Michael Harrison's Outlook: Bishop in control as Germans try to bale out

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The Independent Online

Owning a put option is one thing. Exercising it is another, as the stand-off between Fiat and General Motors illustrates. The put option held by the chairman of bmi British Midland, Sir Michael Bishop, is exercisable at the end of this year and entitles him to sell his controlling stake in the airline to Lufthansa for £229m.

Owning a put option is one thing. Exercising it is another, as the stand-off between Fiat and General Motors illustrates. The put option held by the chairman of bmi British Midland, Sir Michael Bishop, is exercisable at the end of this year and entitles him to sell his controlling stake in the airline to Lufthansa for £229m.

The option was taken out as an insurance policy six years ago when the German flag carrier first bought into bmi, acquiring an initial 20 per cent stake and then buying a further 10 per cent less one share. At the time, Lufthansa saw bmi as its gateway into Heathrow and, ultimately, the hugely lucrative air routes between London and the US. Bmi, which owns 14 per cent of the slots at Heathrow, was also seen as a handy addition to the Lufthansa-led Star Alliance. For bmi, Lufthansa was the strong and financially secure partner it needed while Sir Michael set about realising his long-cherished dream of turning his airline from a domestic and European operator into a long-haul carrier.

It has not turned out like that. The open skies deal that would enable bmi to break into the transatlantic market remains as elusive as ever. Meanwhile competition from the no-frills carriers has sent bmi nose-diving into losses, obliging Lufthansa to write down most of its shareholding.

The Germans are now desperate to wriggle out of their liability to acquire the rest of the airline by disposing of their minority stake before the end of the year. But it is not an easy task to sell a minority shareholding in a private company controlled by a dominant figure such as Sir Michael. The two most obvious buyers are British Airways and Virgin Atlantic - BA because it would tighten its stranglehold over Heathrow with 50 per cent of all slots; Virgin because it would give Sir Richard Branson's airline a ready feed of short-haul passengers for his long-haul routes.

But both BA and Virgin have already shown Lufthansa the door. BA would run into difficulties anyway with the competition authorities if it tried to get into bed with bmi, while Sir Richard has already tried and failed to interest Sir Michael in a merger and has an aversion to paying for anything.

Baling out of bmi would be a useful piece of housekeeping for Lufthansa's new chairman and chief executive Wolfgang Mayrhuber. But it may not be a disaster if he fails to find a buyer because Sir Michael is in no obvious hurry to exercise his put option. He is still only 63 - younger than John King was when he first became chairman of British Airways - and shows no signs of being ready to take his hands off the joystick at bmi. Moreover, for lifestyle reasons Sir Michael has no heir to pass his fortune on to and therefore no pressing need to cash in his chips. The fate of bmi has been up in the air for the best part of a decade and it is likely to stay that way for some while yet. Rather like the business Sir Michael wants to turn bmi into, it promises to be a long haul to the final destination.

Tunnel gloom

When Michael O'Leary warned of a bloodbath in the short-haul travel market, the Ryanair boss had in mind other no-frills airlines. In fact, the biggest victim has proved to be the train operator Eurotunnel. The budget carriers are taking great chunks out of its market and cut-price ferry operators are nibbling away some more, proving that Eurotunnel's guaranteed availability is no match for ultra-cheap fares.

Eurotunnel's traffic figures for last year make gruesome reading, whether it be in English or French. Revenues were down and so were passenger numbers and to make matters worse Eurotunnel's share of the cake is contracting at a faster rate than the cross-Channel market as a whole. The one crumb of comfort is that income has not fallen as fast as traffic volumes, suggesting that yields on Eurotunnel's freight and passenger shuttles are not yet in terminal decline.

Nevertheless, it is a grim background against which to begin debt rescheduling talks with the banks. Eurotunnel has never successfully climbed out from underneath the mountain of borrowings that it took on board to build the tunnel and now, four refinancings later, it is approaching crisis point once again.

The company's short-term solution, which labours under the name of Project Dare, is to cut costs and ration capacity in the hope that it will have enough money left to pay its bills and still be able to service its borrowings. That looks a forlorn hope. Anyway, it fails to address the central problem, which is that the tunnel is in danger of sinking beneath its £6.4bn of debt.

If the situation is dire now, then the outlook is even worse. From the end of this year, Eurotunnel must start paying its interest bill in cash, not IOUs convertible into shares. From November next year, the guaranteed minimum usage charge paid by Eurostar and the freight railway operators comes to an end, knocking a further hole in Eurotunnel's revenues. The year after that, Eurotunnel must start repaying its principal debt, not just the interest. In short, there is no light at the end of the tunnel.

Thanks to a French mutiny a year ago, there is a new crew on board Eurotunnel and thus far the banks have left them to get on with it. But with no sign of progress, the temptation to call in the loans and substitute a new management must be powerful. Bankers are not born to run transport companies but shorn of its debt-servicing obligations, Eurotunnel could clean up on the short straits market and start making money for somebody.

If it were not for French sensitivities about one million private shareholders being left stranded on the other side of the Channel, substitution might already have happened. Plus ça change.

Called to account

He's a card that Mike Rake. KPMG's senior UK partner says we are suffering from a shortage of accountants, or perhaps that should be a deficit. Mr Rake's own firm rather proves the point. He earned £2.45m last year while the average pay of his colleagues rose 9 per cent to £451,000, which demonstrates that money tends to go where the skills are scarce.

If the thought of a world where there are actually too few accountants is more than you can bear, then blame Kenneth Lay. The Enron scandal was as much a comeuppance for the accounting profession as it was for the one-time Texan darling of the energy world. The demise of Arthur Andersen promised a new era of austerity for the remaining Big Four accountancy firms, tougher regulatory controls and the loss of all that lovely consultancy business that went with the audit.

In fact, it has proved to be a boom time for the profession. The demands of Sarbanes-Oxley and the rigours of the new international financial reporting standards have meant we need more, not fewer, accountants. Gordon Brown has done his bit by doubling the number of Budgets each year. As for separating audit from consultancy, what has been lost on the swings is won back straight away on the roundabouts. The profession has even seen off an attempt to make its liabilities match up to the fees it charges.

If it's any consolation, it looks as though leaner times may be on the way for the other Big Four - the City law firms who have traditionally dominated the M&A scene. A survey by the Lawyer magazine calculates that up to a 100 senior partners could lose their jobs because of the downturn in corporate deal activity. Wipe that smile off your face.

m.harrison@independent.co.uk

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