Jeremy Warner's Outlook: Wiser counsel prevails against the SFO's breathtaking naivety over Saudi arms deals
Trinity Mirror: why no one is interested; Bad debt experience divides the banks
Friday 15 December 2006
So much for the rule of law. Lord Goldsmith's insistence that in discontinuing the Serious Fraud Office investigation of a multi-billion pound arms deal with Saudi Arabia he took the view that the wider public interest prevail over the law displays an extraordinarily cavalier attitude to the niceties of the legal system.
Yet the bottom line is that it is also a victory for common sense. The Saudi royal family had become so offended by the SFO probe into allegations that BAE Systems had liberally distributed bribes, prostitutes and fast cars to win the Al Yamamah defence contract that they were in all seriousness threatening to break off diplomatic ties. Nevermind the parallel threat to around 100,000 aerospace jobs if the Saudis had cancelled the promised Eurofighter Typhoon contract and gone for the inferior French option instead.
The SFO was proceeding under a bribery law put in place as late as 2002, which a lily-livered Government was bulldozed by liberal opinion into implementing for the purpose of preventing this kind of thing happening again. Yet the allegations go back to long before the law came into force, when the commissions and favours alleged were very much a part of the price that had to be paid to win arms contracts in that part of the world.
Nor is it even as if there was a victim. The Saudis were being bribed with their own money. What's more, it would have taken years for the SFO to extract the necessary evidence from the secrecy of the Swiss banking system. In the meantime, untold damage would have been done to diplomatic relations, as well as Britain's commercial interests. The SFO's decision to proceed with an investigation displayed a quite breathtaking naivity. Wiser counsel has finally prevailed.
Trinity Mirror: why no one is interested
Highly cash generative, but essentially going nowhere. Just the right spec, you might have thought, to attract a private equity bidder. Regrettably not. A five-month strategic review of Trinity Mirror by the investment bankers N M Rothschild - for which read, everything's for sale provided the price is right - has failed to attract a single bid for the regionals, and only one bid, which the board considered derisory, for the Daily Mirror and other national titles.
Newspapers were once everyone's favourite asset, with regional titles fought over by private equity and the national ones in high demand among billionaires for their supposed cache and influence. Not any more, to judge from this somewhat forlorn search for buyers.
The national titles, highly profitable though they are, may always have struggled to attract the trophy asset prices that others have achieved. Politically, they stand for the wrong things, while the declining demographics of their readerships are all too apparent in the circulation figures. Yet for the regionals to be shunned too is instructive.
Once apon a time there would have been queues around the block for these local licences to print money. As Daily Mail and General Trust discovered when it tried to sell Northcliffe Newspapers, that time has now gone. Investors see instead only an industry in steady, if not terminal, decline, as new media and fast-changing buying habits eat deep into classified and circulation revenues. The 9.6 per cent decline in advertising revenues Trinity Mirror has experienced over the last year seems only to confirm the point.
There's a further reason too, which is that Sly Bailey, the Trinity Mirror chief executive, and her predecessors, have already done an excellent job in streamlining these businesses, so that there is little left in terms of efficiency gain to be wrung out of them. Daily Mail eventually found the offers made for Northcliffe to be inadequate, but at least it got some, this for the reason that potential buyers saw scope for improvement. It is possibly a complement to Ms Bailey that they saw no such opportunity with Trinity Mirror.
Ms Bailey and her chairman, Ian Gibson, were roundly condemned by all the usual suspects yesterday for producing a damp squib - the shares fell nearly 5 per cent on the update - yet it is hard to see what other conclusions the review could have come to. So the board decides to sell the assets anyway, and, with the advertising cycle near its nadir, gets a correspondingly terrible price for them. Is this what shareholders want? Somehow I doubt it.
What Trinity Mirror has come up with instead is what might be called the least worst option, a reasonable compromise sale of more peripheral assets with a likely value of around £500m. Quite a bit of this will be eaten up by the taxman and the cost of defraying various pension liabilities, but there should be £200m-£300m left to return to shareholders. For obvious reasons, newspapers have become a deeply unfashionable form of investment.
The economy as a whole is growing strongly and the stock market is booming, but newspapers seem to be stuck in recession. Inevitably, many investors see this as a structural rather than cyclical phenomenon.
Trinity Mirror has compounded this perception with what to many looks too cautious a new media strategy. It has also been slow to recognise the opportunity of emerging markets, where newspapers are still a growth industry.
Even so, this is a business that still generates oodles of cash, and despite everything that is said to the contrary, has invested quite heavily in its future, with new colour presses coming on stream next summer and state-of-the-art systems virtually ready to go for direct input of classified and display advertising.
The game is not lost to the Googles of this world quite yet.
Bad debt experience divides the banks
Banks seem to have divided into two distinct categories for the present season of trading updates. There are those such as Royal Bank of Scotland Group, LloydsTSB, and yesterday HBOS, whose underlying message is that things are still gloriously benign down there in the banking parlour. Profits are expected to be in line or ahead of expectations, while there has been no noticeable deterioration in either consumer or corporate credit quality.
Then there is HSBC and Barclays, both of which have sounded the alert on consumer lending. Hold onto your hats, they seem to be saying, there's windy weather ahead. How to explain such a divergence? In part, it is to do with business mix.
Both Royal Bank of Scotland and HBOS have been expanding aggressively into corporate banking. By riding the boom in private equity leverage more effectively than others, they've been generating fees like topsy. Things look rosy now, but it may spell trouble come the next business downturn, when fee income will fall away sharply and bad corporate lending comes bouncing back onto the bankers' books.
As for the consumer market, it's obvious enough what's going on there. Britain and America are the two most heavily endebted nations in the world for personal loans. Some of this lending has been quite plainly irresponsible. As interest rates rise, there's bound to be distress. This will hit HSBC, which is big in unsecured sub prime lending both in the US and Britain, and Barclays, with its huge credit card business, harder than the others.
The story is told graphically by the relative performance of the five share prices. Bottom of the table is HSBC, whose share price is up just 6.6 per cent over the past three years. So much for the supposed advantages of the global bank. You would have done better sticking your money in one of HSBC's deposit accounts. Interestingly, this underperformance dates back almost exactly to the acquisition of Household, the US consumer lending business.
Top of the class is HBOS with a 53 per cent appreciation. Virtually all its personal lending is secured, mortgage debt, which is relatively immune to bad debt experience. It is also the bank with the lowest cost to income ratio, which again is likely to provide insulation in any downturn.
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