Jeremy Warner's Outlook: Mr Green's five questions may not be enough

Debt-fuelled Britain; GlaxoSmithKline
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The Independent Online

Nearly All private equity bids require a full due diligence before bankers and other financiers will summon up the courage to provide the very high levels of debt gearing that make the alchemy work. It is testament to Philip Green's reputation as a deal maker and retailer that he's apparently able to put a fully funded bid on the table for Marks & Spencer on the basis of satisfactory answers to just five questions.

Nearly All private equity bids require a full due diligence before bankers and other financiers will summon up the courage to provide the very high levels of debt gearing that make the alchemy work. It is testament to Philip Green's reputation as a deal maker and retailer that he's apparently able to put a fully funded bid on the table for Marks & Spencer on the basis of satisfactory answers to just five questions.

Admittedly these are the five most important questions affecting valuation - such as the detail of M&S's long-term commitments on capital spending, supplier contracts and rentals - but even so, few others could have dreamt of pulling off such a feat. It is of course far too early for predictions, but I'm none the less more and more of the view that Mr Green has a mountain to climb in winning this company.

Emboldened by the appointment of a new chief executive and chairman, M&S may decide it cannot give Mr Green even the limited look at its books the five questions imply. Through Bhs, Mr Green is a direct competitor. Having appointed Stuart Rose to be their chief executive, City institutions would feel obliged to go along with his judgement if he said no.

If Mr Green were bidding pure cash, then it would be an easy enough thing to decide. The fact that there will be an equity element puts a different perspective on any offer that's made. How do you value Mr Green's paper? There is no obvious answer, but given the choice, most institutional investors would much prefer paper in Mr Rose than in Mr Green.

Mr Green says he plans to invest £1bn of his own money in the company's equity. Goldman Sachs is also putting up an as yet unspecified quantity, and if it is still not enough, then Mr Green can always call for support on some of his long standing financial backers, such as the Barclay brothers. Yet even Mr Green doesn't have £1bn lying around in an unused bank account. To raise it, he must borrow a substantial proportion. Those borrowings are likely to be secured against his privately owned retail empire - Bhs and Arcadia.

Mixing of private and public company interests in this way nearly always spells disaster. Mr Green has persuaded some class acts aboard to help answer these concerns, including Dennis Stevenson, chairman of HBOS and Pearson, yet ultimately Mr Green will control the company and in such circumstances there can be no adequate safeguards.

The competition issues may also have been underestimated. If he's successful, Mr Green will end up with more than 20 per cent of the UK clothing market. Suppliers will be up in arms given Mr Green's reputation for grinding them into the ground. The highly leveraged nature of the beast will command a further public interest test.

With Mr Rose's appointment, M&S, has turned the tables. It's going to take a mighty wrench on Mr Green's part to turn them back again. Mr Green has done the City a big favour with his approach, but unlike his previous adventures, he may end up with nothing but thanks for his trouble.

Debt-fuelled Britain

Britain's love affair with debt shows no sign of cooling, despite three interest rate rises since last November. To the contrary, the evidence of new figures from the Bank of England yesterday is that it is growing stronger by the day. Both mortgage and unsecured lending are continuing to rocket. This undoubtedly brings forward the date of the next interest rate rise, possibly to as soon as next week. It also raises questions about the Bank's so far gradualist approach to increasing interest rates - a quarter point at a time, roughly timed to coincide with the Bank's quarterly Inflation Report. At least one member of the Bank's Monetary Policy Committee, Andrew Large, is in favour of more draconian policy action. In Mr Large's view only shock therapy in the form of a full half-point rise in one go is likely to bring the soaraway housing market to heel.

Yet this would be precisely the wrong time for the Bank of England to panic and do something precipitous. Interest rate therapy rarely has any immediate effect. It works on a very long fuse, but work it eventually does. Intense levels of competition for lending mean that for the time being many mortgage and credit card rates are still falling even as the repo rate is rising. In these circumstances, it is hardly surprising that consumers and house buyers are continuing to borrow heavily. The market is like one of those cartoon characters that keeps on running long after he's gone over the cliff. Eventually he looks beneath him to see there's nothing there, then plummets like a stone.

That's what the Bank of England wants to avoid at all costs. Too rapid a tightening might kill off the still nascent business recovery and bring about the very housing market crash the Bank wishes to avoid. The failure of monetary policy to have any effect so far is not as much of a puzzle as it might seem. Exactly the same thing happened in reverse last summer. Then interest rates were way below that which would normally be associated with decent levels of growth, yet the economy refused stubbornly to respond. Despite calls for further policy easing, the Bank held its nerve, and by the autumn the medicine was kicking in with a vengeance. Indeed, it could be argued that the Bank's last rate cut in June of last year was one too far, helping further to inflate the now runaway consumer and mortgage lending boom.

I'm sticking to my view that the peak of the interest rate cycle will still be no higher than 5.5 per cent, even if that point is reached rather more quickly than I would have said a few months back. For many people and businesses, even 5.5 per cent will feel quite painful, but it shouldn't be of a level that will bring the economy grinding to a halt. Alarming though yesterday's figures look for an already debt fuelled economy, a soft landing still looks more likely than a nasty road crash.


Having successfully sued half of Wall Street for the misdemeanours of the boom, Eliot Spitzer, the New York Attorney General, is turning his ire on Big Pharma, which somewhat ironically for an industry meant to be committed to improving the quality of human life, seems increasingly to be taking on the role of public enemy number one. All over the US, politicians and lawyers are making capital at the industry's expense. When the big pharmaceutical companies aren't being accused of profiteering, they are seemingly poisoning everyone or worse.

In his latest lawsuit, Mr Spitzer alleges that GlaxoSmithKline concealed critically important studies on Paxil, its leading anti-depressant, which showed that the product was of doubtful use in treating depression in children and could lead to suicidal thinking and acts.

Paxil is now banned for use with children in virtually all areas of the world and in any case is off patent, and therefore a declining revenue stream for GSK. None the less, the company faces a heavy fine for its alleged cover up. Far worse, there will be untold reputational damage if the charges stick.

Particularly damning is an internal memo cited in the lawsuit which says that Glaxo intended to "manage dissemination of the data in order to minimise any potential negative commercial impact". Allegations of concealment have been around for some years now, yet GSK was unable to provide any meaningful explanation of the memo yesterday, adding to the impression that it has been caught unawares by Mr Spitzer's action.

For Big Pharma, the clouds seem to be building all around. The efficacy and safety of its products are challenged as never before, the courts increasingly won't support patent defence, and both patients and governments regard the prices that are charged as extortionate.

If GSK did deliberately suppress the evidence, then it fully deserves anything that's coming. More so than almost any other, the pharmaceuticals industry must be open and honest if it is to command public respect and confidence. Yet no cutting edge treatment can be entirely without risk, and if the pharmaceuticals industry isn't allowed to make decent levels of profit, then it won't be able to meet the ever higher standards of safety and efficacy set by the FDA and others. Small wonder that there are so few genuinely new drugs being launched these days.