Jeremy Warner's Outlook: Egg scrambled by the French connection

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The Independent Online

To the astonishment of his critics, Paul Gratton, chief executive of Egg, has so far managed to survive the company's disastrous foray into France with no more than egg on his face. That's mainly because Egg has continued to thrive here in the UK, despite the drubbing it's received on the other side of La Manche. None the less, France has been a shockingly costly mistake for Egg worthy of the very worst of the dot.com bust ­ £230m, to be precise ­ and though Mr Gratton was continuing to insist yesterday that with the right level of investment, eventually it could have been made to work, hardly anyone agreed with him. Prudential, which owns 79 per cent of the stock, has been trying to sell the company for more than nine months now, but no one was prepared to buy it while the French oeuf remained uncooked.

To the astonishment of his critics, Paul Gratton, chief executive of Egg, has so far managed to survive the company's disastrous foray into France with no more than egg on his face. That's mainly because Egg has continued to thrive here in the UK, despite the drubbing it's received on the other side of La Manche. None the less, France has been a shockingly costly mistake for Egg worthy of the very worst of the dot.com bust ­ £230m, to be precise ­ and though Mr Gratton was continuing to insist yesterday that with the right level of investment, eventually it could have been made to work, hardly anyone agreed with him. Prudential, which owns 79 per cent of the stock, has been trying to sell the company for more than nine months now, but no one was prepared to buy it while the French oeuf remained uncooked.

Again, Mr Gratton is keen that his Parisian misadventure should not be seen as a showcase in the perils of investing in France, but it is, to be frank, hard to see it in any other light. It was all our fault, says Mr Gratton, who may be right to insist that he misjudged the market, but is surely too harsh on himself in thinking that " dirigiste" France was not just a tiny bit to blame as well.

Egg was right to identify France as an under-developed market in consumer credit where, by offering value for money, a new entrant could potentially make quite an impact. Where it got things wrong was in underestimating the response of the indigenous banks, with their powerful grip on the national payments system. They were absolutely determined to prevent the foreign interloper from gaining any kind of a toe hold, and cut their previously extortionate prices to levels that ensured it didn't. Needless to say, Egg's protestations of predatory pricing fell on deaf ears.

Having spent more than £100m trying to get in, Egg is being forced to provide something similar against the costs of getting out, which because of French employment protections, is a hugely more expensive exercise than it would be here in the UK. All in all, Egg has ended up as an extraordinarily powerful advertisement against inward investing into France. The French banking establishment closed ranks to ensure that Egg was strangled at birth while the authorities stood by and watched. For the jobs that Mr Gratton's brave endeavour did manage to create, he's now being forced to pay a terrible price in terms of redundancy and consultation costs.

No wonder French unemployment remains so difficult to shift from its long-term rate of close to 10 per cent. Looking at what's happened to Egg, no foreign company in its right mind would invest in France, where public policy seems to be stuck in a bygone age of protectionism for both labour and capital. Mr Gratton is obviously a bit of a Francophile, but he should be careful not to let his love of the country get in the way of his judgement. France's aversion to foreign competition has just cost his shareholders £230m. The tragedy of it all is that the French Government still doesn't seem to realise the damage this inward looking approach is doing to its own people.

Uncharted waters

The bid battle for Marks & Spencer grows ever more surreal. As shareholders meet today for what promises to be a rumbustious annual meeting, we are, in all kinds of respects, in uncharted waters. From where I sit, those waters look deep and murky indeed. For a start, there is as yet no real bid at all, though the battle is being fought as if there is one. Instead, the battleground is over Philip Green's rights or otherwise to put a bid to shareholders, yet nobody knows for sure whether he's capable of it. His bid vehicle, Revival Acquisitions, is as things stand no more than a shell. As far as I know, it doesn't even yet have a nameplate, and though we know broadly what its structure might be in the event of a real bid, we don't know where the equity will be held ­ onshore or offshore ­ or where the money to subscribe the equity is coming from.

Our lack of knowledge about the bidder is matched only by the dearth of information about who owns M&S. It is plainly changing by the day, but because much of the short-term trading is taking place through contracts for differences (CFDs) or other derivative instruments, usual disclosure rules have gone by the board. This is not unique to M&S. The average length of stay on the share register of big publicly quoted companies nowadays is less than six months. Traditional long investing in public companies, now quite widely thought of as a mug's game, has given way to a growing wave of short-term trading, often using CFDs, which avoid stamp duty as well as carrying the benefit of anonymity.

A CFD gives the buyer the right to the upside in a share price held by someone else, generally a market maker or proprietary trading desk. It also makes the holder liable to the downside, or if he's short, gives him the benefit of the downside. Because there's no stamp duty, it greatly reduces the costs of rapid fire trading. The CFD also allows the buyer to circumnavigate usual disclosure rules. In a bid situation, the rules require a holder of more than 1 per cent of the shares to disclose any changes in their position. Not so if the economic interest in the shares is held through a CFD. With M&S, there are in all likelihood quite a few positions of more than 1 per cent in the stock which are not reported because they are held through CFDs.

Some time ago, the City Takeover Panel attempted to move with the times by having CFDs included in the disclosure rules, but in another instance of the Financial Services Authority loading up the City with unnecessary and irrelevant bureaucracy while failing to do anything about the things that really matter, the proposals were left by the wayside. The result is an accident waiting to happen.

In M&S there already exists a cabal of short-term traders perfectly capable of swinging the bid. Yesterday Mr Green was able to announce that 8.3 per cent of M&S's share capital held through derivative contracts had swung behind his demands for rights of access to M&S's books. Together with Brandes and others, Mr Green now has the support of more than 27 per cent of the equity. It continues to look unlikely that the speculators will eventually succeed in buying their way to victory.

In recent days there has been evidence of a collective loss of nerve. If Mr Green is eventually forced to withdraw his tanks, the hedge fund overhang is such that in the short term the share price will fall back steeply. So the gamble is a big one. As the hedge funds stop to think about whether it's worth taking, the flood of trading in M&S shares, so noticeable throughout last week, has slowed to a trickle.

As we went to press last night, Philip Green was perilously close to throwing in the towel, dispirited by the possibility that the M&S board would never recommend his offer however much support he gained.

However, the game is not yet entirely over for Mr Green. He's badly boxed himself in by making his offer conditional on a recommendation, yet there's a way out of the cul de sac he's driven down. He could drop his demand for a due diligence, which he's all but admitted he doesn't need, and commit to his mooted bid of £4 a share. The condition that the bid be recommended would be less easy to wriggle out of without a fight with the Takeover Panel, but that doesn't necessarily matter. If Mr Green can persuade more than 50 per cent of the equity to support him, the board would have no option but to agree. The only alternative would be to convene an EGM to oust the board, which would be messy and difficult to achieve in the time available.

Yesterday, the first big long fund, Standard Life, declared in favour of the M&S board's decision to spurn Mr Green. Standard holds the old-fashioned view that bidders be required to pay a premium for control over and above fair value to deserve consideration. Yet this counts for nothing if the short-term traders manage to hold sway. All they want to see is a premium over the traded price, which Mr Green's £4 per share plainly is. Some of them might already have sniffed the prospect of a share of the sub-underwriting in Mr Green's stub equity. Underwriting a bidder for a company in which the underwriter is a shareholder is to my mind a questionable practice, but it is apparently allowed by the Takeover Panel under certain conditions.

As I say, we are in uncharted waters.

jeremy.warner@independent.co.uk

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