back in 1998, about 20 per cent of its prices were as cheap as you could find anywhere else on the high street. By last year, this had sunk to 12 per cent. This year it is back up to 17 per cent and in these product categories, the stock is again flying off the shelves. The unanswered question is whether this is enough to recreate the overall impression of value for money. The next three trading statements, starting with the one in July, ought to tell us the answer.

j.warner@independent.co.uk

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