Jeremy Warner's Outlook: Will the last British company to be bought up by foreigners please turn out the lights?
Wednesday 07 June 2006
Should we be bothered as another important UK company passes into foreign ownership? Despite its free market rhetoric, the Government is likely to be more concerned than it cares to admit at Ferrovial's success in its bid for BAA. It's all very well having an open borders policy on inward investment, but what's going on at the moment is more akin to a bargain basement clearout of the family silver than a refreshing infusion of overseas money.
P&O, O2, Associated British Ports, the London Stock Exchange - one after another some of our choicest and most enduring corporate assets are being snapped up by overseas investors. This might not matter too much if they were being replaced as stock market investments by corporate assets of equal stature and reliability.
Instead it is by such well known goliaths of the UK corporate scene as PartyGaming, a company of little more than six years existence whose business relies largely on an illegal activity, and Kazakhmys, a copper mining operation based in faraway Kazakhstan. These are soon to be joined by Rosneft, a company created around "stolen" Russian oil assets. All these enterprises no doubt have their place, but are they any kind of a substitute for the likes of BAA? I don't think so.
Six months ago nobody would have thought it remotely possible that BAA's key airport assets, the gateway to these islands and the international portal on which much of our prosperity rests, could pass into foreign hands. Most of us had assumed the Government still held a blocking "golden share", and that in any case it wouldn't allow assets of such strategic importance to fall to a highly leveraged bunch of financial chancers.
In fact, the European Commission forced repeal of the golden share some years ago - though it continues untouched in other parts of Europe - while with no obvious competition concerns to answer, it was always unlikely the authorities could block Ferrovial through the mechanism of a mergers investigation. In the end not even some thinly disguised warnings from the Civil Aviation Authority about the dangers of highly leveraged bids, or the threat of break-up from the Office of Fair Trading, could derail the Ferrovial attack.
If nothing else, Rafael del Pino, chairman of Ferrovial, has proved himself to have cojones. His steely determination was evident throughout this battle of wills, and although his opposite number at BAA, the City veteran Marcus Agius, eventually forced him to pay far more than he intended, he didn't blink once. All that was necessary to succeed was done. Mr del Pino gets married next week - his second wife. BAA should make a fine wedding present.
Certainly nothing like it would have been allowed on Spanish soil. All airports in Spain are state owned. As for the Government, it has already attempted to ban EON of Germany from buying the electricity supplier Endesa. In France, they cut up rough when even companies as innocuous as Danon, a yoghurt producer, are under threat of foreign takeover. Goodness knows what would happen if in the forthcoming privatisation of Aéroports de Paris, the owner of the international airport Charles de Gaulle, a foreigner tried to buy in. They could expect an immediate guillotining.
In cross-border mergers, as in much else in Europe, there is no such thing as reciprocity. We allow them; they don't. This at least helps fund the current account deficit, but there will surely come a time when most of the decent stuff has been flogged off, leaving investors who have to rely on the stock market as their way into corporate equity only a rag bag of highly volatile online gaming sites and natural resource stocks in faraway places to stick their money into.
I exaggerate, of course, but only by a little. I'm not quarrelling with the Government's open door policy on foreign takeovers. It's probably the right approach, though it is being tested to breaking point by the current wave of activity. Yet to work it has to rely on a counterbalancing appreciation among UK investors of the nature of value, and there is very little evidence of that in the stock market today, dominated as it is by the demands of hedge funds and other short-term traders.
Mr Agius has more than earned his chairman's fee in extracting such a price from Ferrovial. Nor can he be faulted for turning down the apparently higher offer from Goldman Sachs. Ferrovial offered certainty and immediacy of execution, as well as a limited share alternative offer. With Goldman Sachs, deliverability was more open to question. In an auction it usually pays to sell to the buyer you know is going to sign the cheque.
Anything is still possible, but at this stage it looks as if Goldman Sachs is out of the game. Its chances of re-entering are made that much more unlikely by the break fee of nearly 10p a share BAA would have to pay Ferrovial to wriggle out of the deal.
Yet though Mr Agius has dutifully pursued the will of his shareholders, and has done exceptionally well by them, privately this deal will still irk. It is possible that Mr del Pino and his backers have paid too much and will end up losing their shirts. Possible, but unlikely. Much more likely is that a few years from now, as air travel continues to soar around Europe, the price will look a steal.
The problem lies in the structure of markets where these days the cleverest people all work for hedge funds, leaving the traditional long funds in the hands of old duffers with a tendency still to allow the quarterly performance tables to drive their view of value.
The sadness of the BAA takeover is that Ferrovial's equity partners are pension fund investors - overseas ones that is. Our own seem to lack the imagination or foresight for this sort of thing. Instructed by misguided solvency regulation, they are instead dumping their equity holdings for what the actuaries tell them is the lower risk asset class of government bonds.
In so doing, they drive down both the price of equities and of debt, thus contributing to the alchemy which makes highly leveraged takeovers of the type Ferrovial has pursued with BAA than much more lucrative. If it wasn't so tragic to see value given away so recklessly, it would be almost funny.
As for the future of BAA, a break-up of the assets in order to pay down the debt now looks inevitable, whether or not the Competition Commission eventually demands it. This is what the airlines want, so everyone should be happy, shouldn't they? Well perhaps, but the airlines speak only with their own narrow vested interest in mind, and this generally amounts to trying to keep the competition out and the landing fees low. As for the flying public, their interest lies only in expanded capacity delivered at reasonable price. It is not clear that this priority is best served by the Ferrovial takeover
Supermarkets row resolved - nearly
The impasse in the affairs of Wm Morrison Supermarkets seems finally to be breaking. David Jones, the deputy chairman, though ill with Parkinson's disease, had made it his business to settle the succession before retiring from the board, and this he seems to have succeeded in with the soon to be confirmed appointment of an outsider, Marc Bolland, as chief executive.
Perhaps more important still, he's also persuaded the company's septegenarian founder, Sir Ken Morrison, to give up all executive responsibilities, stepping back into the position of non-executive chairman.
A clean break might have been better; it is hard to imagine Sir Ken taking a back seat in anything. Yet the impasse could never have been broken without some kind of compromise.
Mr Jones and Sir Ken have been at daggers drawn virtually from the moment Mr Jones joined the board to bolster corporate governance a year and a bit ago. In bringing in a new broom as chief executive after the disaster of the Safeway's takeover, Mr Jones has finally fulfilled his duties. The shares may even be a buy again.
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