Jeremy Warner's Outlook: We sell it cheap, they sell it back again with mark-up. A scandal or just smart business?

Kingfisher: Murphy takes a battering; Arcelor comes out fighting in Mittal bid
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The Independent Online

It's those dastardly Europeans again. Not content with imposing their ghastly laws on us, swiping all our fish, taking away our weights and measures, and generally destroying our traditions, they've also been conspiring to send our gas and electricity bills through the roof.

Believe it if you will, yet the Brits have plainly achieved a victory of sorts by persuading Neelie Kroes, the European competition commissioner, to launch a fully fledged investigation into alleged price fixing by Europe's biggest energy utilities.

Europe's failure adequately to liberalise her energy markets has long been a source of legitimate complaint for British energy companies, which have found it virtually impossible to break into continental markets. Whether such liberalisation would also improve the lot of the British consumer is more open to question, but it certainly couldn't do any harm and if it led to more transparency, then everyone would at least know where they stood.

The main point of dispute lies with the interconnector which allows gas to flow between the Continent and Britain. In the summer, when supply in Britain is plentiful and prices cheap, the gas flows freely to the Continent.

Yet in the winter, when British demand outstrips the North Sea's capacity to supply it, and prices therefore rocket beyond continental levels, the pipeline stays strangely empty. There's no compensating flow the other way, even though market prices dictate there should be. British consumers have already paid £1bn more than they should have done for the gas this winter, says Ofgem, and unless something is done, it will soon be even worse.

A perfectly simple, non sinister explanation exists for this phenomenon, which is that the spot market is limited because continental energy companies must use their long-term supply contracts to honour their own customers first. Greater storage capacity makes them more capable of hoarding the supply against peak demand than their British counterparts.

That we sell them our gas cheaply during the summer because we've nowhere to store it, and then they sell it back to us expensively during the winter may be thought a little rough, but hardly scandalous. It's not even commercially questionable practice, still less illegal.

Even so, the continued existence on the Continent of powerful, vertically integrated monopolies plainly cannot be helping matters. If the Brussels' inquiry leads eventually to the separation of these companies into distribution and supply, in much the same way as has happened in Britain, it can only be for the good - and I don't mean just for the investment bankers who advise on such transactions.

Kingfisher: Murphy takes a battering

Should Gerry Murphy, chief executive of Kingfisher, be taken out and summarily executed, or is he right to insist that in an extraordinarily difficult market for DIY, the group's core B&Q brand is doing as well as could be expected?

Yesterday's trading update was grim to the point of dire. Curiously labelled "Q4 highlights", the statement admits to a 9 per cent fall in like-for-like sales and a plunge in gross margins for the year as a whole of a stomach churning 200 basis points. "Lowlights" would be a more accurate description.

Whether this is better than the DIY market overall, as the company claimed yesterday, is a matter of some debate. Kingfisher is one of the first to report, so it may take a while for the full picture to emerge. In the meantime, it's evidently the case that almost everyone in the household goods market is having a terrible time of it.

Office for National Statistics figures released yesterday show a 2.4 per cent fall in the household goods sector of the retail market in the three months to January. Since these numbers would include items such as flat screen TVs which were flying off the shelves, it is reasonable to assume that anything in the area of home improvements would have been much more seriously hit.

With credit conditions tighter across the board, new kitchens, bathrooms, home extensions or even a fresh lick of paint for the kiddies' bedroom are expenditure that can wait another day. To add to the picture of carnage in the DIY sector, there are two substantial players in the market - the quoted MFI and the private equity owned Focus - which are literally fighting for their very existence. Maverick price discounting is therefore the order of the day.

All this may help explain Kingfisher's poor showing, yet it doesn't entirely excuse it. As the market leader by some distance, with the best sites, the greatest buying power, and, in theory at least, the best IT systems, B&Q should be flourishing in conditions like these by capitalising on the misery of its weaker competitors.

The fact that B&Q was one of the few retailers not in a position fully to roll out chip and pin across its estate this week may be symptomatic of wider management failings. Mr Murphy has moved to change and strengthen his senior team at B&Q, but there's plainly been a period of sustained lack of focus and drift, which might be called B&Q's lost year.

B&Q is too far ahead of its nearest rival for there to be any question of it being ousted from pole position, but the same might once have been said about J Sainsbury and there is certainly very considerable discontent in the City about the performance of this company. There's a new chairman joining this summer - Peter Jackson, former chief executive of Associated British Foods. He's as tough a cookie as they come and if Mr Murphy hasn't got a firmer grip on the business by then he'll have to answer the consequences. Only one thing seems certain. The trading environment is not about to come to his rescue.

Arcelor comes out fighting in Mittal bid

Forget the allegations of racism, anti-Indian bias, poor corporate governance and all the other mud slinging that has erupted since Mittal Steel made its hostile bid for Arcelor, the two sides have finally started to argue about value, and at this stage of the game, it looks like first set to Arcelor.

Whereas Mittal was forced to announce a sharp drop in annual profits this week, Arcelor has been able to unveil a big rise, helped by cost reductions and strong growth in the group's low cost Brazilian operations.

The news at Mittal was weakness in China, where sales are being hit by the rapid expansion of domestically based capacity; at Arcelor it was the resilience of the higher margin, added value end of the market, which management cite as a key advantage over the more commodity driven nature of Mittal's business.

There's also an 85 per cent hike in the dividend, laughably passed off by Arcelor's chairman Guy Dollé yesterday as just in the normal course of business and easily justified by the structural improvement in profitability he's just managed to achieve.

Pull the other one. But for Lakshmi Mittal's bid, it's impossible to believe the payout would have been raised by as much. Even so, it may just about be sustainable and it certainly creates a major problem for the Mittal bid, which looks more like a reverse takeover attempt by the day. The offer is mainly in paper, which means that anyone accepting it would be electing for an immediate and very substantial reduction in dividend income.

Mr Mittal continues to promise synergies of at least $1bn a year. Arcelor insists that with so little geographic overlap between the two, there's no industrial logic, and it cannot understand how Mr Mittal arrives at his number. Whatever the truth of the claim and counterclaim, it's looking ever more certain that Mr Mittal will have to raise his offer to succeed.

Having categorically stated this week that he will not, it's an interesting question as to whether he will now be allowed to. If the battle were being fought under City takeover rules, he'd be held to his statement. The rules may be more pliable for Luxembourg registered concerns. So pliable in fact, that Luxembourg is said to be trying to rush through a change that would in effect kill the Mittal bid stone dead by forcing the company to make a full cash alternative.

Let the fight take place on value instead. On yesterday's evidence, Arcelor might even win.

j.warner@independent.co.uk

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