Jeremy Warner's Outlook: BHP Billiton digs in for the long haul

Arnold offers Rock a plausible way out; Living-dead battle draws to a close
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The Independent Online

Marius Kloppers, the chief executive of BHP Billiton, says he's prepared to be "patient" in pursuit of the Rio Tinto bid prize. He'll need to be, because, even on his own admission, the proposal is going to take 9 to 12 months to get through regulators. It is also as plain as a pike staff that he'll have to raise the offer to persuade Rio shareholders to back him.

At this stage, it is not clear which comes first – finding remedies that will satisfy anti-trust authorities, or raising the bid to a level that will persuade the Rio board to help him with the endeavour.

Mr Kloppers cites the very substantial overlap between the two companies' shareholders in support of the offer as proposed. Both sets of shareholders would gain from the mooted $3.7bn (£1.8bn) of cost and revenue synergies, so, by demanding a higher offer, the great bulk of Rio shareholders are only depriving themselves as BHP investors.

This argument would be perfectly correct if there was an exact overlap of investors with the same weighting in each stock. In those circumstances, there wouldn't have to be a premium at all. But in fact, some 30 per cent of Rio's shares are owned by investors who do not also own BHP shares, and with the balance, the weight of shares may lie with Rio.

The Chinese are already going to have a major issue with this deal, on account of the near 40 per cent of China's iron ore needs it will give to a single supplier. They too might reasonably think Rio worth a lot more than Mr Kloppers is offering. More to the point, they have the sovereign wealth to outbid him, and take in Mr Kloppers' company while they are about it, too.

Arnold offers Rock a plausible way out

Luqman Arnold has come up with proposals for rescuing Northern Rock which do not involve bidding for the company at all. Rather, the former UBS and Abbey National chief executive proposes something which is more akin to a management buy-in. In return for a chunk of the equity, presumably on favourable terms, he proposes to manage the company out until it can stand on its own two feet again, free of government and Bank of England support.

Can he hope to succeed? Nobody seems to be offering the Government the clean exit it wants and until they do Mr Arnold's proposals may have something to commend them.

The deadline put in place for buy-out proposals by Northern's advisers is next Friday. Yet as far as can be ascertained from the outside, all the rival proposals seem to involve a continuation both of the Treasury guarantee of deposits and the open-ended Bank of England loan facility, at least for the foreseeable future.

In these circumstances, it is hard to see the point of doing a deal which may involve little or nothing for the shareholders. Fine if the buyer can guarantee to get the Government completely off the hook in respect of the Treasury guarantee and the £24bn of loans provided by the Bank of England.

The Government at least would leap at anything of that sort, though technically it has no say in the matter and is desperate to keep the whole thing at arm's length so as to avoid the charge that it is acting as a "shadow director" and is thus responsible for what is going on.

With credit markets as they are, it is hard to see how any of the hotchpotch of private equity players and chancers that amount to the current roster of "bidders" could manage such a refinancing. Northern's advisers seem to be saying they will provide a partial refinancing, but not the whole thing. Even the major banks would think long and hard in current circumstances before taking such a big liability on to their balance sheets. Certainly no one could finance it easily in today's markets.

What's more, even if one of these bidders has found takers for the debt, the shareholders are going to stick at any deal that doesn't involve a reasonable payout for them. If the Government moved to sell the company over the shareholders' heads, it might find itself in the same position it was in with Railtrack, when it was eventually forced to concede that the company was worth something and had to pay out accordingly.

What is truly astonishing is that the Government should stand idly by when there is so much public money at stake and allow the management that got Northern Rock into so much trouble in the first place to carry on running the show. Having turned around Abbey National and re-established the brand to a point where it could command a bid at a reasonable price from Spain's Banco Santander, Mr Arnold certainly has the credibility to bring about the cure at Northern Rock. The Rock's advisers say they want to sell the business, not let someone else steal it.

But we haven't seen any sign yet of a proposal which either allows the taxpayer to get his money back or offers a decent price to shareholders. Maybe there will be one by the Friday deadline. If not, then Mr Arnold seems to offer a reasonable alternative which, because the proposal was prompted by them, would also command the support of the company's two largest shareholders.

Living-dead battle draws to a close

It's game over for Resolution's Clive Cowdery, for the time being at least. But though he plainly would have preferred a different outcome to takeover by Hugh Osmond's Pearl, he can at least give himself a pat on the back for having done an excellent job for investors.

The shares have nearly doubled since he folded Resolution into Britannic Group two and a bit years ago, and by setting up counters to Mr Osmond – first in the form of Friends Provident and then Standard Life – he managed to force Pearl to pay more than it intended.

None the less, the whole saga is a revealing case study in the advantages of private equity over the listed sector. In the end, the declining value of Standard Life's equity was no match for Mr Osmond's cash. Standard Life's shares surged by more than a fifth yesterday on relief that it was out of the hunt.

Mr Osmond's financial backers, whoever they are, have demonstrated much greater fortitude, and will now reap the long- term rewards. Mr Cowdery must be wishing he had remained privately owned. As Mr Osmond is demonstrating, it's proving easier to bring about consolidation of the closed "zombie fund" life market from the fortress of private equity than the vagaries of the listed market.

In the end, Standard Life couldn't persuade its investors of the merits of the deal, and certainly not the higher price it would have had to offer to win the day. Instead, Standard found itself caught in the old trap of the more equity it offered, the further its share price would fall, thus further undermining the value of the bid.

But though Mr Cowdery has won a reasonable deal for his shareholders, is it really such a great deal for policyholders? It might be argued that "with-profits" life policies are now such a rotten investment all round that it doesn't much matter who ends up managing them. Either way, the charges seem to keep rising and the investment returns falling.

This isn't particularly the fault of the "zombie-fund" champions such as Mr Osmond and Mr Cowdery. There may always have been a lot wrong with the "with- profits" investment model, but any merit it might once have had was stifled out of it by well-intentioned but misguided regulation, which forced funds to sell their equities into a declining market for solvency purposes. Most of these funds have as a consequence missed out on the bounce in equity markets which took place after 2003.

Pearl, Standard and Friends have found themselves fighting over what is in reality a miserable business which is despised and resented by its customers. As with a monopoly, policyholders have little option but to lump it because the penalty costs of early surrender are so high. Very little has been said about their interests in the unseemly scuffle for dead body parts.

j.warner@independent.co.uk

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