Jeremy Warner's Outlook: Challenges a-plenty as Chancellor hits record

WH Smith/pensions; Green's virtual bid
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The Independent Online

By the time Gordon Brown stands up to deliver his annual Mansion House speech tomorrow night, he will already have clocked the record as the longest serving British chancellor in more than 180 years, having finally superseded Lloyd George's seven-year span in the early 20th century. For any government minister to stay upright on the ice-rink for so long certainly takes a large element of luck, but it can only really happen if he doesn't screw up, and that's down to more than just luck.

As we know from bitter experience of the post-war years, and the disastrous performance of many British chancellors, the British economy is in fact the easiest thing in the world to mess up on. Yet the Chancellor's achievements go further still. Unlike any other G7 economy, including the United States, Britain hasn't experienced a single quarter of falling output for more than 10 years now.

The record speaks for itself. Indeed, it is the only indisputably successful part of this Government's seven-year rule, without which Labour would be looking at an even worse drubbing at the ballot box than it is already getting. That in itself is a huge irony, as it is the economy that has been the undoing of nearly all past Labour governments. This time it's the marshal spirit of Britain's military tradition which is proving Labour's nemesis.

Yet there are clouds on the horizon, and unless Mr Brown can soon engineer a switch of position to No 10, he may find himself a victim of his own joke about chancellors falling into two categories - those who fail and those who get out in time. I'm not sure the cocktail of economic challenges the Chancellor faces today is significantly more dangerous than it ever was, but it is certainly of different nature, and surviving it without a nasty hangover will require all the Chancellor's legendary luck.

The British economy has been protected from recession by high government and consumer spending, which in turn has been made possible by exceptionally low interest rates. In the face of a global downturn, this was exactly the right policy response, but there now comes the more difficult task of managing the consequences. Higher interest rates is one of them and, as the Governor of the Bank of England suggested in a speech last night, another might be falling house prices. This in turn would make the problem of excessive Government borrowing that much worse, possibly resulting in a downward spiral of higher taxes and falling consumption.

To me, this still doesn't look the most likely outcome. The Chancellor's boast that he's created the mechanisms for long-term stability is, I think, largely justified. Yet after seven years at the Treasury, the Chancellor has rarely been on thinner ice.

WH Smith/pensions

The chances of a bid from the private equity house Permira for WH Smith at the originally indicated level of 375p a share seem to be fast receding. Permira is about half way through the due diligence on which the offer is dependent, but although it remains hopeful of eventually being able to table a bid, allegedly unforeseen problems are cropping up all over the place. The latest of these is a £215m pension fund deficit, which could plainly affect the amount Permira is willing to pay by quite a bit.

If trustees proceed with their threat to block the deal unless Permira fully funds the deficit, it would substantially affect the economics of the transaction. In such circumstances, it is doubtful Permira would want to proceed. Yet there are plenty of ways to skin a cat, and it might satisfy trustees if the pension fund were merely moved to the top of the pecking order of creditors in any insolvency. Whether that would be acceptable to Permira's bankers is another matter.

What does seem clear is that if Permira proceeds at all, it will use the pension fund issue as another excuse for chiselling down the price. This is pretty much par for the course at this stage of a private equity bid where, having secured a foot in the door by offering an apparently generous price, the offer is then steadily reduced to the level the bidder intended to offer all along.

Pension fund deficits have long been a nuisance for private equity bids. The WH Smith case has served to highlight the nature of the problem. Nearly all private equity bids involve very high levels of debt gearing, which greatly increases the risks of insolvency. The Government's new Pensions Bill contains measures to address these risks, including a compensation fund to protectworkers' pension rights in insolvent companies, but it will be some years before key aspects of the Bill are fully up and running.

In the meantime, pension fund members would seem to have very little to gain inprivate equity takeovers of their companies. To the contrary, they may be doubly hit with an increased risk of insolvency and with the private equity house less likely to fund any deficit because of heavy debt servicing costs.

The private equity lobby has screamed blue murder over provisions of the Pensions Bill that would make private equity houses together with their investors and directors liable for pension deficits in companies that become insolvent under their watch. For the venture capital industry, this is plainly extremely bad news, but if you are sitting there as a member of the WH Smith pension fund, you can kind of see the point of what the Government is trying to do.

The downside is that it will make private equity less keen to take on troubled companies with big pension fund deficits and might therefore end up doing more harm than good. Yet the reality is that companies of this sort tend not to be very appealing to private equity anyway. On balance pension fund members are more likely to find themselves disadvantaged by private equity takeovers than helped by them.

It is therefore entirely reasonable that legislators and pension fund trustees should attempt to raise the bar so as to ensure that the rights of pension fund members are fully protected. Private equity is focused on serving the interests of only one set of stakeholders - bankers and investors. All too often, other stakeholders go by the board.

Trustees of the Marks & Spencer pension fund must be alive to these issues in considering any bid Philip Green eventually makes for their company, for one thing is certain: their interests will rank a long way down Mr Green's list of priorities. Clauses in the Pensions Bill that ensure pension fund liabilities are not dumped in any corporate restructuring on the new compensation scheme are likely to prove a significant barrier to future private equity transactions, but that may be no bad thing. Much private equity activity is just asset stripping in modern form. For some reason, the new alchemy already enjoys huge tax advantages. It is only right that there should be obligations to match.

Green's virtual bid

Is Philip Green about to raise his bid for Marks & Spencer? Has he ruled out £4 a share? Or is he about to throw in the towel? There was a bewildering array of answers to these and other questions pertaining to the M&S bid in the weekend's press. Only the bidding war for The Daily Telegraph scores better for the shifting sands of misinformation.

Mr Green cannot be held accountable for much of this noise, which is largely just speculation from a story-poor press desperate for whatever crumbs fall from Mr Green's table. But one story sticks out like a sore thumb. This is the one that quoted "friends of Mr Green" as saying that if he comes back with a higher bid at all, it won't be at £4 a share, the minimum institutions say they want.

"Friends of" is a press aphorism for "from the horse's mouth". It is the expression journalists use when they want to quote someone directly who is talking off the record or unattributably. Whether it was Mr Green himself, or one of his sidekicks is irrelevant. The "virtual" nature of Mr Green's bid - so far he's tabled only a heavily qualified indicative offer - allows the share price to be manipulated all over the shop. There's no way of telling what's truth and what isn't. So has Mr Green ruled out a bid at £4 or above? Well no, of course he hasn't, but it may take another ruling by the Takeover Panel to get him to admit it.

jeremy.warner@independent.co.uk

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