Jeremy Warner's Outlook: Sarin buys time with Japanese disposal. The danger is that the wolves will be back for more

Arun Sarin has never been glued to the Japanese business, and would have gladly sold up ages ago had he been able to find a buyer at a decent price
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Will it be enough to keep the wolves from his door? Arun Sarin, the chief executive of Vodafone, yesterday chucked them a few bones in the form of the likely sale of the mobile phone Goliath's Japanese operation.

The effect on the share price was electric, so goodness knows what the sale of the group's much larger American mobile arm, Verizon Wireless, would do for the rating. Vodafone Japan may keep the pack at bay for a while; the danger for Mr Sarin is that having now tasted flesh, it will be back for more.

As it is, the Japanese situation seems to have been something of a stroke of luck. Mr Sarin has never been glued to the Japanese business, in the same way as he perhaps is to the US, and would gladly have sold up ages ago had he been able to find a buyer at a decent price.

The problems of the Japanese operation were so intractable that it seemed scarcely imaginable that anyone would be interested. Only some of these problems were of Vodafone's own making. Mr Sarin's predecessors completely misread the Japanese culture and mood by rebranding the company it expensively bought in 2000 as Vodafone. The phones, the tariffs, the marketing, the brand and the management were all wrong for the Japanese market. Add to that a strong anti-foreign bias among regulators, who repeatedly frustrated Vodafone's efforts to introduce pre-pay tariffs, and a dominant incumbent, DoCoMo, determined to stamp Vodafone out of existence, and all the ingredients were there for disaster.

Now along comes Masayoshi Son, who most of us thought had died in the dot.com bubble, a phenomenon for which he was one of the chief cheerleaders. As it turns out, he survived the explosion and has since rebuilt Softbank as one of Japan's leading broadband and internet providers. Whether he can come up with the £5bn to £6bn in cash Vodafone is demanding remains to be seen, but the omens look good.

So what of the US, where Vodafone has a fabulous business, but one mired in lack of management control and a different technology? This is where Mr Sarin draws his line in the sand, believing that if he waits long enough, his over-leveraged partner will be forced to sell him their shares. If his shareholders force him to sell instead, he'll go down with the ship.

Japan: the end of zero interest rates?

What a nice problem to have. While Europe and America grapple with rising interest rates, the issue in Japan is of a rather different nature: how to bring to an end five years of zero interest rates, a topsy-turvy world in which the banks would almost have paid you to borrow and certainly would have charged you to save.

The return to normality came a step closer yesterday with news that Japan's core consumer price index, excluding fresh food prices, rose at an annual rate of 0.5 per cent last month. OK, so this hardly looks like inflation at all by Western standards, but for a country which has experienced vicious price deflation for the best part of the past 10 years, this little uptick in prices has huge significance, and may even come to mark the end of Japan's experiment in exceptionally loose monetary policy.

The policy has contained two elements. The first is the existence of zero interest rates, a concept almost impossible to understand from these Western shores, but all too easy to comprehend in a land where your money buys you more by the month as prices drive relentlessly downwards. The second is the policy of so-called "quantitative easing", where the banking system is flooded with liquidity so as to try and encourage consumer and investment demand. It's tantamount to turning on the printing presses.

It is this latter element of the policy which is likely to be withdrawn first as Japan rises phoenix-like from a lost decade of growth. How to do it without panicking the markets, sending interest rates spiralling upwards and pushing Japan back into recession, is one question.

The other is what should replace it. With the return of price inflation, the Bank of Japan is having to consider such oddities as whether to have an inflation target, what would be the appropriate level, and how to prepare the markets for these outlandish shocks. After such a long period of zero interest rates, it's quite a change. So big, in fact, that Prime Minister Junichiro Koizumi, continues to think it premature.

While the Bank of Japan seems ready to end the quantitive easing, the government wants to see more evidence of economic recovery before it thinks it safe to return to the real world. There's good reason for its position. Repeatedly in the past, the hyper-conservative BoJ has moved too soon. Any nascent economic recovery has been strangled at birth by premature BoJ jitters. Few have any doubt this time around that the recovery is for real. The export-led recovery where it began is familiar enough. Japan has had revivals of this sort before.

Yet repeatedly they have proved short-lived. What makes this one different is that it has been supplemented by growing levels of domestic demand. It is this fragile prize that Mr Koizumi thinks should be protected from any heavy-handed action from the BoJ. Yet Japan has to be weaned off the medication at some stage, and the moment is fast approaching. The challenge for the BoJ is to achieve this outcome without plunging the country into a bout of cold turkey.

British Telecom: don't count on a bid

The last financier to attempt a private-equity bid for British Telecom ended up murdered in the Hamptons. After such an ominous precedent, is it likely that anyone would want to repeat the exercise? With strong and apparently stable cash flows, BT makes an obvious target for private equity, brimming over as it is with funds to invest. As a consequence, every man and his dog has run the slide rule over this company in recent years.

Yet there are as many reasons for not bidding as for taking the plunge. The most obvious is size. BT's enterprise value is in excess of £20bn, which would be a massive and virtually unprecedentedbite for any private-equity bid. True enough, private equity recently paid nearly £8bn for TDC, the Danish telecoms operator, which up until recently wouldn't have been thought remotely possible either. Even so, there's quite a difference between £8bn and £20bn.

And though private equity might be overflowing with money looking for a home, few individual private-equity funds are empowered to allocate any more than 10 per cent of their assets to any one investment. The upshot is that the consortium would have to be an awfully large one to get to the starting gate at all.

The more players, the more room for disagreement, which is another reason why private equity would have to secure the agreement of the board to stage its offer. Unfortunately for them, Sir Christopher Bland, the chairman, shows little sign of wanting to sell.

To the contrary, he and his chief executive, Ben Verwaayen, are rather enjoying the glory of a well-managed turnaround. The company was a basket case when Sir Christopher came aboard. Now it's got one of the most credible broadband strategies in Europe, as well as a leading position in the market for global corporates.

Then there is the little problem of the pension fund. Significant progress is being made in closing the deficit, but it remains a big one. As one of the largest pension funds in the land, with a tail of liabilities which dwarfs the company's stock market value, it would plainly be a huge risk for a leveraged bidder, even if the pensions regulator were to allow it in the first place.

There are also big risks still attached to the cash flow, with revenues from metered call charges falling faster than broadband revenues are growing. It's not yet clear where the balance will end up.

Anything is possible in these markets, and if the current bout of speculation leads to a well-deserved re-rating, so much the better. But I wouldn't bank on a private-equity bid to support it.

j.warner@independent.co.uk

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