Jeremy Warner's Outlook: King's inner hawk finally triumphs in decision to break ranks over interest rates

Hands invokes 'force majeure' to halt bid; Hedge funds as shareholder activists
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The Independent Online

The main body of the text was the usual dull assessment of the economy, full of facts and figures signifying very little at all. Even the rehearsal of arguments for and against a change in interest rates seemed fully to justify that famous description of economics as the dismal science. The sensation came rather in the vote when, for the first time as Governor of the Bank of England, Mervyn King sided with the minority in voting against the subsequently enacted cut in interest rates.

In all eight years of the MPC's history, this has never before happened. Mr King has certainly found himself in the minority before, probably more so than any other member of the MPC, but never as Governor, and his predecessor, Sir Edward George, never once voted with the minority. Even in circumstances where the vote is equally split, the Governor has historically always voted for the status quo. The Governor's vote has therefore been seen by the City as a sort of non-vote, a force for conservatism and consensus.

In fact, the Bank of England was keen to point out yesterday, there has never been any such convention. Sir Edward George was happy to be known as a "consensual governor" but he always made plain that he would view it as a matter of personal integrity to vote with the minority if he felt strongly about it one way or another. Indeed, he even contemplated casting just such a vote for the only purpose of establishing a precedent, but eventually thought it trite to do so.

Mr King has since put the same point more strongly still. He once told the Commons Treasury Committee: "I think the strength of our process, the reason why it works so well, is because there are nine people round the table, none of whom ever says, 'I am right and you are wrong', but who say, 'these are the arguments. In the end my judgement is that I come down on this side'."

Mr King makes it all sound very grown up and collegiate, an atmosphere of mutual respect with no recriminations or violent disagreements. Nonetheless, he will be forgiven a wry smile on seeing Tuesday's higher-than-expected inflation figures.

The Bank sets policy to target inflation two years out, not as it is now, yet the latest data seems to more than vindicate the minority view that rates should have been left on hold. Mr King is a hawk by nature. To have voted with the minority and been shown to be right will strengthen his hand in ensuring that policy is kept appropriately tight.

Hands invokes 'force majeure' to halt bid

East Surrey Holdings is best known as proud owner of the Sutton and East Surrey Water Company in southern England, but it is the group's fast growing domestic gas business in Northern Ireland which has made this quiet little backwater of corporate Britain an object of controversy.

Some months ago Guy Hands, the private equity pioneer who made his name with the Japanese bank Nomura, made an agreed £453m bid for the company through Terra Firma Investments. Mr Hands wasn't really interested in the water company, which he intended to sell off. Rather, it was Phoenix Natural Gas in Northern Ireland which attracted him. With its apparently secure and growing cash flows, Phoenix seemed a natural for private equity.

What he hadn't banked on was the interference of Douglas McIldoon, maverick chairman of the Northern Ireland Authority for Energy Regulation. Mr McIldoon has yet to spell out precisely what he wants, but he figures that since Mr Hands is prepared to pay shareholders of East Surrey such a handsome price for their company, then customers of Phoenix should get a share of the spoils as well.

With this threat ringing in his ears, Mr Hands has chosen to invoke a condition of his offer dealing with adverse regulatory changes and withdraw the bid. Takeover Panel rules dictate that once an offer has been made, it cannot easily be abandoned, so East Surrey will naturally be disputing his right to do so.

There are few precedents for withdrawing an offer, if only because the panel is generally so stubborn about it. It would play havoc with markets if companies were routinely allowed to announce a bid only then to change their minds and not go through with it. The last attempt was by Sir Martin Sorrell, chief executive of the advertising goliath WPP.

It was his misfortune that he had an offer on the table for the media buyer Tempus at the time of the terrorist atrocities in New York and Washington. If the bid looked overpriced before 9/11, it seemed doubly so in the immediate aftermath.

Sir Martin pleaded a "material adverse change" in circumstances in an effort to reduce the value of his offer, but the Panel refused this on the grounds that these were external factors rather than an internal change in Tempus's trading prospects. As it happens, Sir Martin eventually made the acquisition pay even at the inflated price he was forced to adhere to, but that's a different story.

Mr Hands' chances of being allowed to wriggle off the hook look equally poor. True, regulatory change was a condition of his bid, but despite his threats Mr McIldoon hasn't yet acted. What he has done is publish a consultation document questioning whether it was right in the light of Mr Hands' interest to have eased the regulatory burden on Phoenix a year ago.

It's worth noting that there were similar calls for customers of the Sutton and East Surrey Water Company to share in the Hands largesse, yet these were dismissed by Ofwat, the UK water regulator, as without foundation.

Indeed, the real villain in all this is not Mr Hands but Mr McIldoon. What sort of a message does he think he's broadcasting for a region which still desperately needs to attract decent levels of inward investment to underwrite its post-conflict future? Few businesses will want to invest in an area subject to such arbitrary interference, and those that do will demand a higher rate of return to take account of the extra risk.

Who is it that pays for that higher rate of return? Why, the customers, of course. Mr McIldoon's stance is as financially illiterate as it is economically damaging for aregion struggling to put past troubles behind it.

Hedge funds as shareholder activists

The traditional view of a hedge fund is as a professional "short seller" of stocks and shares. As the genre grows, however, hedge fund managers seem increasingly to be long of them, and to the dismay of many companies, it is hard to find shareholders as activist or as diligent in their approach to investment as a hedge fund.

It was a hedge fund which forced Deutsche Börse to abandon its bid for the London Stock Exchange. Now they are threatening to derail Shire Pharmaceutical's bid for the US biotech Transkaryotic Therapies, by challenging the valuation in a Delaware court. The idea is to force Shire to pay more. If they succeed, Shire may instead withdraw altogether.

Whatever the outcome, managements can expect many more of these frustrating interventions. Even companies as large as Vodafone are unlikely to be immune in the hunt for value extraction. Is this a good thing? To many chief executives, it seems as if long-term vision is being sacrificed in the pursuit of short-term gain. Yet like them or loathe them, activist hedge funds are the new reality, and if their proposals for corporate change are reasonably founded, then increasingly we can expect them to succeed.

j.warner@independent.co.uk

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