Jeremy Warner's Outlook: Pensions impasse for Sainsbury deal

Witty picked as new chief at Glaxo; Sensible tax plan that gains no traction
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The Sainsbury family is again threatening to scupper the chances of a successful takeover bid for the eponymous supermarkets group. This time around, it is not so much the price they object to, or even the debt-leveraged structure of the deal, which in any case has been adjusted to meet their concerns. Rather, it is the fate of the pension fund.

For principal members of the Sainsbury family, the J Sainsbury pension fund remains a key sticking point. Delta Two, the bidding vehicle, has already promised a £1bn top-up. The trustees want a minimum of £1.5bn and more like £2bn. The Sainsbury family intend to vote against the Qatari-backed £10.6bn takeover bid unless this gap is closed to the satisfaction of the trustees.

This puts the Sainsbury board in an extremely awkward position. Having completed its due diligence, Delta Two was moving towards a formal offer at a price which Sir Philip Hampton, the Sainsbury chairman, and co-directors felt minded to recommend.

What's more, their advice had been that any such recommendation did not need to be dependent on whether a separate deal could be reached with the trustees. This would otherwise have given pensioners the final say, not a position that any board would gladly agree to. The company's articles of association give pension trustees no such veto.

The difficulty the board faces is that, with the family siding with the trustees, pensioners may well be in that position after all. The offer would need a 75 per cent majority to succeed; the family speaks for 18 per cent. There is therefore a question mark over the deliverability of any deal that does not carry the explicit agreement of the trustees. It also might damage Sainsbury's reputation for high standards of corporate social responsibility to be seen backing a bid that was opposed by such an important group of stakeholders.

The chances are, Delta Two's Paul Taylor can still reach agreement with the trustees, either by bridging the gap, or by persuading his Qatari backers to underwrite the pension fund. Meetings take place this week to hammer out a deal. But if he doesn't, all bets are off. Would Mr Taylor risk bidding, knowing that the family was against him? The last private equity bid for Sainsbury came to grief on exactly the same rocks.

Back then, the Sainsbury family was accused of frustrating a deal other shareholders would have wanted to accept. The family didn't seem to care about it last time, so there's no reason to believe they'd be bothered by the charge this time either. Both David and John Sainsbury believe themselves to answer to a higher purpose than mere money. Safeguarding the legacy, and the stakeholders who benefit from it, is more important to them than the dosh. They won't blink. The question is what will Mr Taylor do?

Witty picked as new chief at Glaxo

Chief executives just seem to get younger by the day, especially in Big Pharma. Roche recently appointed a 40-year-old to succeed the legendary Franz Humer. Now GlaxoSmithKline has opted for a 43-year-old, Andrew Witty, to replace Jean-Pierre Garnier when he retires as chief executive in May. It's seemingly not just a changing of the old guard among the world's leading pharmaceuticals groups, but a change of generation too.

Mr Witty will bring a marked change of style to GSK in other respects as well. For a start, he appears intent on running the show from Britain, not as Mr Garnier has done from the US. At least, this is where he and his family intend to carry on living. Yet it is in the US, still around half the world market for pharmaceuticals, where his biggest challenges plainly lie.

Dealing with the aftermath of the Avandia debacle is only the minor part of it. The bigger issue remains pricing. As the baby boomers retire, volume sales are likely to soar. The bad news is a relentless downward pressure on prices which may culminate in European-style price controls for all but cutting-edge treatments. That's one of the reasons the GSK board opted for Mr Witty. He's proved himself adept at negotiating compromise pricing arrangements with European healthcare authorities which recognise innovation and efficacy. Yet first he's going to have to deal with the fallout from his appointment. There were two other internal contenders for the job. They are unlikely to hang around long enough to find out if Mr Witty was the right choice.

Sensible tax plan that gains no traction

Here's one announcement that Alistair Darling won't be making in today's pre-Budget report. "In response to popular demand, I've decided to go one further than the Tories and scrap inheritance tax altogether.

"And unlike the Opposition, I'm not going to hit the non-doms to pay for it. Foreign income is in practice exceptionally difficult to tax and, in any case, the Tories' proposals for doing so wouldn't raise nearly as much as they think. Instead I'm going to slap capital gains tax on the sale of houses". Gasps of astonishment all round. There could be no more sure a way for a Government to commit political suicide than to tamper with the tax breaks enjoyed by the UK housing market. Yet rising for a moment above the political impossibility of such an initiative, it would in fact be a remarkably sensible way of proceeding.

One of the reasons inheritance tax sticks in the craw is that it is a form of double taxation. Having paid your taxes once, you are then taxed all over again when you die. On the other hand, death duty is also one of the most obviously reasonable forms of progressive taxation there is. Inherited wealth entrenches privilege and disadvantage between the generations. For anyone who believes in social justice, it is plainly right that the Government should remove some of this wealth so that it can be redistributed to the needy.

Unfortunately, inheritance tax as it stands just doesn't work as it is supposed to. The rich find ways of not paying it at all, and, even for the relatively wealthy, your affairs can be set up in such a way that the tax is largely voluntary. This leaves inheritance tax as increasingly the preserve of ordinary middle class householders, more and more of whom find themselves caught in the net as a result of strongly rising house prices.

The phenomenon of rising house prices may in turn be quite heavily influenced by the tax breaks enjoyed on housing. There is no capital gains tax payable on first homes in Britain. Buy-to-let owners also enjoy tax breaks. The effect has been to introduce a considerable distortion into the British savings and investment market, with a disproportionate flow of money into unproductive bricks and mortar and arguably a consequent paucity of investment in productive industry.

Switching the onus of tax from death to capital gain would meet the twin political objectives of cooling the housing market and bringing properties owned by the wealthy and non-doms into the tax net. But would anyone do it? Not a chance.

All the same, Mr Darling needs to respond to the Tories in some shape or form. All of a sudden, they've managed to put tax cutting back on the political agenda. This breakthrough comes at a time when Labour's own room for manoeuvre on taxes has been whittled down to virtually zero.

With growth slowing, and spending still rising – albeit more modestly than we've seen – there's no scope for overall cuts in taxes. Mr Darling's scope for adjusting the tax system is therefore reduced to that of robbing Peter to pay Paul, or merely redistributing the tax burden from one group of interests to another.

The same is true of the spending side of the balance sheet. There's no room for borrowing more, so if the Chancellor wants to find extra money for health and education, he can only do so by squeezing a different budget. For the Tories, the challenge is credibly to explain where all the money is going to come from for the tax cutting. Unfortunately for Mr Darling, voters seem to be more interested in the promise of tax cuts than how they might be paid for.

j.warner@independent.co.uk

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