Jeremy Warner's Outlook: Kingfisher hits a £200m panic button after B&Q fails to do it as it is supposed to

Sir Gerry wins some Rentokil support; Stock market shrugs off poor economy

The parallel is only partially justified, for despite its problems, B&Q is still twice as big as its nearest rival in DIY. It's impossible to believe that such a commanding position could ever be lost, though you only have to look at the example of Sainsbury's to see that these things can indeed happen if the market leader takes its eye of the ball for long enough and there's an aggressive pretender waiting in the wings. Fortunately for B&Q, there appears to be no such rival in DIY. The other chains are all slightly different, and in any case probably too small to mount a serious challenge.

Yet the price differential between B&Q and its main rivals isn't as big as it was, while the company also appears to have missed a trick in not moving as aggressively into home furnishings and household products as Homebase and others. Plans to address this were announced yesterday, but it may already be too late.

As for changing the advertising slogan from "You can do it if you B&Q it", to "B&Q: the real deal", that's the sort of thing managements do when they are in trouble. It doesn't address the underlying problem. Nor, I suspect, will the company's plans to simplify and rationalise the product range so as to concentrate on the lines customers buy most.

It's easy to see why retailers would want to do this, but in my view it's generally a mistake. One of the main reasons for going to B&Q instead of one of its competitors is that you can be pretty sure it will have the particular bolt or size of nail you are after. Strip away that advantage and you lose part of the reason for going there.

Still, Gerry Murphy, the chief executive, had to be seen to be doing something. While he's been off expanding the company into China and Eastern Europe, the backyard has fallen into a state of disrepair. But does he really need to charge as much as £200m in rationalisation costs? This suggests a bigger programme than the 7 per cent reduction in selling space announced yesterday, and would seem strongly suggestive of worse to come. For what it's worth, the company admits that the deterioration has continued into the second half.

B&Q used to believe itself relatively immune to the ups and downs of the housing market. If people moved less, they would spend more on DIY, was the theory. Yesterday the company was forced to admit that it had indeed been hit by the decline in housing transactions. There's little sign of relief on that front.

Are the shares now cheap enough for Home Depot of the US to take a pop? Since the beginning of the year they've come all the way down from £3. The continued weakness of the dollar against the pound will be a powerful deterrent, and Home Depot's Robert Nardelli may in any case calculate that the shares have further to fall before he needs to pounce. Yet, at some stage, pounce he almost certainly will. Kingfisher would fill some big gaps in his geographic spread. Home Depot's presumed interest should provide some support for the shares. Unfortunately, there is not much else holding them aloft.

Sir Gerry wins some Rentokil support

Most analysts were distinctly underwhelmed by Sir Gerry Robinson's presentation to the City this week, detailing his plans for the pest control group Rentokil Initial. It was all a bit wishy washy, was the majority view, with Sir Gerry still adequately to explain why he should be paid £58m simply for coming in and seeing what needs to be done. Yet the balance of opinion was not as clear cut as generally portrayed. At least two brokers came down strongly in favour of Sir Gerry in circulars to clients yesterday, apparently bowled over by his Irish charms.

Lehman's Craig Fraser said there had to be a very real chance of Sir Gerry succeeding, if only because Sir Gerry has "considerable personal charm, and to a company with poor morale this could be the crucial issue in injecting life into the workforce". I'm not sure personal charm alone could be worth £58m, but Mr Fraser reports Sir Gerry as possibly prepared to attach performance hurdles. If so this might be crucial in winning over marginal votes.

Cazenove goes further to suggest that shareholders representing 25 per cent of Rentokil Initial's share capital, in addition to Franklin Templeton, with nearly 15 per cent, might support Sir Gerry's assault on Rentokil. Most investors won't see the remuneration package as an issue, in Cazenove's opinion.

This is quite a claim, for if true it means that the owners of Britain's stock of listed companies have begun to ditch established corporate governance practice on executive pay in favour of anything goes provided shareholders get a better return. As far as the hedge funds are concerned, this has always been the case.

Extraordinarily high reward is par for the course in the hedge fund industry. To them, Sir Gerry's demands don't seem off the scale at all. For foreign investors, who today account for about 30 per cent of UK stock market ownership, remuneration may not be such an issue either.

Yet for more traditionally minded UK fund managers, this will make an interesting test case. The conventional view is that reward for simply being there is not only wrong in principle, but tends to lead to poor management and poor returns. Sir Gerry's plans for Rentokil, such as they are, don't seem so very different from those of the incumbent management. What shareholders would be paying for are Sir Gerry's track record of value creation. If he succeeds in persuading them, the sky would be the limit on executive pay, but it might just halt the flow of executive talent into private equity, where the rewards have been equally gobsmacking for some years now.

Stock market shrugs off poor economy

The economy seems to have stalled to judge by yesterday's retail sales figures, yet the stock market is at a new four-year high. What's going on here? Long gone are the days when the UK stock market was a mirror of the UK economy, with ICI as its "bellwether" company. Perhaps as much as half of quoted company earnings now come from overseas. The indices are also heavily weighted towards oils and mining, which have been driven higher by the boom in commodity prices.

Yet even outside these soaraway sectors, there is also a greater degree of business confidence out there than generally assumed. Most business leaders see the present hiatus as just a soft patch ahead of the resumption of relatively strong growth next year.

This is evidenced by the amount of mergers and acquisitions activity, which has returned to near record levels, not just in the UK but globally. According to Dealogic, which tracks M&A, activity in the year to date is higher than at any stage since the boom year of 2000, both in terms of value and number of transactions.

With corporate profits surging, share buy-backs and other forms of capital return are also at record, or near record, levels. Share prices reflect whatever collective view investors have of the future, hence the old stock market saying that it is better to travel hopefully than actually to arrive. Rightly or wrongly, that view is relatively positive right now. There's little reason to disagree.

j.warner@independent.co.uk

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