Jeremy Warner's Outlook: Despite doubts on tax and spend, markets might welcome Brown's succession to Blair

Private equity tilts again at PizzaExpress; Little wonder at Woolies for Baugur
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The Independent Online

The way things are going, we won't have to wait as long as next May; Tony Blair will be gone before the party conference. Do the Prime Minister's death throes hold any significance for the financial markets? Mr Blair's most likely successor, Gordon Brown, has already been running the economy for the past nine years, so possibly not.

Presumably, things will just carry on much as before in that regard. Old Labour supporters who see in Mr Brown the possibility of a Labour leader out of the old school are just kidding themselves. Mr Brown is in most respects as much New Labour as Mr Blair. We are unlikely to see a more overtly socialist agenda.

Perhaps strangely, it is on the geopolitical scene that Mr Brown could have his greatest impact, not because of who he is, but because of who he is not. Financial markets have hugely underestimated the dangers of the present tinder box in the Middle East, where two of the region's most powerful nations, Israel and Iran, as well as the world's superpower, the US, appear hell bent on increasingly destructive courses. The Prime Minister's tendency to go along with all that President Bush demands of him has made Britain a part of the problem.

The potential for this already fraught situation to descend into something much worse is only too real. As long as the region's torment remains localised, it may not in itself matter too much. Unfortunately, the Middle East also happens to be the world's biggest single source of oil. The effect on confidence and other economic variables of a wider descent into chaos in the region could therefore be profound.

A change of political leader in the UK may be part of the catharsis necessary to begin the process of defusing a geopolitical mess quite as dangerous as anything we have seen since the Cold War, possibly more so in that the prospect of mutually assured destruction that ruled in the days of the Iron Curtain was arguably a force for stability and peace.

Tony Blair has become a key part of the mischief and a formidable barrier to forward movement. He's too locked into his own convictions any longer to be a credible force for change. He's also too beholden to the madness of George Bush.

By going along with the US administration in an attempt to ensure that this military and economic superpower isn't isolated in the world, he's only succeeded in becoming its prisoner. Mr Brown, by contrast, has none of this baggage, and can therefore begin the process of disengagement from a self-evidently disastrous Middle Eastern agenda.

Assuming Mr Bush doesn't nuke Iran or Syria before then, a change in US President in two and a bit years' time will further advance this process. For financial markets, then, Mr Brown's succession should be seen as mildly positive. He's not the wolf in sheep's clothing that some business leaders fear. But he could be a powerfully positive force for change in the Middle East.

Private equity tilts again at PizzaExpress

Gondola Holdings, the restaurant group which owns PizzaExpress, has already been through the private equity mill once. Now, just 10 months after the company was refloated on the stock market, the private equity bandwagon wants to return for a second bite at the cherry.

This may say more about private equity's increasingly desperate search for decent homes for its uninvested billions than the innate attractions of the company itself, yet there's no doubt that, under the guiding hand of Chris Heath, Gondola is turning out to be a great little company.

Having been through private equity once, the company is already quite highly geared; it is also highly cash generative and could therefore quite easily accommodate another recapitalisation.

According to recent data from the Office for National Statistics, Britons are now spending more of their food pound on eating out than at home. PizzaExpress and Gondola's other restaurant formats sit slap bang in the vanguard of such trends. These are the restaurants where people cut their teeth on the eating-out craze.

Cleverer still, they even manage to retain the passing trade of arguably more discerning consumers like me who have eaten in some of the fanciest restaurants in London. There's only so much foie gras you can take. The scope for geographic expansion is even greater than for further market penetration. The national footprint is a long way from complete.

To succeed, the private equity bidder must first persuade the previous generation of private equity owners to sell. TDR Capital and Capricorn have retained 48 per cent of the shares, and although they have already made a great deal of money out of Gondola, they may share the bidder's belief that there is still more to be made.

The mooted 415p a share is a big premium to the 320p the shares were floated at, yet if there is indeed scope for a further big securitisation at Gondola, the profit made by selling now would look like chicken feed against what's to come. How much debt can Gondola take? The controlling shareholders' assessment of this question will determine their decision.

Little wonder at Woolies for Baugur

Think of a retailing company which long ago was stripped of all its freeholds, leaving it only a leaseholder on escalating rents. Add in across-the-board price deflation, a market position squeezed between the might of the supermarkets on the one hand and the growth of online shopping on the other, and an entertainment division in structural decline because of music and film downloads.

Then, for good measure, throw in the shift in shopping habits from high street, where all the company's stores are located, to out of town. Surely such a company couldn't any longer exist; it would have gone bust long ago? In fact, it is alive, if not entirely well, and it is called Woolworths. Yesterday it was reported that the Icelandic retail invaders, Baugur, frustrated as a major shareholder with lack of progress, want to bid and break up the company.

This is hardly an original idea. The patent expired on it ages ago, since when all and sundry have thought similar thoughts. The last people to have a serious go at it, the private equity house Apax, retired hurt after just three weeks of due diligence. Their mooted offer of 55p a share looks like a king's ransom by today's standards. Even at the time, it looked pretty good, which is why 70 per cent of the share register sold in the market while the price reflected prospects of a bid. In truth, Apax never had much intention of paying it, and one look at the books made it certain they wouldn't.

With 800 stores and a turnover of £2.6bn, surely someone can do better with Woolworths than the present lot? Trouble is, whenever they get inside, they realise they can't. I doubt Baugur, which by the way was sheepishly denying large parts of the story yesterday, can either.

Flog off half the stores? Fine, but Baugur wouldn't get any money for them because they are all leaseholds, and in so doing the rump might well become unviable because of the loss of critical mass and buying power. Sell off the wholesale CD and DVD business? Again fine, but it wouldn't be worth much stripped of its Woolworths contract, which accounts for about 35 per cent of revenues. If half the stores are to be turned into food halls, that contract wouldn't be worth much either.

Trevor Bish-Jones, the Woolworths chief executive, seems becalmed with a hopeless strategy of laborious store refurbishment. But an alternative that stands some chance of working has yet to be articulated. If Baugur thinks it knows of one, it should go ahead and bid. Shareholders would be only too happy to take the Icelanders' money.

j.warner@independent.co.uk

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