Jeremy Warner's Outlook: Vodafone consolidates in South Africa

Monstrous alliance of monopolists is born; Manufacturers buck credit market gloom
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The Independent Online

Little more than a month after rebuffing attempts by activist investors to limit his hand on acquisition-making, Arun Sarin, chief executive of Vodafone, is considering splashing out the thick end of £5bn buying another 50 per cent of Vodacom, South Africa's largest mobile operator.

Of all the proposals put forward by the activists, the one which would have forced the board to seek shareholder approval for any deal above $1bn was always the most ludicrous. For a company of Vodafone's size, $1bn amounts to little more than a week's revenue. Had they succeeded, the activists would have further complicated what in the case of the South African business is just a necessary piece of housekeeping.

Vodafone already owns 50 per cent of Vodacom, so already has effective control of the business. The situation is therefore quite unlike the US, where Vodafone is in a minority to Verizon's majority position. In the US, operational and strategic management control lies with Verizon, making Vodafone's position an awkward one.

Yet even in South Africa, the situation has the potential to turn against Vodafone. South Africa's Telkom is in the midst of a strategic review in which it has made it plain it is open to offers for the other 50 per cent stake in Vodacom. Vodafone already has pre-emption rights. Standing idly by and letting someone else snap up the stake risks lumbering Vodafone with an altogether less co-operative partner. Besides, Vodafone may not have to buy the whole thing. If it bought just a part of the holding, its positron would still be reasonably well protected.

Vodafone has set itself published criteria for the amounts it allows itself to pay for emerging market assets, but as the recent acquisition of Hutchison Essar in India demonstrated, in practice these tend to be pliable. In the end, investors are forced to trust Mr Sarin's judgement. So far, it has proved good. He got it right in Turkey, and the early signs are that he's got it right in India too. Africa is one of the other big growth markets where he is determined to make headway. Assuming the price dem-anded is not off the scale, acquiring full control of Vodacom would be an important milestone.

Monstrous alliance of monopolists is born

Many years ago, I asked Bernard Arnault, head of the French luxury goods group LVMH, whether there was any purpose other than obfuscation in the "cascade" structure of corporate ownership so beloved of his and other French companies. It was very simple, he told me, as if only a fool would fail to understand what he plainly saw as an entirely justifiable use of the bountiful opportunities offered by the capital markets. It was so that he could control a very large corporate empire from a quite limited capital base.

The French Government seems to have taken his message to heart in its determination to force through the merger of Gaz de France and Suez to create the world's fourth largest energy utility behind Gazprom, Eon and EdF. They like long, drawn-out takeover sagas on the Continent, as we are learning with the battle for control of ABN Amro, now well over six months old. Yet ABN has got nothing on this one, which has been going since February last year.

It all started with the threat of a hostile bid for Suez from the Italian utility Enel. This promp-ted a highly nationalistic res-ponse from France, where the Government offered to put the largely state-owned Gaz de France on the table as an alternative. The one-for-one share swap terms agreed considerably diluted this controlling interest, but it didn't entirely remove it.

Unfortunately, it was plain from the start that though the terms might have suited La France, they considerably undervalued Suez. To increase the bid would have been further to dilute the stake to a non-controlling position, laying the Government open to the charge from still powerful public sector unions that this was back door privatisation. The coincidence of these events with the French elections made the issue doubly sensitive.

After much arm twisting by Nicolas Sarkozy, the French president, Suez has now finally agreed to sell off a majority holding in its water and waste management group, theoretically squaring the circle on valuation. Suez will none the less retain a controlling 35 per cent interest, establishing the "cascade" structure so fondly recalled by M. Arnault. The French Government ends up with a controlling interest in a combined Gaz de France/Suez, while Gaz de France/Suez retains a controlling minority interest in the water and waste management group.

The cause of French economic patriotism is thus defended. On these shores, you might have thought that Centrica would object to this monstrous alliance of monopolists, but because it will allow Centrica to exercise pre-emption rights and buy out Gaz de France's interest in SPE, the largest alternative gas supplier in Belgium, it claims to be not that bothered.

Perhaps it should be. There are big synergies to be had from crunching Gaz de France and Suez together, but an equal purpose is that of bulking up to pursue further M&A opportunities within the European market. Spain is likely to be first on the new behemoth's shopping list. Britain may not be far behind. Whatever the new company's ambitions, its creation isn't going to bring the goal of liberalisation in European energy markets any closer. Europeans seem more interested in creating national champions than furthering the cause of competition.

Manufacturers buck credit market gloom

The great thing about investment banking is that the smartest operatives make their money on the way down as well as the way up. Nor is it just the traders who thrive on volatility that manage to pull off this trick. Having first made a fortune from clients putting all those clever deals and structured instruments together, the fortune is then made all over again tearing them apart. The investment banker is architect, builder, demolition man and redeveloper all in one. The faster the cycle, the more he makes.

OK, so this may be an unduly cynical view of this extraordinarily innovative industry. Plenty of City people will lose their jobs because of the present crisis, and bonuses will be much reduced, poor dears. But in the round, it won't be that bad. The Bank of International Settlements is already saying that thus far the fallout isn't as severe as the crisis of 1998, when the Federal Reserve was forced to organise a rescue for the hedge fund, Long Term Capital Management. Both the economy and the markets recovered quickly from that particular shock.

I would hesitate before declaring the present crisis over, but it already seems apparent that the events of the past month were not "the big one" – the financial armageddon – the doomsters forever predict. Credit conditions have tightened markedly, but they also plainly needed to given the excesses that were building up in the financial and property markets. This is not going to lead automatically to a recession. The world economy is still too strong to make this a likely outcome.

The renaissance in British manufacturing as highlighted by a buoyant survey from the Engineering Employers Federation (see analysis, page 38), seems to prove the point. There is no sign whatsoever of a let-up in growth and optimism in this once bombed out segment of the British economy.

Admittedly, it would have been hard for Britain's manufacturing tradition to have shrunk any further, so bad had things become, yet thanks largely to emerging markets development, and a focus on specialist, high-tech functions, it seems once more to be in rumbustious form. Its new-found success also provides a welcome, real world antidote to the long faces of the financiers, and the self-important, doom laden predictions about the consequences of their antics.

j.warner@independent.co.uk

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