Jeremy Warner's Outlook: Gent gambles on JP Garnier's GSK therapy

Pennon/Shanks; British Airways
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If Sir Christopher Gent, the rumoured chairman in waiting at GlaxoSmithKline, had managed to sneak along to yesterday's annual general meeting, he would not have liked what he saw. Sir Christopher Hogg, the present incumbent, managed to avoid the humiliation of last year, when the company's remuneration report was rejected by shareholders, but there was the usual public drubbing, and investors seemed scarcely any less vocal in their dissatisfaction with the board than they were a year ago.

If Sir Christopher Gent, the rumoured chairman in waiting at GlaxoSmithKline, had managed to sneak along to yesterday's annual general meeting, he would not have liked what he saw. Sir Christopher Hogg, the present incumbent, managed to avoid the humiliation of last year, when the company's remuneration report was rejected by shareholders, but there was the usual public drubbing, and investors seemed scarcely any less vocal in their dissatisfaction with the board than they were a year ago.

According to the City Ouija board, Sir Christopher Gent has ruled himself out of the running for the chairmanship of Marks & Spencer so as to be able to take up a directorship at GlaxoSmithKline, a position that would transform itself into the chairmanship once the other Sir Christopher gives up the post in a year's time. There was still no comment on that yesterday, which suggests a hitch in the negotiation.

I'm sure they'll get there in the end, but the choice between Marks & Spencer and GlaxoSmithKline may not be as much of a no brainer as it seems. The challenges at M&S are daunting, yet there is terrific uncertainty surrounding the future of GSK as well.

For M&S's difficulty in reviving its brand read GSK's constipation in generating new products to fill a fast maturing portfolio of older medicines. For the problem of price deflation on the high street read the challenge of defending a profit margin for prescribed medicines which is under attack from politicians and medicare plans across the world. Executive pay is the least of GSK's problems and Sir Christopher's undisputed talents as a grower of businesses and a deal maker are not obviously the best treatment for them.

Pressure is building in the City for the appointment of a talented retailer as chairman of M&S. On the same logic, there should be a chemist, or at least an experienced Big Pharma boss, at the top of GSK. Sir Christopher has a wealth of international experience, but in some respects his talents in selling mobile telephony to the world might seem more suited to retailing than prescription drugs.

Still, the gamble that Sir Christopher is taking is that by the time he becomes chairman the worst will be over. Jean-Pierre Garnier, the chief executive, thinks of 2004 as a trough, or gap year for GSK. It's still too soon for the next generation of products to be contributing, but with the bulk of the old portfolio now off patent, the existing revenue and profit is subject to steady erosion from generics.

So how successful is the next generation likely to be? No one really knows. Over the last year, there appears to have been a quite substantial improvement in the productivity of Research and Development, which collapsed in the immediate aftermath of the merger of Glaxo Wellcome and SmithKline Beecham, with a much bigger pipeline of relatively promising compounds reaching phase II trials. Mr Garnier would attribute this, in part, to the decision to create properly incentivised "centres of excellence" in R&D, concentrated on specific therapeutic areas.

The capital markets remain sceptical. GSK shares trade on a big discount to the average for the pharmaceuticals sector, and there is a suspicion that the larger number of compounds reaching phase II and III trials may be more a case of a higher number being put forward for tests than any underlying improvement in GSK's science base, and frankly, even if you happen to be a biochemist, your opinion is unlikely to be any more informed than anyone else's.

There is no reliable way of judging the efficacy or safety of many of these products until they are tested on human beings. Worryingly, the number of new drugs falling at the last hurdle seems to be rising. The City is pretty much split down the middle in its view. JP will stand or fall on his success rate over the next few years. If he's got it right, then Sir Christopher Gent's chairmanship will be an easy and rewarding one. If he's got it wrong, then even M&S may seem like a walk in the park by comparison.

Pennon/Shanks

Guy Hands, one time enfant terrible of private equity, has been quiet almost to the point of invisibility since parting company with Nomura nearly three years ago. There was an unwanted appearance in the headlines last summer after he managed to persuade Robin Saunders of WestLB to overpay for the TV rentals company Box Clever. She eventually lost her job over the affair, and the two have barely spoken since. But in other respects, the man whose name was once linked with just about every mooted deal in town, many of them if the truth be known more in the realms of fantasy than reality, seemed to have moved into semi-retirement.

Now he's back where he likes to be, with his own private equity partnership, Terra Firma Capital Partners. This failed to raise the €3bn of funding Terra Firma had been looking for, but with nearly €2bn to spend, Mr Hands is very definitely a player once more. Mr Hands is returning to familiar ground - water companies - with his proposed £1bn bid for Pennon, owner of South West Water.

Some years ago he fought a long and eventually unsuccessful battle for Kelda, owner of Welsh Water. Mr Hands is also using some familiar tactics. Having had his proposal rejected out of hand by the Pennon board, the story was placed in the weekend press, soliciting a statement from Pennon confirming that an approach had been made first thing yesterday morning. The Pennon board can no longer afford entirely to ignore Mr Hands' advances.

At this stage, it is not altogether clear what Mr Hands is after, for Terra Firma also wants to buy the same landfill assets Pennon is in advanced talks to acquire from Shanks Group. Terra Firma already owns Britain's largest landfill company, Waste Recycling Group, and Pennon owns one of the other leaders in the field, Viridor. Hard to believe but seemingly true, a two way tussle has broken out for the heart and soul of Britain's rubbish dumps. By general agreement, it might be possible to combine two of these businesses, but competition constraints would almost certainly preclude the combination of all three without very significant regional divestments.

By making approaches for both Pennon and the Shanks landfill assets, Mr Hands is hedging his bets. The bigger gamble is obviously Pennon, for it includes a sizeable water company. Furthermore, the water industry is in the middle of one of its periodic reviews of water pricing. The company's value depends crucially on the water regulator's eventual determination of what it can charge, how much it is allowed to spend, what rate of return it is allowed to make on its investment, and what efficiency gains are assumed in arriving at that rate of return.

All three participants have everything to play for. Yet private equity is no longer the licence to print money it once was. Much of the low hanging fruit has already been plucked. Exit strategies are also proving more difficult to engineer and execute. Mr Hands has got his name back in the headlines, but the pickings may not be as easy as when he was last on the prowl.

British Airways

Rod Eddington has done a great job in turning around the fortunes of British Airways, which after yesterday's figures could almost be described as back in rude health. And all without having to tap the markets for new equity. But this wouldn't be the airline industry if it were all carefree flying and regrettably BA cannot yet be described as free of turbulence. Soaring fuel costs and vicious competition on short hall routes promise new storms ahead for the BA chief executive. The rising cost of oil alone will add £150m to the airline's fuel bill, of which only a half will be clawed back through the new surcharge, even assuming BA can make it stick. Mr Eddington has no option but to keep digging away at costs, all the while knowing that if he hits a raw nerve, they'll all be out, causing untold reputational damage and loss of fares revenue. Mr Eddington is Australian, so he's used to long-haul flights, but he would never have of one as long as this.

jeremy.warner@independent.co.uk

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