Jeremy Warner's Outlook: The last laugh may be on the empire-building Germans as BOC falls to Linde's £8.2bn bid

Click to follow
The Independent Online

Has not Wolfgang Reitzle, chairman of the German gases and forklift truck company Linde, had his fill of the British industrial scene? Today, Mr Reitzle is an empire-building German industrialist of some ability, but 10 years ago he was running Rover Group, a company so troubled that it used to be referred to by its then owner, BMW, as the "English Patient". His next charge - looking after Jaguar and Land Rover on behalf of the Ford Motor Company - could scarcely be regarded as any less challenging. Mr Reitzle never did manage to stem the losses.

Now he's back, a glutton for punishment you might think, with a very fully valued £8.2bn bid for BOC. Unlike his last two British charges, BOC is no basket case. The company is stable, cash generative and reasonably well managed. All the same, this is a high-risk endeavour for Linde, which is the smaller of the two companies. Its all-cash bid is only partially offset by the issue of new equity in Germany. Even after disposal of the forklift trucks business to help pay down the debt, the transaction continues to look very highly leveraged.

What's more, the anticipated cost savings of €250m a year are a long way short of those necessary to justify the premium. Nor, with little overlap between the two companies, will that make them any easier to achieve.

The BOC board studied the alternatives - a big capital return, or perhaps that BOC should turn the tables on Linde and bid itself - but couldn't make the figures add up to anything like Linde's £16 a share. Much has been written and said about how the choicest of Britain's industrial assets are falling like nine pins to Johnnie Foreigner, but on a short to medium-term view there's little doubt who is getting the better end of the bargain here. Mr Reitzle gains an empire; BOC investors seem to be cleaning up on the shareholder value.

Why do Mr Reitzle's own shareholders tolerate these imperial ambitions? In this regard, he's greatly helped by the fact that his two largest shareholders, Deutsche Bank and Commerzbank, are also his biggest lenders. What they lose on the shareholder value, they gain on the banking fees. Germany's banker/shareholders used to be thought one of the country's greatest industrial strengths. Yet if there were a greater focus on shareholder value, the country's banking system, laid low by unrecognised bad debt, might not today be in such a mess.

Still, these are issues for Germany and its bankers, not for the UK stock market. It's a little bit galling to see yet another of the big names of British industry and commerce falling to a foreign takeover, but provided the price is right, it's hardly of any great long-term significance. Only a quarter of BOC's revenues come from Britain in any case. Asia and America are these days much bigger sources of income.

Provided there are new "national champions" coming along to replace the old ones, the present cull among our established industrial names may not matter all that much. The same rallying call went up when BMW acquired Rover. Even then it was hard to see why anyone would want to save this dog of a company for the nation. As Mr Reitzle knows to his cost, there's no doubt who had the last laugh on that one.

The corporate empire builder will always in the end over reach and extend himself. Whether BOC is the deal too far for Mr Reitzle is at this stage unclear, but I'd give odds on an enforced break-up five to ten years hence. The Brits can then buy it all back again should they feel so inclined.

HSBC's profits: why no bank bashing?

One of the most remarkable features of this year's banking season, which drew to a close yesterday with news of an astonishing $21bn profit from HSBC, is how little bank bashing there has been. Time was when such an explosion of profits would have prompted an equally forceful outpouring of outrage and indignation.

How dare the banks make so much money out of their unhappy customers, is the usual cry. Punish, tax and bash them. Yet this time around there have been few such calls. Has the political Left gone soft? Or is it too busy with the excesses of the oil companies to notice?

Whatever the explanation, it is unlikely to be for the rational reason that though the banks are reporting record results, the profits of their UK retail banking operations are broadly in retreat. HSBC is something of an exception in reporting a 17 per cent rise in the profits of its UK retail business, a result powered mainly by cost-cutting and the acquisition of the financial services arm of Marks & Spencer. For most of the others, retail banking profits are under pressure.

The reasons are not hard to fathom. In all cases, including HSBC, the impairment charge is substantially increased to take account of the growing bad debt experience of the consumer credit and mortgage market. What's more, there has been a marked slowdown in consumer and mortgage lending. As credit conditions have tightened, the market has paradoxically become more competitive, and as banking customers have become more financially savvy, the costs of customer retention have risen.

As the consumer credit gravy train slows, banks must instead turn to long-term savings, overseas, and the capital markets to keep the profits flowing. Furthermore, if Sir John Bond, chairman of HSBC, is right in warning about the dangers posed by global trade and capital imbalances, banks will need all that fat and some to survive the coming storm.

Banks have changed out of all recognition since the days of boom and bust that used to characterise the banking cycle. Whether it is any less risky remains an open question. To see where the new sources of risk might lie, just follow the money. Sir John Bond made £4.48m in pay last year. This is a large sum by anyone's standards, yet it is dwarfed by the more than £8m a piece bagged by his two investment banking heads, and by investment banking standards, they are poorly paid for what they do. The Achilles heel of the banks has switched from the banking cycle to the capital markets. We can only hope they know what they are doing.

Nuclear power: an unsustainable option

There was never any doubt which way the Government's Sustainable Energy Commission would jump on the nuclear power debate, even if the conversionof James Lovelock and other "greens" to the nuclear cause might have led ministers to hope otherwise.

Nobody could think of nuclear as a remotely sustainable source of energy. The feedstock is finite, its extraction is itself highly energy intensive, and its waste products remain toxic for hundreds of thousands of years. Nobody wants the waste repository anywhere near their doorstep.

For Sir Jonathon Porritt, the commission's chairman, there have to be better solutions. Perhaps deliberately, he's rather vague as to what they might be.

At present, nuclear accounts for about 20 per cent of Britain's power generation. It is almost certainly unrealistic to think that this near carbon-free source of power can be replaced by renewables and energy efficiency. Of the two, the latter looks by far the most promising, yet so far the Government has shown very little appetite for administering the necessary dose of medicine.

As things stand, the Government remains committed to reducing Britain's emissions of greenhouse gases by 20 per cent by 2020. Yet ministers have so little faith in their ability to deliver such a reduction that they refer to it as an aspiration, not a target. Sir Jonathon might be right in insisting that nuclear is not the answer, yet it is hard to see how else the Government can come anywhere close to meeting its aspirations on greenhouse gases.

j.warner@independent.co.uk

Comments