Michael Harrison's Outlook: Another utility retreats from the US, but at least Kelda avoids a soaking

Sure-footed Sorrell defies his critics; Shot across bows of Spanish armada
Click to follow
The Independent Online

It has come to a pretty pass when a company measures its success not by whether it has made money but by whether it has avoided losing it. But the water industry is a funny old world and that is precisely the yardstick by which Kelda, the owner of Yorkshire Water, has chosen to judge its exit from the American market after six years. It's a retreat, admits chief executive Kevin Whiteman, who yesterday sold the Connecticut water business Aquarion to Macquarie Bank. But at least it's an honourable one because Kelda's shareholders have escaped without losing their shirts.

Given the propensity for UK utilities to lose vast sums of money when they venture into overseas markets, there is some vestige of truth in what Mr Whiteman says. But it is hardly a ringing endorsement of Kelda's short-lived overseas expansion strategy to say that at least it did not end in disaster.

The Aquarion deal always had the feel of being neither fish nor fowl. It was big enough to tie up a decent chunk of Kelda's capital but far too small to give it any critical mass in what remains a very fragmented industry. Kelda's plan was to use Aquarion as a bridgehead into America, buying up smaller neighbouring companies as it went along. But the price of these businesses ran away from Kelda, leaving it with a stark choice of whether to pee or get off the pot.

As if that was not enough, it rained in Connecticut when it was not supposed to. Since the stuff was falling from the sky for free, Aquarion's well-heeled Connecticut customers stopped using their metered water supplies to sprinkle the lawn and profits fell.

It was the reverse of the problem Kelda once had in Yorkshire when a drought famously resulted in one of Mr Whiteman's predecessors nipping across the county border to take baths at his mother's home.

After the £1bn that Scottish Power lost on its ill-fated acquisition of PacifiCorp and the horlicks some of his fellow water companies have made of investments in other far flung parts of the world, Mr Whiteman can content himself that Kelda is emerging chastened but unscathed.

Across the entire utilities sector, only National Grid can claim to have an untrammelled track record of successful overseas expansion. Its policy of targeting adjacent electricity-distribution and transmission businesses on the north-eastern seaboard, where the regulatory regime is more benign, has reaped big rewards for the company. Now, however, it finds itself embroiled in an auction for the Rhode Island gas supplier Keyspan. Grid has avoided overpaying in the past and it must not let temptation get the better of it this time around.

Sure-footed Sorrell defies his critics

Sir Martin Sorrell, the chief executive of the world's second biggest advertising agency WPP, has had a mixed press of late. Accusations that his pursuit of Marco Benatti, the agency's former country manager in Italy, are born more out of personal animus than ethical concerns have been followed by suggestions that he treats the business too much like a personal fiefdom and pays too little attention to succession planning. Yesterday, he produced the best possible riposte to his critics in the shape of a forecast-busting set of annual results with pre-tax profits up by more than a third to £669m against consensus expectations of around £630m.

In the media village that Sir Martin inhabits, personal criticism tends to go with the territory, particularly for a man who has supporters and detractors in equal measure. But once the noise from these, admittedly entertaining, distractions has died down, the boss of WPP has a bigger problem to grapple with. Or rather two problems: put simply, China and the internet. First, how to deal with the structural shift in the market away from conventional channels of communication such as television towards online, direct and interactive marketing. And second, how to exploit the exponential growth of Asia as a source of revenues as the mature markets of America and Europe go into relative retreat.

This year, as it happens, those mature markets will each provide a kicker in the shape of America's mid-term elections and the World Cup in Germany, which together are likely to add about 1 per cent to global advertising revenues.

But the tectonic plates are shifting and the long-term trend looks clear. So far, WPP has managed to remain ahead of the curve. Its revenues in China and India last year grew at twice the rate that their economies expanded.

But to maintain that edge, WPP cannot afford to rest on its laurels. It needs to move from generating 80 per cent of its revenues in the US and Europe to a position where Asia is equal in size to each of them. It also needs to migrate more of its business into what are broadly termed marketing services ­ such as research and public relations. And it needs to tilt the balance so that less of its remaining advertising revenues come from traditional avenues such as television and print and more is derived from new media such as digital, voice over internet protocol and mobile.

In a few short years, Asia will be home to two-thirds of the world's population ­ the exact reverse of the position a century ago ­ and advertisers such as WPP need to be ready to take advantage. Who knows what will happen in another 100 years. But one thing is for sure: Sir Martin's current travails are unlikely to make even a footnote in history.

Shot across bows of Spanish armada

Heathrow... the world's fifth biggest international airport. Somehow, it doesn't have quite the same ring. While BAA was entertaining the Press to a tour this week of its rather wondrous Terminal Five development ­ truly a cathedral to 21st century air travel ­ Heathrow was quietly slipping down the ranks of European hub airports. Since it is the Spanish who are stalking BAA, it was entirely appropriate that it should have been Madrid airport which pushed Heathrow down the league table.

Last weekend, the Spaniards opened, not one, but two new runways at Madrid's Barajas airport, enabling it to handle 120 take-offs and landings an hour compared with Heathrow's 85. Madrid now has four runways to Heathrow's two and it is a similar story at Charles de Gaulle in Paris, where a new piece of tarmac appears to have been laid each time you touch down.

Here, by contrast, we have not had a new runway in the South-east of England for half a century and, given current environmental hurdles, Heathrow will not get its third one for at least a decade.

Part of the problem is location ­ no other European airport is quite so close to a mass urban population as Heathrow and therefore capable of causing the same amount of blight and pollution. But part of the problem is also political will. In Spain and France, they get these things done.

Nevertheless, if the Spanish, in the shape of Ferrovial and its financial partners, do ever get around to bidding for BAA they will discover a sizeable investment programme to fund in addition to the cost of buying the company. After yesterday's strictures from BAA's regulator, the Civil Aviation Authority, about the danger of airport owners over-leveraging their balance sheets, the chances of Ferrovial winning its prize just got smaller. We may not do runways, but we do regulation brilliantly.