Jeremy Warner's Outlook: There seem to be signs of life at ITV, and that's before Michael Grade even arrives
UK's disappearing corporate landscape; Bidding war hots up for Hutchison; Not yet time for contrarian thinking
Wednesday 03 January 2007
Bong. With the speed of Big Ben chiming for News at Ten (or should that be 10.30?), ITV has finally got round to announcing plans for a broadband portal, on which it will be possible to access all ITV programming online. It's even recruited an online high-flyer, Annelies van den Belt from Telegraph Media Group, to manage the enterprise. Is this an early sign of the new broom, Michael Grade, making his presence felt?
Although he's not yet got his feet under the table, he's already suspended the company's share buy-back plans and pledged to invest the money in programming. And it was possibly his appointment that encouraged Ms van den Belt to take the plunge. Yet this is terribly late in the day to be chasing ITV's viewers into cyberspace. All over the shop, Mr Grade has a huge challenge in catching up with the new media front runners.
UK's disappearing corporate landscape
As part of its defence against an unwanted takeover bid from Nasdaq, the London Stock Exchange has been trumpeting the record £28bn it raised in new company listings last year. London's success in becoming the place of choice for company listings is obviously a cause for celebration, yet it disguises some disturbing trends.
While the number and size of overseas companies listing in London is strongly on the increase, the home-grown, corporate-equity base seems to be shrinking with a speed as alarming as that of the polar icecaps. The amount raised by British companies is significantly outstripped by the delisting of equity involved in the growing number of public-to-private transactions. Taking into account share buy-backs, the total size of the listed equity base is getting smaller, even adding in the growth in foreign listings.
Two phenomena are at work here. There is no need, perhaps, to find fault with the first of these. London's success as a financial centre has made it probably the world's leading international source of capital and therefore a magnet for corporations looking for investment. This has prompted growing numbers of overseas concerns to seek listings here.
The second is the continuation of extraordinarily benign credit conditions. The easy availability of cheap money means it makes sense to replace relatively expensive equity with debt. The cost of the debt is far outweighed by the likely return on the equity, driving a flood of private-equity takeovers and share buy-backs.
One reason for thinking this second trend a matter of concern is that gearing companies up with too much debt will plainly have adverse consequences for balance-sheet strength and business investment when credit conditions become less friendly. None the less, the market will do what the market does, and, until demonstrably proved otherwise, we have to assume "de-equitisation" is, in the round, a beneficial force which drives greater business and capital efficiency.
Yet the bigger concern lies rather in the ever-scarcer availability of reasonably well-known and well-researched British companies in which to invest. The more companies that disappear into the hands of overseas and private-equity owners, the fewer there are for ordinary investors to put their money into.
Private equity and hedge funds have been a growing alternative asset class for life assurers and larger, defined-benefit pension funds. Yet both of these institutions are a dying savings mechanism. In their place are individualised savings accounts linked in the main to the performance of listed securities. Both private equity and hedge funds are largely closed to all but the very wealthiest of retail investors. Where retail access is readily available, it tends to be poorly performing.
The upshot is that most ordinary savers are obliged to invest in listed equities if they are to pretend to a decent rate of return. If the companies we know and understand are being progressively replaced by those based in faraway places about which our intelligence and knowledge is patchy, then that seems to me to be just a tiny bit worrying.
Many of these new arrivals are undoubtedly a great deal more risky than the companies which are being delisted. Centuries-old standards of business probity and oversight are being replaced by an anything-goes attitude to listings under which, provided the risk factors are adequately spelt out in the prospectus, so that investors understand the dangers, it doesn't matter what the origins, substance and reliability of these companies might be.
Yet it is in such vehicles that our pension pots are being progressively invested. These changes reflect global trends in financial markets and the world economy. We are only at the beginning of the process. A less predictable future beckons.
Bidding war hots up for Hutchison
Li Ka-Shing, chairman of Hutchison Whampoa, has been much mocked for the disaster of his 3G mobile-phone enterprise in Europe. Hutchison's success with Orange must have gone to his head, it has been unkindly said. In attempting to repeat the exercise, he's squandered countless billions.
Pride prevented him from knowing when it was time to throw in the towel, so instead he's been chucking good money after bad.
Yet it seems that the old fox hasn't entirely lost the Midas touch. In India, he's managed to spark a bidding war for a majority interest in Hutchison Essar, with at least four players, possibly more, each vying for the country's fourth largest mobile phone company. According to reports, the bidding has already reached multiples of earnings not seen since the dying days of the dotcom boom. In some respects, there is good reason for this enthusiasm.
Mobile phone penetration in India is just 15 per cent of a population of more than a billion. There's mouth-watering potential for growth. On the other hand, much of the population still subsists below the poverty line. For the majority, a mobile phone is still an inaccessible luxury, even on the tiny charges and marginal handset prices Indian operators manage to achieve. Yes, there's potential for growth, but is it likely to be as big or as profitable as the markets anticipate?
Whatever the answer, Vodafone, one of the bidders, is going to need Houdini-like powers of escapology to stay in the bidding. The company's headroom is tightly constrained by self-imposed valuation criteria for acquisitions. Vodafone's chief executive, Arun Sarin, will have to make some heroic assumptions on growth potential to break free of them.
Li Ka-Shing may have blotted his copybook with 3, but he made a fortune out of Orange. The price he extracted from France Telecom was so big that it very nearly sunk the company. Mr Li may be about to repeat the trick with Hutchison Essar.
Not yet time for contrarian thinking
With the last bears finally vanquished, I'm beginning to get a little anxious about my previously bullish stance on UK equities. The markets got off to a roaring start to the new year yesterday. It was hard to find a bearish voice among the cacophony of new year forecasts. The mood seems to have become positively Panglossian, which is always dangerous.
As this column has repeatedly argued, there is good reason for remaining fundamentally bullish, both about the world economy and equity markets. In recent months, this has very much become the prevailing view. The contrarian in all of us advises that we should watch out for the consensus and do the opposite.
Yet like a lot of stock market folklore, the contrarian view is most of the time completely misplaced. Only occasionally does it pay to swim against the current. For the time being, we must let it carry us forward, like an incoming tide. Be careful not to get beached though.
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