Market bets on enterprising alternatives to Shell

Terminator charge
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The Independent Online

Sam Laidlaw, soon to be Enterprise Oil's ex-chief executive, should make "Lucky" his middle name. Although Mr Laidlaw claims to have been looking forward with relish to a prolonged stint at the helm at one of Britain's last remaining oil independents, the £4m he stands to collect for having his reign cut short after just five months should more than compensate for the disappointment.

Mr Laidlaw is a beneficiary of the old oil industry axiom that it is much easier to grow by acquisition than by exploration. He had barely got the drill-bit between his teeth when along came ENI of Italy with an unsolicited takeover offer at the start of the year. Now Phil Watts of Shell has popped up with what he hopes is a knockout bid valuing Enterprise at £4.3bn – some 60 per cent more than it was worth when Mr Laidlaw arrived last November.

So confident is Mr Watts that he will not be outbid, that he has agreed to dispense with the usual poison pill that is a regular feature of agreed takeover deals these days. In the absence of a break fee to pay, anyone is free to spoil Shell's party and come in with a higher offer. Just to show them he means business, Mr Watts got his brokers to wade into the market yesterday and buy up 10 per cent of Enterprise before the share price ran out of his reach.

Enterprise was never likely to last the course as an independent oil exploration company. Too small to compete with the majors and too big to be quite as nimble as the real niche players, it was always destined to be gobbled up, particularly after its second attempt to merge with Lasmo ended in failure.

Enterprise remains a bite-sized morsel for Shell. Even so, nothing is ever too small to rule out the risk of overpaying and the contrast between Watts' timing and that of BP's Lord Browne could not be more stark. Lord Browne bought Amoco and Atlantic Richfield – both of them much bigger propositions than Enterprise – when oil prices were at rock bottom and has since reaped enormous rewards for himself and his company.

Mr Watts, on the other hand, is buying Enterprise at a time when oil prices are at a six-month high, fuelled by rising tensions in the Middle East. Moreover, Shell is almost certainly forking out more than it would have had to pay had it bid before ENI sent the Enterprise share price gushing in January. The $300m a year in cost savings Shell reckons it can make out of the deal is not to be sneezed at, and means Shell can pay more than most possible rivals for the company. Even so it hardly looks a bargain.

Mr Watts insists that capital discipline remains the watchword. But it is a moot point whether the Enterprise deal would have stacked up quite so impressively had he not relaxed the criteria against which takeovers are judged a short while after taking over as chairman last August. The benchmark used to be that any investment must pay with the oil price at as little as $14 a barrel. Mr Watts relaxed this to $16. The Enterprise share price suggests an even higher bid may be in the offing. With demand for oil expected to carry on growing for at least the next fifty years, but fresh sources of supply becoming difficult to find or develop, it could be that someone is prepared to pay more. It is, on the other hand, three months since the talks with ENI were disclosed, and noone has yet come up with a better offer. If there is someone out there, they are taking an awfully long time to come forward.

Terminator charge

Not all regulation is bad. There are lots of instances where it is capable of doing some public good. But is there any case for more regulation of the mobile telephony market? The industry has mobilised a veritable army of lobbyists and number crunchers behind the campaign to smother Oftel's proposals for more price regulation of the so-called termination charge (the price a caller pays the mobile operator to whose network the call is being routed), and by the look of yesterday's "issues letter" from the Competition Commission, which is adjudicating, it may be making some headway.

The principle of price regulation for the termination charge was conceded some years ago, when the then Monopolies and Mergers Commission came down in favour of Oftel by imposing price controls on the two big incumbents, Vodafone and Cellnet. Now Oftel wants to go further, by extending price controls to the other two operators and by making them harsher. The industry has chosen to fight the plans on the broadest possible front, but its starting point is to question the whole point of price regulation for what under any measure is a highly competitive market.

Few industries can claim to have delivered such growth and improvement in quality of service, all at the same time as consistently falling prices, as the mobile phones business. The progressive introduction of competition into mobile telephony has to date made regulation largely unnecessary. However, there cannot by definition be any competition in the termination charge (although that isn't stopping the Competition Commission from exploring some truly whacky ideas for introducing it). That makes it a distinct market and it is one that the mobile operators have been profiteering from, says Oftel, as competition has eaten away at what can be charged elsewhere.

Well maybe, but outside Vodafone it is hard to see much evidence of profits at all, let alone excessive ones, and at a time when the industry is being asked to spend massively on introducing 3G services, this may not be the best of times to be introducing extra prices controls. The mobile phone operators do not see the termination charge as a distinct part of their business. Squash the prices down in one area of the network, they say, and they will just press up in another.

In the United States, the termination charge is paid for by the receiver of the call. It's the fairest way to charge for the costs of mobile telephony, and indeed the only feasible way of introducing competition into the market for termination charges. But it also leads to a natural tendency to reject incoming calls and is one of the reasons for poor US take-up of mobile phones. The industry is even less keen on that approach than having the prices regulated, and if its application leads to lower mobile phone use, it doesn't really offer a solution to anyone.

Greater transparency of charging might offer one way forward, though as yet it is unclear how you make consumers aware of a rival network's charging policies. Judging by recent announcements, the European Commission seems as determined to tackle the issue of termination charges as Oftel. There's a real possibility of a harmonised, Europe-wide crackdown.

Not all price regulation is wrong, but for an industry still in its relatively early stages of development, and with already vibrant levels of competition, the termination charge is not obviously an abuse. Regulators should tread carefully in attempting to tackle it.

j.warner@independent.co.uk

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