Jeremy Warner's Outlook: Del Pino embarks on the charm offensive, but he's got his work cut out in bidding for BAA

Protectionism: not such an odd response; Dresdner Kleinwort: a question of names
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The Independent Online

We can only assume from the charm offensive being mounted by Rafael del Pino, chairman of Grupo Ferrovial, with the British financial Press that not only is he serious about bidding for BAA, but that he may also be about to pull the trigger.

That, at least, is the buzz in Madrid, where the newspapers are awash with speculation of an imminent strike. Yet while Mr del Pino is certainly preparing the ground, I'm a little bit sceptical about the immediacy of any action.

Since Ferrovial first declared its hand three weeks ago, there's been no contact whatsoever between the two sides. If Mr del Pino had already fully financed his bid, he would presumably have by now attempted to open negotiations with the BAA board. This he has not done.

Of course, there is nothing to stop Ferrovial launching a hostile bid, but this is not Mr del Pino's style. He's never done anything of the kind before and, with an asset as sensitive as BAA, owner of Britain's most important airports, he'll surely be doubly keen to secure the board's agreement first.

What's more, his two known partners in the venture, the Singapore government and Caisse de Depot et Placement du Quebec, would be most unwilling to do anything hostile. They may even be barred by their statutes from doing so.

Even so, the possibility shouldn't altogether be discounted. There's a belligerent atmosphere already creeping into proceedings after what Ferrovial thinks of as a breach of the understanding the two companies reached when Ferrovial first announced its interest that neither side would seek to brief against the other. If the two sides haven't even met and yet relations are already fractious, it doesn't hold out much hope for an agreed deal.

So even if Mr del Pino feels uncomfortable about it, he may have to go hostile to play at all. E.ON's bid for Endesa demonstrates that the old order, where foreigners didn't bid for what politicians thought of as strategically important national assets unless invited to do so, is fast breaking down. Mr del Pino would obviously prefer to win board approval, but if the price is acceptable to shareholders, it doesn't necessarily matter.

Can he muster sufficient ammunition? Again I'm a little bit sceptical about reports that Macquarie, the Australian investment bank which recently failed in a hostile bid for the London Stock Exchange, is now firmly aboard the Ferrovial consortium. The two are partners in a number of infrastructure projects, including the Sydney, Bristol and Belfast airports, yet relations are not as good as they were. There was a serious falling out over the toll roads company Cintra, a joint venture between the two which was split asunder after Ferrovial found Macquarie bidding against it for a number of business opportunities.

Would Mr del Pino risk Macquarie's involvement after the controversy stirred by its hostile bid for the LSE. Rightly or wrongly, Macquarie emerged from that entanglement with its name blackened as a buccaneering asset stripper too mean even to pay the going rate. It's going to be difficult enough taking a tilt at BAA. To have the reputationally damaged Macquarie aboard the endeavour might make it tougher still.

Typically, Ferrovial finances its infrastructure deals with 80 per cent debt and 20 per cent equity. If the same formula were applied to BAA, given investment commitments which will already leave debt at more than 100 per cent of equity, the debt-to-equity ratio would rise to approximately eight times. Even if the banks could be persuaded to finance such leverage, I cannot see the Civil Aviation Authority, the economic regulator, allowing it.

Another possibility is that BAA could be broken up to help defray the costs. Abertis Infraestructuras, a rival Spanish infrastructure company, has this week expressed some interest in participating in such a break-up. Yet this also may encounter opposition from policymakers.

There is a momentum behind the further development of Heathrow and Stansted that nobody in government wants to see derailed. Only the low-cost airlines are wholeheartedly behind the idea of a break-up, but this is because they have tenancy rights at Stansted which would be undermined by the costly development of a second runway. Never mind that it was the cross subsidisation of the first runway from revenues at Heathrow that helped them get off the ground in the first place; their vested interest is now in a cessation of further investment.

Even ignoring these public interest issues, there is also the question of value. If Ferrovial and its partners can make the numbers work at, say, £9 a share, then unless the financing is essentially unsound, the company's fair value must be higher.

We are still at that stage of the cycle where investors value stable sources of cash flow above investment in growth. Almost uniquely, BAA combines both these characteristics, which is what makes it so attractive to the foreign pension fund money that will be backing Ferrovial's bid - an exceptionally long-term source of reliable cash flow in combination with excellent growth prospects.

The reasons are too sad and long-winded to rehearse, but our own pension funds have yet to relearn that the best way to secure long-term sources of income is to invest in the future, not to lend to the Government to finance current expenditure. Yet the climate is changing, as refusal to accept Macquarie's low-ball bid for the London Stock Exchange demonstrates. Mr del Pino is a charming and determined chap, but he faces an uphill struggle.

Protectionism: not such an odd response

In all the uproar over the apparent outbreak of protectionism prompted by merger mania among European utilities, it's important not to lose sight of the big picture. Of course it is wrong for governments to be erecting barriers around their industrial assets, or trying to broker domestic mergers to create monopolistic national champions.

Yet it is also an entirely understandable and predictable reaction to this particular phase of the single market's development. Since the failure of the European constitution last year, there has been a disturbing reassertion of nationalistic principles which runs quite counter to the efficient operation of the euro and the single market. If there is no freedom of movement for capital, there's no point in having a single currency.

On the other hand, if you think about where Europe has come from in the past 20 years, this latest row is really of no long-term significance at all. Fifteen years ago it was barely possible to buy a share as a foreigner in these companies, let alone contemplate a hostile takeover. It was only as recently as six years ago that the first hostile foreign takeover bid on German soil took place - Vodafone's bid for Mannesmann - and although it has long been possible to buy British energy assets, it has not in practice been feasible on the Continent.

So when companies start trying to do it, it is bound to create friction. What makes this friction more understandable still is the lack of anything remotely close to a level playing field. It may be possible for a German utility to buy a Spanish one, but owing to the size of the players and the structure of the national markets, it is not possible the other way round. The righteous indignation being expressed over attempts to block these cross-border transactions is quite sickening in its hypocrisy.

The bottom line is this is just a storm in a teacup, a minor, but necessary bump in the road towards fully fledged European integration.

Dresdner Kleinwort: a question of names

A reader e-mails to point out that the other day in Outlook, I wrongly referred to Dresdner Kleinwort Wasserstein as Dresdner Kleinwort Benson, a name the investment bank hasn't used for some years now. Apologies for the mistake, yet it does make you wonder about the constantly shifting landscape of City names. At least half of the name now refers to a German commercial bank which seems to have done its level best to destroy this once famous City house, and a buccaneering American financier who these days works for Lazard Brothers. Why not just revert to the original Kleinwort Benson? It's so much easier to remember.