Jeremy Warner's Outlook: Tesco to concentrate on short-term investor return? Leopards don't change their spots

Why the Chancellor just loves BP; Whitbread settles on a partial break-up
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The Independent Online

By agreeing to the sale and leaseback of up to £5bn worth of freehold property, Tesco seems finally to be bowing to pressure from shareholders for a more immediate return on their money. That, in any case, was the way the company chose to present yesterday's news. There's to be a £1.5bn buy-back, and the dividend too is to be raised by an inflation-busting 14.2 per cent, with the promise that the payout will in future be increased in line with earnings rather than, as in the past, set to deliver ever higher levels of dividend cover.

Yet anyone tempted into the view that Tesco is abandoning its policy of heavy investment in its long-term future in favour of the supposedly more investor-friendly approach of short-term shareholder gain should think again. The dividend is one thing, but the buy-back is little more than illusion. Of the £5bn raised from property sales over five years, more than two-thirds will go straight back into capital spending. The £1.5bn promised for buy-backs barely cancels out the new shares that will be issued over that period as staff bonuses.

With record capital spending of £3bn planned for this year alone, yesterday's set of announcements can hardly be viewed as a private equity style squeeze on investment. Despite the growing backlash against "Big Bad Tesco", Sir Terry Leahy, the chief executive, has no plans to curtail his expansion ambitions, either in Britain or internationally. Indeed, the primary purpose of the sale and leaseback programme seems rather that of further feeding Tesco's appetite for capital than returning money to shareholders.

Despite Tesco's talent for serving the consumer, its share of the domestic grocery market, already at above 30 per cent, surely cannot go much higher. Yet there's nothing to stop the company's growth in non foods and services.

Not withstanding the forthcoming Competition Commission investigation, there is to be a new distribution centre for non-food sales. The company also plans an extended trial of its stand-alone, non-food format, Homeplus.

To counter the negative publicity being drummed up by lobby groups, there is to be £100m for environmental initiatives - everyone is clambering aboard this bandwagon, it seems - and some sort of "multi-pronged" community plan is about to he hatched in an attempt to make Tesco seem even more warm and cuddly than it already likes to think it is. In so doing the company plans to go beyond the rampant consumerism of its message to date of "every little helps".

Yet in other respects Tesco is still essentially what it says on the tin - a jam tomorrow, growth machine rather than the dividend gusher some shareholders say they would prefer.

It is interesting to reflect that what Tesco achieved in the 1990s in overtaking J Sainsbury as market leader - a strategy which meant constantly reinvesting cash flow in growth and improved customer offering - probably wouldn't be possible today. Shareholders would never back such a bold and apparently impossible ambition in today's risk averse investment climate. Yet Tesco has now earned its right to stick to its growth path. If shareholders want something else, they should invest elsewhere. Cash cows are these days two a penny. World class success stories are not.

Why the Chancellor just loves BP

BP didn't quite say it, but the oil colossus came as close as made no difference yesterday to blaming speculators and hedge funds for the renewed surge in the oil price. The fundamentals certainly don't justify it, BP insisted, with demand being more than satisfied by supply. Don't blame the oil producers, Lord Browne, the chief executive, seemed to be saying: it's the speculators who are driving the price higher.

Well perhaps, but the Saudi oil minister used to say exactly the same thing three or four years ago when the price was still under $40 a barrel, and look what's happened since. As it happens, the price of the black stuff eased a little in New York yesterday after President George Bush said he'd temporarily halt deposits to the strategic reserve so as to help lift the pressure on prices.

Yet the possibility of military action, or sanctions, against Iran, one of the world's major producers, continues to be the over-riding force in the market. Speculators in any case only reflect a prevailing view of where things are heading. If they were self-evidently wrong about the market, they'd soon get their comeuppance.

What's changed over the past month to underpin the higher oil price is everyone's view of the outlook for the world economy, which is now a whole lot more optimistic than it was.

A month back, the conventional view was that by the end of the year the US economy, and perhaps the world economy too, would be showing signs of flagging. Today, most people would forecast robust growth well into next year, with US growth perhaps only faltering after the US presidential election in 2008.

What's more, the oil price may be starting to reflect longer-term pressures on supply. The cheaply extracted stuff is running out. It is impossible to forecast exactly when peak production of such supplies might be, but it may be sooner than the industry pretends, leaving the world to fall back on reserves which are much more expensive to extract and process.

In the meantime, BP and others in the midst of today's oil fever continue to be showered by an embarrassment of riches. The super profits are matched by super dividends, paid in large measure to our pension funds, and super taxes to swell the Chancellor's coffers.

The Treasury continues to blame the higher oil price for more depressed growth, but boy is the Revenue managing to claw it all back again. Thanks to the hike in North Sea oil taxation last autumn, the total tax take from BP is expected to surge from 35 per cent of profits in the first quarter to 39 per cent for the year as a whole.

Whitbread settles on a partial break-up

It's quite some years since Whitbread abandoned its roots in the beerage. Now it's planning to strip down further from a sprawling conglomerate of diverse leisure interests to just three divisions - Premier Travel Inn hotels, Costa Coffee shops and the David Lloyd leisure centres.

Alan Parker, the chief executive, has been under pressure to deliver a complete break-up, with the various bits and pieces sold off to private equity. There's little logic in keeping Whitbread together as it currently stands. The strong run enjoyed by the shares over the past two years in part anticipates that it will not.

What Mr Parker, who has always been resistant to break-up, now proposes is a halfway house. Where Beefeater and Brewers Fayre complement the site of Premier Travel Inns, they will be kept and run as a single business. But the rest - some 250 sites in total - will be sold off and the money returned to shareholders. We can only assume that the strategic review ordered of TGI Friday's and Pizza Hut will come to the same conclusion.

Is Mr Parker going far enough, or now that he's set the ball in motion, will he be forced to go the whole hog? Whitbread insists that all three remaining interests are probably too small credibly to be stand-alone businesses. Yet just to sell them to private equity would only be to give away potential and value.

Rather than have them subsumed by others, why not allow them to develop, so that they can eventually consolidate others themselves, Mr Parker would say. The obvious partner for Premier Travel Inns would be Permira's budget hotel chain, Travelodge. As for David Lloyd Leisure and Costa Coffee, there are myriad different possibilities.

Still, Mr Parker has yet to win the argument. Yesterday's partial break-up certainly doesn't bury it. Any private equity bid for one of the remaining businesses would bring it roaring back again.

j.warner@independent.co.uk

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