Jeremy Warner's Outlook: In the battle between CSN and Tata for Corus, the biggest loser may end up being the victor

John Lewis bucks the retailing trend; Harry Potter loses his magic
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It seems scarcely possible - even today, with so much hype around the supposed super cycle in commodity prices generated by Asian and Latin American economic development - that the remnants of dear old British Steel (Corus as now is) could find itself the subject of a rapid-fire bidding war. Yet here we have a couple of the emerging titans of the developing world in an apparently to-the-death battle for this once gloriously loss-making business.

Tata Steel seemed genuinely to believe it had blown the Brazilians, Companhia Siderurgica Nacional (CSN), out of the water when it came back with a 500p-a-share offer late on Sunday night. There was delight in the Indian camp at the shock this must have caused to CSN, just as it was putting the finishing touches to a bid worth just 475p. Yet unfazed, the Brazilians immediately came back with 515p. To judge by the finance put in place, CSN's chief executive, Benjamin Steinbruch, has the firepower to go higher still if he needs to.

Has Tata got what it takes to stay in the auction? The hedge funds plainly believe it will, with the shares rising another 5.5 per cent yesterday to 526p.

I admit to having been largely wrong about this bid situation so far. I was sceptical about the prospects of a counterbid, if only because the Corus board had asked Mr Steinbruch whether he wanted to talk turkey only months before agreeing takeover terms from Tata. He said he didn't. I was also sceptical about the chances of the bidding going much above the 475p a share the Brazilians then tabled. There's surely only so much debt leverage the poor old nag can carry?

Yet grudgingly I have to admit to the superior judgement of the hedge funds, who seemed to understand better than me the principle that however indifferent to the wares a suitor might be, they become the height of desirability the moment any rival in the race to go global shows interest.

While this is brilliant news for the shareholders, it cannot be anything other than extremely damaging to virtually all other classes of stakeholder. We are witnessing a clash of ambitions and egos almost certain to end with one party or the other seriously overpaying. While credit is cheap and abundant, and markets all puffed up by the idea that Asian development has succeeded in abolishing the business cycle for good, nobody bothers to think about the safety of the debt structures used to finance such offers. Both bids involve heavy leverage highly likely to sink this business come the next downturn.

The Corus board has spent many months exploring the merits of a merger with Tata, a business dynasty with an excellent record of value creation and a strong commitment to corporate social responsibility. Much of the profits of the Tata empire go to good causes. The Indians would have made reliable and decent custodians of the Corus business. Yet the company has strict return-on-capital criteria for its operations which it will struggle to meet with Corus if it goes any higher.

Nor does it have the advantage of the $450m of extra cash flow CSN can gift to Corus through the supply of cheap iron ore from its own mines. On one level, this is a bit of a mirage, since by giving Corus this benefit CSN only deprives itself of the higher prices it could have secured if it had sold the stuff on the open market. The Corus bonus is just transfer pricing. However, it does help to underpin the British debt raised against Corus to make the CSN bid.

As I say, I've been wrong about this takeover battle all along, so it wouldn't entirely surprise me to see Tata bid higher still. Yet the idea of a winner's curse has rarely seemed more apt.

John Lewis bucks the retailing trend

Not everyone is having a torrid time on the high street this Christmas. They were serving free muffins at tea-time at the head office of the John Lewis Partnership yesterday in recognition of another record week in which the department stores bit of the company (that's excluding Waitrose) clocked up £91m of sales.

How do they do it? It certainly has nothing to do with the sort of "viral marketing" much in vogue among other retailers this Yuletide (see page 37) as they struggle to attract custom. There's been no discounting at John Lewis, the chairman, Sir Stuart Hampson, points out. Rather, it is in the virtues of good, old-fashioned retailing - knowing your customer and offering him, or more usually her in the case of John Lewis, outstanding value and service.

John Lewis has also been investing heavily in product availability, so as better to deliver instant gratification to its customers. Many sales fail once the customer realises he might have to wait for weeks to have the product delivered. Product availability has been a powerful driver in converting footfall into sales.

Demographics have also worked strongly in the company's favour. John Lewis is unashamedly a retail format for the aspiring middle classes. Unlike many retailers, it also appeals to the elderly, many of whom, unlike their younger counterparts, have the time as well as the money for shopping. What's more, few of these older shoppers are debt-constrained.

Yet there is perhaps a bigger reason why John Lewis is getting it right while others seem to be floundering. One of the company's founding principles is that it should be labour that is employing capital, not capital that employs labour. The partnership structure underpins this philosophy, so that all employees feel that they are in some way owners of the business.

It is surely no accident that the retailers doing well in a stagnant market are those that have invested heavily in their future. At a time when the trend in retailing has been the sale and leaseback of freehold properties so as to release capital for equity and debt holders, John Lewis has the luxury of a portfolio still largely made up of wholly-owned properties. That in turn lowers the cost base and makes the retailer immune to punishing rent reviews.

The same goes for the debt leverage that private equity has injected into some of our best-known retailers. Debenhams repaid its private-equity backers several times over before being refloated on the stock market. The repeated gearing up with debt that this process involves cannot be done without adverse consequences for investment and future sales. The last trading update showed that Debenhams was struggling. Philip Green's Bhs and Arcadia are also shivering in the winter winds, having been similarly fleeced of their capital.

Of course, it is just when commentators like me start to write that a retailer can do no wrong that it tends to fall precipitously from grace. Success breeds complacency, and that's when things go awry. There's a downside to John Lewis's structure of ownership, alongside the benefits. Ill-disciplined use of capital can be just as problematic in business as too little of it.

Yet John Lewis has no intention of converting or floating on the stock exchange. It would no longer be John Lewis if it did. Can you imagine a quoted or private- equity owned company keeping a haberdasheries department in all its stores? In an age of disposable clothing, it would be quite unthinkable, as would John Lewis without one.

Harry Potter loses his magic

Bloomsbury Publishing was presumably hoping to don its special Harry Potter cloak of invisibility when it chose to delay a calamitous profits warning until 6 o'clock last night, well after the markets had closed. Why not go the whole hog and announce on Christmas Eve, the traditional slot for really bad corporate news?

With a bit of luck, profits have merely been delayed, rather than forgone altogether, but the signs don't look good. Book sales have apparently been dire so far this Christmas. Either way, the chairman, Nigel Newton, has quite a bit of explaining to do. A shortfall of as much as 75 per cent surely cannot be entirely explained away by that weighty tome which Bloomsbury manfully agreed to publish - the unabridged speeches of Gordon Brown. Or can it?

j.warner@independent.co.uk

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