Jeremy Warner's Outlook: Why shareholders think BSkyB's the limit

Interest rate peak; Hays pay-off?
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The Independent Online

BSkyB is an extraordinary successful company. Of that there is no doubt. Indeed, it can reasonably be described as one of the most remarkable entrepreneurial achievements of the past 20 years, a lasting monument to Rupert Murdoch's vision, energy and drive as a business leader. Among British companies, there are no obvious comparators, unless it be Vodafone. Regrettably, Europe still struggles on this front to emulate the US, where companies that have come from nowhere in 20 years to achieve world class status are two a penny. In Europe, there are only a handful of them. Sky is one.

BSkyB is an extraordinary successful company. Of that there is no doubt. Indeed, it can reasonably be described as one of the most remarkable entrepreneurial achievements of the past 20 years, a lasting monument to Rupert Murdoch's vision, energy and drive as a business leader. Among British companies, there are no obvious comparators, unless it be Vodafone. Regrettably, Europe still struggles on this front to emulate the US, where companies that have come from nowhere in 20 years to achieve world class status are two a penny. In Europe, there are only a handful of them. Sky is one.

Yet, ironically, BSkyB's relationship with the City remains fraught with difficulties. The reason is Mr Murdoch. Sky would be nothing without him, yet many investors continue to mistrust his modus operandi. It's a sort of love-hate relationship. Nobody can but help admire his determination and achievement, but at the same time some investors suspect him of continually disadvantaging them, or rather, of single-mindedly pursuing his own maverick agenda regardless of their interests and wishes.

First came the ousting of Tony Ball as chief executive to install Mr Murdoch's son, James, in his place. Now there's the plan to buy back 5 per cent of the company's shares, for which Sky will seek permission at next month's annual meeting. Given that Mr Murdoch, through News Corp, controls 35 per cent of the stock, there is not much doubt about the outcome. Yet the effect will be further to strengthen Mr Murdoch's grip on the company. As the capital base shrinks, Mr Murdoch's economic interest will rise. To enable Mr Murdoch to do this, the company will have to seek a dispensation from rules designed to prevent creeping control, even though this is precisely what will occur. Mr Murdoch strengthens his control without having had to pay a premium for the privilege.

The subtext to these bruising encounters is the suspicion that Mr Murdoch is pursuing an entirely different strategic agenda for Sky to the one favoured by his outside shareholders. Sky is a rapidly maturing company. It's been through its big growth phase, and should, by convention, now be at that stage of corporate development where it pays out its cash flow in the form of ever increasing dividends. Yet the Murdochs appear not to want to do this. Instead, they want to continue to chase new subscribers and growth, and if there is anything left for afters, to spend it on buy-backs rather than special payouts. Is Sky now a yield stock, or still a growth stock? The City thinks one thing, Mr Murdoch another.

There is no obvious solution to these problems. The Murdochs think their share price absurdly cheap, a point of view I would tend to agree with, yet Mr Murdoch senior says he couldn't afford to buy out the outside shareholders because the dollar is too weak against the pound. Nor in any case would they find it at all easy to do so, for almost any price they thought worth offering would by definition be too cheap. If News Corp thought it worth bidding at, say, 600p a share, it would imply that in News Corp's view the real worth of the company was a good deal higher. As chairman and chief executive of Sky, Mssrs Murdoch senior and junior would find themselves in an impossible position.

Sky is in many respects a classic for the debt financing of private equity. Its monopoly of pay TV is relatively secure, and its revenues are reliable and predictable. They could easily be securitised. Yet the business would then have to be run for cash, which would be at odds with Mr Murdoch's ambitions for further growth. The truth is that the free cushion of equity provided by outside shareholders suits Mr Murdoch's agenda down to the ground.

Mr Murdoch once said that if shareholders don't like the way he runs his company, they should sell the shares, and in a way he's got a point. Everyone knows what they are buying into with BSkyB. For better or worse, you are hitching a ride on the Murdoch express. It is he, not you, who controls the speed. Yet as long as News Corp remains a significant shareholder with management control of the company, there will always be these gnawing corporate governance concerns, which in turn means the shares will always trade at some sort of discount to fair value.

Interest rate peak

Is the Bank of England's repo rate already at its cyclical peak? A year ago, nobody would have thought it remotely possible that rates would peak at a "mere" 4.75 per cent. Most had the ceiling pencilled in at 5.5 per cent, while a few thought rates might need to rise as high as 6 per cent to choke off the housing boom and deal with resurgent inflationary pressures. Views have changed markedly over the past three months. Nobody thinks the Monetary Policy Committee will raise interest rates today at the conclusion of its monthly meeting, and few now think it will do so either next month or the month after. If growth returns to trend of 2.5 per cent or less next year, as most suspect it will, there may be no need for further rate rises at all.

The evidence isn't yet conclusive, but a pronounced slowdown does indeed seem to be under way. Manufacturing has contracted for three months in a row, consumer confidence is falling, and retail sales growth is slowing fast. Yesterday's house price survey from the Halifax showed a sharp uptick in house price inflation for September, but this is at odds with the rival Nationwide index and with most anecdotal evidence. Even Halifax asks us to concentrate on the three-month moving average, which again shows a considerable slowdown.

With long-term interest rates, it has been like the Grand Old Duke of York. Having been marched back up to the top of the hill, they've been marched right back down again over the past three months. One minute, the markets are worrying about runaway, inflationary growth, the next they are worrying about recession and deflation once more. Into this cocktail of concerns flows the high oil price, which is both inflationary, because it raises industry's costs, and at the same time deflationary, because it reduces the amount of money for spending on other things.

I'm not yet wholly convinced that there isn't another quarter point to come before the Bank calls time on rising interest rates. But the MPC will take its time in deciding. Much depends on what happens to the oil price, and I've given up making predictions on that one.

Hays pay-off?

Heard the one about the company boss who restructured himself out of a job and then walked away with a payment for loss of office? In the case of Colin Matthews, the former chief executive of Hays, the joke is on shareholders. Mr Matthews has just trousered £1.025m for his last year's work at Hays, £282,000 of which was a performance bonus for his success in dismantling the group. Indeed, so successful was Mr Matthews, that by the time he had finished there wasn't a business left that he thought merited his skills as a chief executive.

Even though Mr Matthews picked up a new job with Severn Trent on the very day that he left Hays, he still collected £103,000 in severance pay (plus a £224,000 cash top-up in lieu of pension). Quite why he deserved a bonus for breaking up the company and then compensation for restructuring himself out of a job is not clear. Hays says that Mr Matthews has actually done shareholders a favour because he was contractually entitled to a year's severance pay but has only taken three months of that to cover the period between leaving Hays and joining Severn Trent.

But it will leave a sour taste in the mouths of all those employees who get nothing more than a P45 and the bare minimum in redundancy when they too are downsized. Meantime, shareholders in Severn could be forgiven for wondering how long Mr Matthews will stick around. He is something of a corporate gadfly, having done four different jobs in as many years.

jeremy.warner@independent.co.uk

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