Jeremy Warner's Outlook: Rentokil's platitudes no substitute for action

Minimum wage rate; Oil investment
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So is that it then? The stock market was understandably underwhelmed by yesterday's keenly awaited strategy statement from Rentokil Initial. Somewhat surprisingly, this concludes that there is nothing structurally wrong with the company which cannot be solved by cultural change, a dismantling of bureaucracy, extra investment and devolved decision making.

So is that it then? The stock market was understandably underwhelmed by yesterday's keenly awaited strategy statement from Rentokil Initial. Somewhat surprisingly, this concludes that there is nothing structurally wrong with the company which cannot be solved by cultural change, a dismantling of bureaucracy, extra investment and devolved decision making.

Expectations had been well enough managed before the announcement for the City to know that the company would rule out anything as dramatic as a break-up, yet investors were hoping for more than they got, nonetheless. The five-point plan outlined yesterday was little more than a list of wishy-washy management platitudes, which in themselves hardly provide a way forward for this dysfunctional group of businesses.

What's more, to put acquisitions firmly back on the agenda seemed positively designed to irritate, given that the company is supposed to be concentrating on operational reform. If Rentokil Initial is undermanaged, what business do executives have trawling the world for bolt-on acquisitions? Shouldn't they set their existing house in order first?

Still, it's hard to know what else Brian McGowan, the chairman, could have said. He's already made his money from a long career in British industry and privately insists he never wanted the job in the first place. The business had stalled and was going nowhere under its creator, Sir Clive Thompson, so Mr McGowan was fully justified in ousting him. Mr McGowan's aversion to disposals possibly has something to do with the fact that he made his name in the hothouse of conglomerate acquisition making - Williams Holdings.

Even so, he may be right to conclude that an enforced break-up at this stage in the cycle would fail to deliver any significant further value to shareholders. The market for business assets of the sort that Rentokil might sell is already depressed. To advertise a clearout sale would further devalue them. For that reason alone, we can safely rule out a private equity bid from Sir Clive. Even at its present depressed valuation, Rentokil would be too big a bite for private equity, while Sir Clive has lost much of the "Mr 20 per cent" cache he once possessed. I'll be back, says Sir Clive, in the manner of the Terminator, but there are many in the City who doubt it.

Before he was fired, Sir Clive had been planning the sale of the parcels and conferencing businesses, the unwanted bits of previous acquisitions. Yet Mr McGowan has put even those disposals on hold. In presentational terms, yesterday's strategy review was misjudged. There is no appetite in these markets for touchy-feely management speak, or for anything as brave as investing in the future of the business. Yet it ought to be seen as little more than a holding statement, pending the appointment of a new chief executive. If by then the City is still chanting the mantra of "dispose and focus", then that is what he will have to do.

Minimum wage rate

Digby Jones, the director general of the CBI, warns that the minimum wage, already at £4.50 an hour for over-21s and due to rise by 8 per cent this October to £4.85, will cost jobs if it rises to more than £5, a likely manifesto pledge by Labour at the next election. The CBI made much the same point about the minimum wage when it was first introduced at £3.60 an hour, yet so far the effect on employment seems to have been zero. To the contrary, by encouraging the unemployed to seek work rather than claim benefit, it might even have had a positive effect on the unemployment rate. All the same, there plainly must be a tipping point at which the minimum wage becomes jobs destructive by raising costs to a level where businesses are uncompetitive. Is £5 that level?

The minimum wage has risen relentlessly at well above levels of general price inflation or earnings growth ever since it was first introduced. This year it is going up 8 per cent. Last year it was 7 per cent. The effect is to put upward pressure on wages right through the workforce, because if those at the bottom of the pile are enjoying inflation-busting wage increases, remuneration needs to rise by a similar order of magnitude right up the chain to maintain differentials. To prove his point, Mr Jones cites an unnamed manufacturer in Doncaster which once paid more than the minimum wage but finds itself left behind by the present rate. £5 is the point at which it ceases to be economic to carry on manufacturing in Britain, forcing the company to shift its production to China.

Well maybe, but if the difference rests on as little as 15p an hour, you have to wonder what the company is doing still manufacturing in Britain at all. Britain's only future in manufacturing is at the high-value-added, cutting-edge frontiers of technology, where wages are likely to be a good deal higher than the minimum in any case, or in products where proximity to markets will win out over the transport costs of shipping the goods from China. In all other products, it is going to become more and more difficult to compete with developing market labour rates, however low the Government sets the minimum wage.

Mr Jones is tilting at the wrong target. Of greater concern is the rising level of taxation, which threaten to do a lot more damage to Britain's competitiveness than a higher minimum wage. On this front we are already perilously close to driving many of our leading wealth creators overseas. The biggest source of job creation in recent years has been the public sector. That's not sustainable without a revitalised private sector. Unfortunately, the Government doesn't yet seem to have got the message.

Oil investment

With the oil price gushing at near record levels and all the indications that demand for the black stuff will continue to mushroom right up to the middle of the century, you would expect there to be a wave of new investment taking place in the industry. That there isn't is a curiosity explained mainly by the fact that the major oil producers have been burnt too often in the past by rushing into new investment when the oil price is high, only to find that it all goes down the drain when it collapses again.

The oil majors, which have hardly been increasing their investment in new production at all this year despite profits and cash flows at record levels, are going to take some convincing that the present bonanza will last. And so too is the stock market. The oil sector is up sharply this year, unlike many others, but not by the sort of margin you might expect given the oodles of cash the industry is generating right now. Even the great tar sands reserves of Canada are economic for further development with the price of crude at its present level, yet nobody shows any appetite for doing so.

A cynic might say this is because the oil industry gets richer by restricting supply than by meeting demand, yet the truth is that the oil majors and the big producing countries won't believe the price has settled at a permanently higher level until they've got at least a year of such experience under their belts. We seem to live in an age when investment in the future is punished by the stock market, however much sense it makes. Lord Browne of Madingley, the chief executive of BP, is still the bee's knees in the City because he's constrained the oilman's natural inclination to troubleshoot whenever and wherever the opportunity arises. Instead he has focused on a decent payback to investors. Both dividend and share buy-back plans have been enhanced over the last year. Not so the company's capital spending plans.

Eventually someone big will take the plunge, and then, lemming like, everyone else will follow suit for fear of getting left behind. As things stand, investment in new development and infrastructure is still woefully short of what's necessary to meet likely demand as it peaks out 20 to 30 years from now. There seems to be a degree of market failure here.

jeremy.warner@independent.co.uk

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