Jeremy Warner's Outlook: L'Oréal will have to bid high to convince Anita Roddick a sell-out is worth it

Bumper profits at British Gas owner; BAA bid faces financing difficulties
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The Independent Online

According to her office, Dame Anita Roddick was uncontactable yesterday, so she would not have known about the bid approach for her beloved Body Shop from L'Oréal, the world's largest beauty company, and to her, presumably, something of a bête noire, the very antithesis of all she stands for.

As it happens, she wasn't off searching for the lost tribes of the Amazonian rain forest, or some natural elixir of life. Instead, she was in Louisiana campaigning for the release of the Angola Three. Quite what she's going to make of Sir Lindsay Owen-Jones's advances once she gets to hear about them is an interesting question.

Time was when she would have come out all guns blazing for this is the cosmetic world's equivalent of McDonald's taking over Pret a Manger. Much the same motivation lies behind it too. Just as McDonald's wanted to diversify into healthier, trendier forms of fast food, L'Oréal wants to improve its green credentials, to add a range of products that can be marketed as free of animal testing and from environmentally sustainable sources.

Yet she's long since given up operational control of Body Shop and sold down her shareholding. Today, she owns just 14 per cent of the company, which even if she wanted to use it for such purposes, is hardly a frustrating interest. If she wanted to resist L'Oréal on ethical grounds, she could presumably still rely on the support of her friend Ian McGlinn, with 23 per cent of the shares, but is she really that bothered anymore? It will be an interesting test, especially if the "investment wankers" judge the price a generous one.

Bumper profits at British Gas owner

One of the main policy objectives in the almost wholly risible White Paper on the future of Britain's energy needs published by the Government three years ago was a major reduction in so-called "energy poverty".

The condition is defined as applying to those spending 10 per cent or more of their disposable income on fuel bills. Notwithstanding the various budget plans introduced by British Gas and others to protect pensioners from ever rising prices, it is plain that no progress whatsoever could have been made towards this objective.

To the contrary, sky-rocketing fuel bills means the number of households in energy poverty can only have increased. I doubt the Government still monitors the situation at all, for fear of the embarrassment that the numbers would cause. Another failed Government objective. Just as well everyone's forgotten it was ever set.

What to make, then, of the bumper profits announced yesterday by Centrica, owner of the British Gas? Coming barely more than a week after the company announced a 22 per cent increase in the price of both gas and electricity, they must to many customers seem a bitter pill to swallow. When the price rises were announced, Centrica blamed Europe. Those dastardly Continentals have been forcing up the price we have to pay for our gas and we've no option but to hand it on.

Really? After a year in which Centrica achieved an operating profit of £1.5bn? The company plainly has quite a bit of explaining to do. It fell to the luckless Mark Clare, the managing director, to try to spell it out. Actually, profits at British Gas fell by more than a half to just £90m last year, and there was a £75m loss in the second half. The boom in profits took place in other parts of the Centrica group - the US operations, gas storage, plumbing and servicing, but in particular from Morecambe Bay gas production, where profits surged 31 per cent to £1bn.

Less easy to explain is why Centrica shouldn't continue to cross subsidise gas supply from the booming profits of gas production. The answer lies mainly in regulation.

If Centrica were allowed to freeze prices when all those around without access to their own sources of cheap production were forced to pay the higher prices demanded in the market, it would amount to unfair competition. Everyone else would soon go out of business. In any case, the gas is fast running out.

Output from Morecambe Bay is declining at the rate of 10 to 15 per cent a year, and will have run out entirely by 2015. For years, British consumers have enjoyed the benefits of access to cheap North Sea gas. Centrica must wean them of the habit and, if it is to have a business left at all when Morecambe runs dry, it must charge an economic rate for what it sells.

Where I think the company is open to criticism, however, is that it has failed adequately to prepare for this moment. Why hasn't it invested more heavily in storage, and why has it been so late in signing up alternative long-term sources of supply? Failure to have such contracts in place has made it highly dependent on the short-term market, where prices have spiralled out of control.

Belatedly, the company has moved to address these issues, yet the pain of rising prices would plainly have been a lot less severe had it moved earlier. Instead Centrica was off investing in roadside services, telecommunications, financial services and other businesses of equal irrelevance to the core function of energy supply. If ever there was a lesson in the wisdom of sticking to your knitting, Centrica is it. Thankfully, that lesson has now been learned. Within a few years, the present supply squeeze should begin to ease. Yet the passage could have been a much more comfortable one.

BAA bid faces financing difficulties

It's all gone terribly quiet round at Ferrovial since the Spanish construction and utilities group announced some two weeks ago that it was interested in partnership with unnamed others in bidding for BAA. To be fair, Ferrovial said at the time that it would take some weeks to get all its ducks in a row. Even so, it may be that the company's silence is indicative of a wider loss of nerve.

Even in the most benign of circumstances, consortium bids are notoriously difficult to organise. Getting the consortium to stick together when the going gets tough is more difficult still. BAA, a company which until recently would have been thought largely bid proof, makes a particularly awkward target.

Do Ferrovial and its backers realise quite how highly regulated BAA is? If they don't, then they have plainly not done their homework, for it is going to make any bid for BAA extraordinarily difficult to finance.

BAA, owner of the South-east's three biggest airports, is already quite highly geared. Once the £4.2bn construction of Heathrow's Terminal 5 is complete, two years hence, debt gearing will be above 100 per cent. Other planned capital spending projects, such as the redevelopment of Terminal 2, dubbed Heathrow East, and a second runway at Stansted, may send it higher still. Given the investment spending that still has to be made, many might think BAA already highly geared enough.

To gear the company further might be thought positively dangerous. Yet it's hard to see how else Ferrovial can make any bid stack up financially. Extensive use of equity is virtually ruled out by a controlling family shareholder which refuses to accept further dilution.

Have Ferrovial and its backers entirely realised that, almost uniquely, British price regulation requires that all the benefits of efficiency gain, including those achieved through reductions in the cost of capital, are clawed back for the benefit of customers? In these circumstances, a company leveraged to its absolute limits to take advantage of lower costs of capital would need hefty price rises to pay for further investment. The regulator would surely not allow such an undesirable outcome.

Is a deal doable at all? Where there's a will, there's usually a way, but given the problems just outlined in credibly financing the deal, and the price that would need to be paid to persuade shareholders to sell, it must seem questionable. Macquarie in its bid for the London Stock Exchange couldn't in the end muster anything close to the price demanded by investors. The same fate is all too likely to befall Ferrovial.

j.warner@independent.co.uk

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