Jeremy Warner's Outlook: Markets wobble again on poor US data, but does America matter as much as it used to?
MFI transforms itself into Galiform; Stagecoach pays top dollar for rail franchise; Northern grit in Sir Ken's recovery story
Saturday 23 September 2006
At his press conference last week to launch the International Monetary Fund's (IMF) latest set of economic forecasts, the organisation's chief economist, Raghuram Rajan, described himself as being a little bit schizophrenic. By this he meant that though the IMF is forecasting a fourth year of above-trend growth for the world economy - making it the strongest such run since the early 1970s - the prediction is compromised by an unprecedented degree of uncertainty.
These warnings about risk factors are a long-standing feature of the IMF's bi-annual World Economic Outlook. The IMF's fault has been to give them too much weight in evaluating prospects, with the result that in recent years at least, the organisation has been consistently too pessimistic about the future. Like a Seventh Day Adventist, it seems to be constantly predicting the end of the world, which with each passing year has to be pushed further out into the future.
This has helped to make the IMF something of a contrary indicator. Think the opposite of what it says, and you might be right. If the IMF has now turned a bit more optimistic about the future, despite its concerns about the risks, this could reasonably be regarded as a bad sign. All those risk factors might finally be coming home to roost.
There was another bad wobble in the stock market yesterday, prompted by fresh data suggesting a now-quite-sharp slowdown in the US. Can the world economy withstand such a whirlwind? If the US sneezes, it used to be said, the rest of the world catches cold.
The big difference this time is rapid economic development in Asia, which may have already become self-sustaining. Such seismic shifts in the pattern of world growth make people believe the laws of economics have been suspended. Nobody should ever think that. But they certainly make for a profound change in the way the world economy works. Mr Rajan is right to be schizophrenic. These are uncharted waters. But he's also right to be broadly optimistic. The US slowdown may not be as painful for the rest of us as it once would have been.
MFI transforms itself into Galiform
MFI is having to pay "only" £126m to persuade Merchant Equity Partners to take its loss-making retail operations off its hands. The reason this apparently counts as good news is that analysts had pencilled in a much bigger divorce settlement. Some £52m of the sum is in customer deposits, so the true amount is just £74m, a figure that Matthew Ingle, the chief executive, regards as cheap at the price.
All the same, it is a pretty humiliating exit from the company's roots in the early 1960s as one of Britain's original "flat pack" furniture retailers. The group has struggled to make the formula work against growing competition from others for many years now. A brief renaissance under John Hancock came to an ignominious end when the company so mismanaged its new IT and distribution system that it couldn't deliver the goods.
Stripped of furniture retailing, MFI becomes just the Howden Joinery business, plus the factory operation that supplies MFI with its fitted kitchens.
Somewhat bizarrely, Mr Ingle has decided to name the remaining rump Galiform, a name for which he has no comprehensible explanation. Why not just call the company Howden, the depot business which Mr Ingle grew from scratch? Well, apparently it is because Howden isn't regarded as a national brand, but a local one, and Mr Ingle didn't want to confuse the punter. Make of that what you will. It beats me.
In any case, Galiform it is to be. If people can learn to love the name MFI - originally Mullard Furniture Industries - why not this meaningless concoction too? Mr Ingle is getting rid of the furniture operation because be felt that both managerially and financially, he couldn't handle both the expansion of Howden and the turnaround at MFI.
In itself this sounds sensible enough, though he's left with a company with very little in the way of net assets and an ongoing pension-fund deficit. How much growth is left in the market for Howden, with DIY retailers invading the builders' merchant's space in their hunt for sales, remains to be seen.
Stagecoach pays top dollar for rail franchise
Brian Souter, chief executive of Stagecoach Group, is famous for speaking his mind. Once questioned about poor standards of customer satisfaction on South West Trains, he replied that he would know there was a problem when he received a brick through the window.
His analysis of events in withdrawing from the bidding for the Great Western rail franchise last year was scarcely less elegant. There were, apparently, "too many hungry pigs in the trough. Let them eat first".
The franchise was eventually won by First Group, which is paying £1bn to the Government over 10 years for the privilege.
So what about Sir Brian's own franchise at South West Trains? Here it seems that, come what may, he's determined to be chief pig and eat first. In any case, he's now agreed to pay £1.2bn over the next ten years on a franchise for which he has received a government subsidy of £500m over the last ten.Has Sir Brian overpaid? The example of GNER, which agreed to pay a stonking £1.3bn for the east coast mainline and is now desperately trying to wriggle out of it, suggests that he might well have done. Admittedly, Sir Brian continues to receive a subsidy for the first two years of the new franchise period, with the premium becoming payable only thereafter. Yet even on Stagecoach's own calculations, the operating margin plummets from the more than 10 per cent being earned on the franchise at present to just 3 per cent.
That leaves very little room for error. The company needs both substantial reductions in costs and big increases in traffic to achieve even this lowly rate of return. It is not clear Sir Brian can achieve them given that he is also on the hook to deliver a better service. Mr Souter described yesterday's win as "good news for customers and good news for the taxpayer". Whether it proves quite so good for his own shareholders is altogether more doubtful.
Northern grit in Sir Ken's recovery story
Prize for the most uplifting story of the week goes not to Sir Richard Branson for his pledge of $3bn to beat global warming - come off it, Sir Richard, everyone is piling into that game - but to Sir Ken Morrison for the remarkable recovery he's presiding over in the affairs of the eponymous supermarkets group. In so doing, he seems to have confounded the sceptics, among whom I was a prime example.
His profits and margins are on the mend, but more particularly so is his share price, which has quietly crept back to within a whisker of where it was when the company embarked on its ill-fated acquisition of Safeway two years ago. I say I was a sceptic, but I never doubted the rationale and logic of the merger. It was the way in which Sir Ken and his team set about the integration that worried me. Key mistakes were made which unnecessarily damaged the company's profits and reputation for being able to walk on water. Overnight, Ken the miracle worker became Ken the provincial bumpkin.
One of the prime characteristics of a Yorkshireman is stubbornness. Despite his advancing years, Sir Ken refused to accept defeat, and he's now beginning to reap the rewards. He vowed to stay long enough to set the company back on its feet. He may well have achieved his ambition.
Morrisons is by no means out of the woods yet. My scepticism isn't entirely vanquished. Nobody yet knows what the new chief executive, Marc Bolland, only three weeks into the job, is going to be like. Yet for the moment Sir Ken is back on top. True northern grit, it seems, still counts for something.
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