Jeremy Warner's Outlook: Little wonder in Woolies for private equity

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The Independent Online

Apax Partners is a serious private equity player which has recruited an impressively accomplished operator to its cause in the shape of Roger Pedder, but whether anything will come of its mooted bid for Woolworths is open to question.

The price being bandied around in the stock market of 60p a share, or £850m in total, is both too small for shareholders to want to accept and too high for private equity to pay. Dealing with the shareholders first, 60p amounts to little more than a quarter of sales or 6.4 times last year's expected earnings before interest, tax and depreciation. That's quite a bit lower than most other retailers.

Of course, there are good reasons for this relative undervaluation. Woolies is being squeezed by the advance of the supermarkets, nearly all its property freeholds have already been mortgaged off, its margins are thin and, despite having got rid of most of its legacy pension liabilities at the time of its demerger from Kingfisher, there's still a £66m deficit in the remaining pension fund. Yet notwithstanding a disappointing Christmas, the business is operationally still on an improving trend. Prospects are good if unspectacular.

The business was nearly sold to private equity at the time of the demerger. Gerald Corbett, the chairman, had to fight Geoff Mulcahy like an alley cat to prevent it, and it seems to have paid off. Floated at just 25p three years ago, the shares were last night trading at more than 50p.

So why would private equity want to buy Woolies now, with the price much higher, the low hanging fruit already plucked and precious few juice-bearing goodies on the higher branches to reach for? The case seems harder to make than ever.

Apax's interest may be explained only by the fact that there's so much money sloshing around private equity looking for a home, that almost anything will do. The lack of a decent property portfolio makes Woolies unattractive for the highly leveraged transaction that underpins the economics of most venture capital deals. There are assets that could be sold to pay down debt, in particular the property assets of Big W, the distribution business and the joint venture with the BBC. Woolies also enjoys some of the same cash cow attributes that have made retail as a whole attractive to private equity.

Yet both of the last two private equity assaults on the high street - JJB Sports and WH Smith - collapsed once the protagonists had got in to examine the books. The effect in both cases was to undermine the business and destabilise the share price. Unless the price is a good one with few conditions attached, Mr Corbett would be well advised to show Apax the door.

More statistical fog

Politicians will only order a change in the way economic statistics are compiled if they think it will reflect them in a better light. For years, Gordon Brown, the Chancellor, has been complaining that the national statistics fail adequately to measure the growth in the output of the public sector. The result is the Atkinson Review, whose final report together with its 54 recommendations was published yesterday.

Some of these recommendations have already been incorporated by the Office for National Statistics into the way the figures are compiled - the ones that pertain to the National Health Service. To the delight of ministers, the effect was nearly to double the output of the NHS over the three years to the end of 2003, allowing the Government to announce worthwhile increases in the overall rate of GDP growth for each of these years as well.

But the process doesn't always go the Government's way. Productivity growth in the NHS was actually lower under the new methodology than the old, prompting the Health Secretary, John Reid, to describe the figures as "absurd" because in his view they failed to take proper account of improvements in the quality of care. No wonder he was rattled. The new statistics seemed to confirm what the sceptics were saying: the more money the Government spends, the less efficient the public sector becomes. That's not at all what the doctor had ordered.

The ONS announced yesterday that it would be incorporating a further nine of the report's final recommendations into the figures, while continuing to assess and consult on the others. All nine relate to measuring educational output, where there are similar concerns to those expressed over the NHS. For instance, if government spending is causing class sizes to get smaller, does that count as an increase or decrease in output and productivity?

The revisions will be ready for publication by the end of April but that doesn't necessarily mean they will be published then. The imminence of the election makes it all very political. If the result is good news for the Government, then Len Cook, head of the ONS, would be accused of deliberately trying to boost the Government's electoral prospects by publishing. Likewise he could be accused of burying the bad news if he fails to publish statistics that show extra government spending on education in a poor light. Now who was it who said there are lies, damned lies and statistics?

Bloodbath cancelled

The "bloodbath" predicted for low-cost airlines by the Ryanair boss Michael O'Leary a year ago looks to have been restricted largely to his own share price and even that is looking a lot perkier now. Yesterday, the no-frills Irish airline announced that its fares this winter would probably rise 5 per cent rather than fall 20 per cent, as Ryanair initially forecast.

The further away you get from Mr O'Leary's bloodcurdling prediction 12 months ago of Armageddon in the budget end of the airline market, the more it appears that his remarks were aimed at rival carriers and not investors. True, the sector has experienced some turbulence - four start-up airlines have crashed completely and another four would-be budget carriers have been forced to slash capacity. But this scarcely amounts to a bloodbath.

The two big no-frills operators, Ryanair and easyJet, have emerged more or less unscathed, with capacity, traffic, market share and profits all up on a year ago.

The main effect of Mr O'Leary's dire warning a year ago was to dissuade mini-me airlines from entering the market, sure in the knowledge that, however suicidal their prices, Ryanair had the balance-sheet strength not only to meet them, but beat them. Perversely, the soaring price of oil has also helped, allowing Ryanair to keep its fares higher than they would have been were it not for the successive fuel surcharges introduced by his full-service rivals.

The Ryanair share price nosedived after Ryanair's warning a year ago, halving in value at one point. Today, the fall has been narrowed to just 16 per cent, which is better news for investors - provided, of course that what Mr O'Leary is telling them today is any more believable than what he was saying back then.

Undermining AIM

At the height of the South Sea Bubble, a large sum of money was raised on the stock market "for carrying out an undertaking of great advantage, but nobody to know what it is". There are echoes of this exaggerated exuberance in the present proliferation of cash shells floating on the Alternative Investment Market. Yet the London Stock Exchange is surely overreacting by proposing that no company raising less than £3m should be allowed to float.

The purpose of this floor is to ensure the issue is large enough to attract institutional money, which in the LSE's view should in turn allow for some degree of corporate governance control. In my experience, institutional involvement rarely guarantees anything, while the idea that the sort of punters who play the Alternative Investment Market need protecting from their own stupidity is just plain patronising. Caveat emptor is all that's needed to govern AIM. All else only undermines AIM's high-risk, potentially high-reward purpose. I, for one, will not be complaining of regulatory failure if the present exuberance ends in tears.

jeremy.warner@independent.co.uk

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