Jeremy Warner's Outlook: Ferrovial will have to do better than this if it is to walk away with assets of such importance

Starting low is never a bad strategy in any negotiation. But in this case, Ferrovial seems to have tied its hands by making the offer so close to final
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Grupo Ferrovial's 810p-a-share bid for BAA, the owner of Britain's most important airports, isn't quite so off the map as Macquarie's offer for the LSE, but it still looks a bit like history repeating itself. The Spanish construction and infrastructure operating company will have to do much better than this if it is even to get through the front door, let alone win the prize. The amount offered is well below the ruling stock market price, and miles away from the £9 a share-plus needed to tempt shareholders into selling.

Starting low is never a bad strategy in any negotiation; the idea behind such opening shots is to lower expectations. In stock market parlance, it's called a bear hug. But in this case, Ferrovial seems rather to have tied its hands by making the offer close to final. In their statement yesterday, Ferrovial and its partners said they would be prepared to offer more, but only "a small increment". What's more, any such increase is conditional on a limited due diligence, the unanimous recommendation of the BAA board, and the agreement of both the trustees and the pension regulator on any additional contributions to the pension scheme.

Ferrovial refuses to say precisely what it means by "a small increment", but most of us would define the term as meaning not very much - perhaps 20p or 30p a share, but certainly not as much as £1, let alone the rather higher figure required for a knockout blow.

Ferrovial's statement is not legally binding, but it would none the less be difficult for the consortium to come forward with a much higher offer without some damage to its reputation as a trustworthy party with which to do business. Let's talk, was the message from Ferrovial yesterday, but it's not hard to see why the BAA board would refuse. What's the point at this sort of a price?

Nor are there any details at this stage of how the offer is to be financed. There's no point in recommending a highly leveraged bid if leverage is going to be an issue for the economic regulator, the Civil Aviation Authority.

The statement makes all kinds of reassuring noises about sticking with planned investment in a second runway at Stansted and more terminal capacity at Heathrow. It also commits Ferrovial to keeping the airports together, rather than breaking them up to help finance the deal. Yet this is what companies say in such circumstances. You would hardly expect Ferrovial to say anything contrary given the national importance of these assets. Whether these commitments count for anything in practice is open to question.

The trouble with high levels of leverage in infrastructure is that the easiest way to pay off the debt is to freeze investment and let the consequent cash flow do the trick. Everyone makes lots of money, but 10 years down the line you find yourself with a dilapidated infrastructure in need of heavy new investment. That's when the financiers demand big price increases to pay for it. The CAA will be particularly interested in the deluge of complaints received about charges and quality of service at Sydney airport since it was acquired by Ferrovial and Macquarie four years ago.

Still, capital structure is not really a question for shareholders, but rather the regulator and the bidders. In cash bids, it's only the price that investors worry about. Yet even on this front there is reason to wonder about whether Ferrovial has the fire power necessary to succeed.

According to yesterday's statement, Ferrovial will hold more than 60 per cent of the consortium's equity, which is higher than normal for deals of this kind. That might suggest some difficulty in persuading partners to cough up the requisite finance. Just how much headroom do they have?

Whatever the answer, they are plainly not going to be throwing in the towel for a little while yet. There's even the possibility of a counter-bid from a Macquarie-led consortium, though investors would be unwise to bank on it. Yet the BAA board cannot afford to be complacent. Some kind of a capital return now seems inevitable, whether or not Ferrovial eventually comes up with a more acceptable price.

In the meantime, the offer has got off to an inauspicious start in being so much lower than everyone was expecting. As with Macquarie, we don't yet know what the game plan is. Then again, as with Macquarie, perhaps there simply isn't one.

The Body Shop: the loss of innocence

It comes to us all, I guess, but Dame Anita Roddick has finally sold out. And to L'Oréal too. Not that she would have had any choice in the matter. Today, she and her husband own just 18 per cent of the company, which is not enough to block L'Oréal's ambitions. Dame Anita could have kicked up rough and threatened to stay in as an obstreperous minority, I suppose, yet had such action proved a deal breaker, other shareholders would have gone mad.

The cash price of £652m is an excellent one for a business which until recently looked to be in steep decline. Granted, the company is as much a personal care business as a retailer, which commands a higher valuation, but even so, the multiple looks heroic when the synergies are likely to prove so slim. Had L'Oréal said it would convert all the outlets to its own format, and use this as a platform for selling L'Oréal products alongside those of The Body Shop, it would be easier to understand. Yet apparently this is not the plan. Instead, the business will be kept as a stand-alone entity.

Assuming L'Oréal is as good as its word, Dame Anita can therefore feel relatively comfortable with the idea that she has found a good home for her company with an enterprise keen to develop it further. In her eyes, L'Oréal is in any case not the evil empire many greens and animal rights campaigners might imagine.

Like most others in the cosmetics world, it gave up testing on animals years ago and is now to all intents and purposes almost as green as The Body Shop. That doesn't seem to have prevented the perceived need to further bolster its image with the acquisition of this pioneer in ethical retailing and reporting. It is hard to see why else L'Oréal is buying.

Dame Anita hasn't been directly involved in The Body Shop for some years, but there is none the less something of an innocence lost about this deal. The passion, dedication and idealism Dame Anita brought to the creation of The Body Shop - a drive which cared more about the business and what it stood for than the money it created - has been an inspiration to a whole generation of entrepreneurs and enthusiasts.

She was also a role model for the explosion of female entrepreneurs we see today. L'Oréal is an honourable and decent enough company, yet The Body Shop won't be the same once absorbed into an amorphous multinational. Dame Anita should be under no illusions on that front. The passion will go, and perhaps some of the social and environmental ethos too.

Legal & General: the rewards of focus

As a lesson in the rewards of sticking to your knitting, Legal & General takes some beating. While other London-based life assurers, more focused on overseas expansion than the UK, warn of tough conditions at home, L&G, which is almost wholly UK orientated, continues to forge ahead, with growing market share and equally vigorous profitability. Others look to further consolidation to keep the profits growing. L&G seems to be doing just fine by itself. There's no rocket science involved here; the formula is a good deal more simple - focus and commitment.

PS: Yesterday's comment on Corus contained an error. The £826m reported as the sale price for the group's aluminium interests should have been euros, not pounds. Apologies.

j.warner@independent.co.uk

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