Jeremy Warner's Outlook: Whose money is it anyway as now Aviva plots to raid the life fund's orphan assets?

Another disastrous showing for GCap; Case for another SABMiller re-rating
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The Independent Online

After AXA's experience in trying to reclaim hundreds of millions of pounds of orphan assets from its life funds five years ago, you might have thought everyone else had been put off for good. AXA eventually succeeded in obtaining the capital, but only at the cost of being portrayed as a plunderer of policyholders' assets. The ensuing High Court battle with the Consumers' Association sorely damaged the brand and for a while the AXA name was dirt.

Yet here comes Aviva, the biggest insurer in the kingdom, to have another go. The prize is a big one - some £3.3bn of orphan assets spread across two funds - but is it worth the fight with policyholders to get it?

Orphan assets are undistributed profits that have built up in life funds over decades. Some of these monies will be the unclaimed accounts of lost or dead policyholders, but mostly it is just surplus profit and capital which for one reason or another has never been distributed through the usual "bonus" mechanism.

The nub of the issue is whether this money belongs to the shareholders or the policyholders. Aviva takes the view that most, if not all, of it belongs to the shareholders. The Consumers' Association (which to the bewilderment of all these days calls itself Which?) has always insisted that since the sponsoring company is typically entitled to just 10 per cent of the profits of a life fund, it should be limited to the same proportion of the orphan assets.

In the AXA case, the Financial Services Authority managed to completely misjudge the issue, rubber-stamping a division of spoils that policyholders later condemned as grossly unfair. It doesn't intend to make the same mistake again; all consideration of such matters today requires the appointment of an "independent advocate" to look after the interests of policyholders. The news yesterday was that Aviva is seeking just such an advocate.

It's going to be a tough negotiation. Aviva has already conceded £1.2bn of the assets need to be retained in the funds for capital-adequacy purposes anyway. It's questionable, given the meltdown that occurred in many of these funds just a few years back, whether any capital distribution should be allowed at all. As things stand, the orphan assets provide a useful cushion against insolvency.

Still, Aviva seems determined to give it a go. If it succeeds, the money won't go directly to shareholders but to fund growth elsewhere in the business. So where to find the independent advocate? Mark Wood is on the market, having lost out to the other Mark - Tucker, that is - for the chief executive's job at Prudential. Then again, perhaps not, for though few would be better qualified for the role, it was Mr Wood who was responsible for pushing through the AXA raid on orphan assets. Little thanks did he get from his French masters for it either. Shortly afterwards he was chopped.

Another disastrous showing for GCap

More bad news for GCap Media in the latest Rajar figures. Even the chief executive, Ralph Bernard, fails to find anything positive to say about them. With commendable candour, he describes the figures as "disappointing". He might have gone further. In fact they were disastrous, with market share for the key 95.8 Capital Radio franchise collapsing to little more than 5 per cent. Only a few years back, it was double that. There's little to ease the pain elsewhere either, with even Classic FM down on the quarter.

With the share price flat on its back, there could scarcely be a better moment for much rumoured predators to pounce, including Clear Channel's Roger Parry. Or perhaps even Daily Mail & General Trust, which cannot be pleased with the progress of its investment since it allowed GWR to be folded into Capital, might be tempted to cough up for the balance.

Mr Bernard promises to outline his strategy for addressing loss of audience share with the interim figures next month. He's already upped the targeted cost savings from the merger from £7.5m to £25m, yet this counts for nothing if he cannot stem the desertion of listeners.

As with ITV, the essence of the counter-attack lies in the company's digital strategy. In a fast-fragmenting media market, the only solution may be to fragment yourself, which is what GCap and ITV have been doing by adding progressively more digital channels. GCap has more than 100 of them, which must be close to unmanageable. Yet Mr Bernard needs to address the legacy franchises too. GCap's loss seems to have been Chrysalis's gain. Heart FM emerges as the clear winner from yesterday's Rajar figures. Interestingly, the BBC continues to improve its share over commercial radio, with nearly 55 per cent of the market in the last quarter, so GCap's poor showing cannot all be down to digital fragmentation.

Back at Capital, Johnny Vaughan has proved no substitute for Chris Tarrant on Capital's drive-time breakfast show, which is fairing even more poorly than the station as a whole.

For the brave in private equity and the trade, this is the time to take a pop for GCap and ITV, whose share price sank to little more than 100p yesterday. Either the shares are hugely undervalued or, as the pessimists suggest, there really is no future for these legacy stations. Take your pick.

Case for another SABMiller re-rating

Anheuser-Busch is running a price promotion in Florida which knocks out a pack of 18 Budweisers at just $1.99 (£1.10). Even by US standards, the price is so cheap that wholesalers are driving in from bordering states to buy and ship the stuff back.

Florida seems to be the extreme, but in a slightly lesser form a fierce price war in beer is raging all over the US. The curiosity of this outbreak of price discounting is that it was sparked not by some upstart trying to carve its way into the market, or even by one of Anheuser's more established rivals, but by Anheuser itself.

To describe Anheuser as the market leader is an understatement. It is in every sense the dominant force in US beer, with about half the total market. Sure enough, market leaders are quick to respond, brutally in most cases, to discounting by smaller rivals, but they hardly ever initiate it, if only because their higher volumes mean they lose more revenue and profit than anyone else by engaging in a price war. Unilaterally to slash prices is an act of self-harm.

So why is Anheuser doing it? Anheuser claims it's all about restoring price differentials with rival beers and alcoholic drinks. Yet the more likely explanation is the progress being made by SABMiller, whose Miller Lite is No 2 in the market.

When Miller merged with South African Breweries, the brand was down and sinking fast. Against the odds, SABMiller's chief executive, Graham Mackay, has succeeded in reversing this trend, but he's done it through clever and aggressive marketing, rather than pricing. Like a wounded beast, Anheuser is now turning nasty.

None of this helps Mr Mackay's case in arguing that his London-listed share price is still far too low. It's enjoyed a fantastic run over the past three years, but the earnings multiple remains still at a big discount to many rivals in the consumer products sector. Given the company's outstanding growth prospects - SABMiller is supremely well-positioned in fast-growing emerging markets including China - Mr Mackay reckons he should enjoy the same rating if not higher.

To succeed, he first has to convince the markets he should be decoupled from other beer stocks and instead placed alongside more highly valued brand categories. He also has to convince investors that there should be no emerging markets discount to cover political and currency risk. Mr Mackay is a determined chap, and with all the excitement over Chinese and Asian growth, views are changing fast on the risks of emerging markets. Who knows, his view may eventually win through.

j.warner@independent.co.uk

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