Jeremy Warner's Outlook: What future for Royal Mail as Deutsche Post wades into UK with mooted bid for Exel?

Diageo blessed by uninteresting times; Wrong call on interest rate cut
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The Independent Online

Having already bought DHL, Deutsche is setting its sights on Exel, the British logistics company. The fact that Exel used to be known as National Freight Corporation rather gives the game away. Logistics is the fancy, "new economy" name given to freight delivery and road haulage.

Exel would tell you that its business these days is as much about outsourcing of supply chain management as lorry driving, but essentially it's all the same thing, which is timely delivery of goods from those who supply them to those who need them. The parallels with postal delivery are obvious and it's easy to see why Deutsche Post, which is already active in the fast deregulating UK postal market, would be interested. It might even be able to use Exel's position in the UK market to further its attack on Royal Mail.

The negative reaction of the Deutsche Post share price to the news yesterday reflects fears that it will end up overpaying. Even for Deutsche Post, £3.5bn is quite a bite. The valuation demanded by Exel in return for agreement is bound to be a fancy one. Yet as a quoted entity, Deutsche is at least free to tap the capital markets to spend as freely as its shareholders will allow. The same is not true of Royal Mail, which is still wholly state-owned, and quite unlikely, given the politics of it, to be privatised any time soon.

As others underwrite their future in the face of cross-border competition in postal services by expanding into new spheres of activity, Royal Mail seems condemned only to a future of contraction. The case for privatisation has never been stronger, if only to give the company a chance of survival in a fast changing world, yet the Government, still in the thrall of the posties, refuses to act.

This is not exactly a manifesto pledge. Labour has only said there are no plans to privatise, which is not quite the same thing as ruling it out. But given how much else the Prime Minister has on his plate, he's unlikely to risk the wrath of his party by giving this beleaguered company its freedom.

Besides, the responsible minister, Alan Johnson, Secretary of State for Trade and Industry, is himself a former postie. The tragedy is that he may be condemning his beloved former employer to oblivion by refusing privatisation at the same time as throwing the postal market open to competition. Germany seems to have handled these reforms much better than Britain.

Diageo blessed by uninteresting times

There are big boring companies (BBCs) and little boring companies (LBCs), and then there are big interesting companies (BICs) and little interesting companies (LICs). To the relief of investors, Diageo, the international drinks group, has in recent years been very much a BBC. It was not always so. Fast back 20 years to when the company was known as Guinness and boring would be the last word to describe the roller-coaster affairs of what was then one of the UK's most dynamic enterprises.

Under Ernest Saunders, the company went from one takeover to another, culminating in the great bid battle for Distillers. It destroyed Mr Saunders, and many more besides, when it emerged that the takeover had been won by paying massive inducements to ramp the share price, but it was the making of Guinness, which under Sir Anthony Tennant quickly became one of the biggest companies in the FTSE 100.

It was Sir Anthony who reaped the benefits of Mr Saunders' foul play by finally realising the full potential of Distillers' stella collection of top international drinks brands, though even Sir Anthony in a later guise was eventually to be engulfed by scandal. Such are the vicissitudes of corporate life.

Nor was this the end of the "interesting" phase. For years, the company's affairs were dominated by a stormy relationship with LVMH's Bernard Arnault, the French financier with whom Sir Anthony had somewhat unwisely formed a strategic alliance. This was only finally resolved when Guinness merged with the drinks interests of Grand Metropolitan, a deal which M. Arnault fought tooth and nail. Then the company changed its name to a silly, Latin-sounding invention, and became boring almost to the point of invisibility.

For shareholders, on the other hand, dull and consistent is generally a better experience than interesting and flash. So it has proved under the present incumbent as chief executive, Paul Walsh, whose approach to brand management may seem plodding but has proved highly effective. As the goliath of the industry, top and bottom line growth is never going to be any more than pedestrian, but boy does this company generate an awful lot of cash.

With only minimaladverse consequences for the group's credit rating, Mr Walsh has effortlessly raised his annual dividend by 7 per cent and promised to double the share buy-back programme to £1.4bn a year for at least the next two years. That would take total capital payment to more than £10bn in as many years, or nearly half the company's present market capitalisation. Only BP is as reliable a cash gusher as this.

Yet as Mr Walsh is quick to point out, he could have done a lot more. The reason he didn't is that he wants to preserve his A grade credit rating so as to have the flexibility to make acquisitions. So is Diageo about to get interesting again?

Don't hold your breath. Diageo is already so dominant in the spirits market that Mr Walsh is severely constrained in what he can bid for, while in beer, the assets are either too expensive, or as with the family-controlled Heineken, not for sale. Diageo's days of grand, empire-building takeovers are very probably over. But if Mr Walsh cannot bid for companies, he can bid for brands, and in a low-key way he's been steadily topping up the portfolio. He even managed to get something out of the fallout from Pernod's acquisition of Allied Domecq, which nobody would have thought likely.

He promises more of the same, a slow, incremental build-up of additional brands wherever there are holes in the portfolio to fill. No transforming deal then? Mr Walsh is careful not to rule it out, but it is hard to see where such a deal would come from that would meet his demanding criteria. Which is just as the shareholders like it - boring but remunerative.

Wrong call on interest rate cut

It's looking ever more likely that last month's quarter-point cut in interest rates was a mistake. Since I argued for it at the time, this is not an easy thing to admit. Anecdotal evidence of a rapid slowdown was strong and seemed easily to justify the risk of being wrong. Call it an over-reaction to the terrorist atrocities of 7 July, or listening to too many hysterical retailers, but the economy seemed to be stalling badly. In any case, a quarter-point cut could easily be reversed.

This now looks to have been a bad call, not just because of the extra boost to inflation delivered via higher oil prices by Hurricane Katrina, but more importantly because the outlook, both for the world and British economies, seems to be brightening markedly going into the autumn. Why's this? Mainly it's down to buoyant corporate profits, which at last seem to be delivering the hoped-for pick-up in investment and marketing spend. The economy didn't need the extra boost of a cut in interest rates, while the inflationary dangers of soaraway oil prices are all too apparent.

j.warner@independent.co.uk

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