Jeremy Warner's Outlook: King edges ahead in race of the legacy retailers but there's harder going to come

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The Independent Online

Few would have thought it, even as little as six months ago, but against the odds, Justin King, the chief executive of J Sainsbury, seems to be edging ahead in the three-horse race to revive the fortunes of Britain's biggest legacy retailers. Admittedly, we are not yet far enough into the course to have any idea what the outcome might be, but under starter's orders, Mr King was no more than a rank outsider against the apparently superior form of Stuart Rose at Marks & Spencer and Richard Baker at Boots.

Few would have thought it, even as little as six months ago, but against the odds, Justin King, the chief executive of J Sainsbury, seems to be edging ahead in the three-horse race to revive the fortunes of Britain's biggest legacy retailers. Admittedly, we are not yet far enough into the course to have any idea what the outcome might be, but under starter's orders, Mr King was no more than a rank outsider against the apparently superior form of Stuart Rose at Marks & Spencer and Richard Baker at Boots.

To see him ahead of the pack on such an unpromising nag is truly a wonder to behold. Mr Baker started well but has lagged behind after a couple of profits warnings, while against the backdrop of the most challenging high street conditions in years, Mr Rose has already managed to become embroiled in a humdinger of a boardroom row. This doesn't promise well for the final furlong.

But enough of this silly analogy. Success in business is as much about perception as reality, and although Mr King has developed a certain amount of momentum behind what at first looked a hopeless turnaround endeavour, the reality continues to look daunting. Profits collapsed to just £15m last year after write-offs of £550m, mainly on the investments made by Mr King's predecessor, Sir Peter Davis, in IT and distribution. These systems are still not functioning as they were supposed to.

Mr King has succeeded in stemming the fall in sales and reversing a little bit the progressive decline in market share, but only at the expense of collapsing operating margins to just 2 per cent, where Mr King promises they will remain for at least the next year. Profits are for the time being to be sacrificed for sales. This is all very well in helping to get customers back into Sainsbury's, but it is plainly unsustainable beyond a certain point if at the same time the industry leader, Tesco, is still managing to out trade on price and achieve a 5 per cent plus operating margin to boot.

Mr King reckons he's on track to deliver on his three-year recovery programme. He should enjoy his brief moment in the sun while he can, for the outlook is for harsher weather to come.

Lift-off for Stansted runway row

The Government's go-ahead for the construction of a new runway in the South-east of England always promised to turn into an almighty punch-up and so it is proving. However, the fisticuffs are not so much between the airport operator BAA and local protesters - although in the fullness of time there will be plenty of action in that department - but between BAA and its airline customers.

Last year Tony Blair decided in his wisdom that the runway should be built at Stansted ready in time to open in 2011, even though the economic case for siting it at Heathrow was overwhelming, as his Chancellor, among others, pointed out to him. Stansted may lie in open countryside but Heathrow is the place where international travellers want to arrive.

The choice of Essex over west London was a politically expedient one - Stansted sits in a sea of blue whereas the flight path into Heathrow passes over an uncomfortably large number of Labour marginals. The fig leaf used to justify Stansted was that a new runway there did not face any of the environmental obstacles that a third runway at Heathrow would need to overcome. It was also argued that Stansted is where the explosion in no-frills air travel is happening.

Having initially gone along with the pretence that Stansted's passengers could finance a new runway and associated facilities costing £4bn, BAA has now admitted what was plain all along - that the project can only work if it is cross-subsidised by passengers at Heathrow and Gatwick.

BAA has to persuade the Civil Aviation Authority to agree, because the current regulatory rules state that any airport expansion in the South-east must be self-financing. Reaching agreement with its airline customers looks a lot trickier. Ryanair and easyJet fear that paying for another Taj Mahal at Stansted will wreck their low-cost business models and with it the very rationale for choosing Stansted in the first place. But British Airways, Virgin Atlantic and bmi are equally opposed to the idea of making their passengers at Heathrow and Gatwick pay for someone else's runway. If Heathrow can pay for Terminal Five, then Stansted must pay for Runway Two.

Even if BAA wins the cross-subsidy argument, the second runway will not now open until 2013. It if loses, then it will be nearer to 2020. Heathrow, on the other hand, could finance a third runway tomorrow from the £405m it makes in profits. The odds of a third runway at Heathrow before a second one at Stansted will continue to shorten. In fact, it could be among Gordon Brown's first announcements as prime minister.

A Regal disaster on AIM's wild west

Caveat emptor is meant to be the guiding principle of the Alternative Investment Market (AIM), yet in the absence of direct oversight by the Financial Services Authority, investors should at least be entitled to rely on the good name of the sponsoring adviser, shouldn't they? Not so, according to the City securities house, Evolution Group, which yesterday expressed bewilderment over the stomach churning 12 per cent plunge in its own share price prompted by a statement from one of its clients, Regal Petroleum, that all was not as it was supposed to be. Has Evolution not heard of reputational damage?

Less than a month ago, Evolution raised £45m on behalf of Regal by placing 11.5 million shares with investors at 390p each. The Kallirachi acreage off the coast of Greece isn't Regal's only prospect, but it was the one investors were most excited about. Some genuinely believed it to be potentially Europe's biggest-ever offshore prospect, a belief not discouraged by Regal.

Sadly not. There is indeed a little bit of oil there, scotching suggestions that the whole thing was just a scam, but the flow rates are so low as to be deemed non-commercial. It might perhaps have been better to have awaited firmer test results before tapping the market for new money. Yesterday, the shares duly collapsed to just 100.5p. Is not Evolution just a tiny, little bit embarrassed? Well no, not particularly.

The placing was substantially with existing Regal investors, Evolution said yesterday, all of whom would have understood the risks. What's more, the AIM rules, such as they are, don't require the sponsoring adviser to conduct a detailed due diligence for a secondary placing such as this one. Instead the advisers are entitled to rely on warranties provided by the company. Nor does Evolution retain any kind of financial exposure to the meltdown in the Regal share price. All the shares were placed with outside investors.

So if Evolution is off scot free, how come the shares fell by so much? With more than 100 corporate clients to his name, Evolution's chief executive, Alex Snow, is at a loss to explain why trouble in just one of them should cause his share price to collapse, and he mutters darkly about being targeted by various unspecified short sellers. Well perhaps, but in my experience if you lie down with dogs you can generally expect to come out with fleas, and that's what's happened here.

In the old days, Regal would have been called a ramp. No doubt both Regal and Evolution genuinely believed there was oil in them there Mediterranean waters. That there was virtually none at all was not something anyone wanted to hear. The known involvement in the stock of Robert Bonnier, an active trader with regulatory form, only adds to the sense of untoward goings on. AIM is the wild west frontier of investment. High risk and poor disclosure comes with the territory. It surely cannot be long before the FSA comes knocking, and then what happens to all those wonderful fees? As one City wag put it yesterday, with characters like these, who needs a plot?

j.warner@independent.co.uk

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