Michael Harrison's Outlook: Ferrovial and its partners will have to go higher still if they want to land BAA

Sarin buys himself time at Vodafone; A Goldman back in the US Treasury
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The Independent Online

Will 900p do the trick? Having initially insisted that they would only raise their bid for the airports operator BAA "slightly", the Spanish company Ferrovial and its two other foreign backers, have undergone a reality check and increased the price by a "significant" amount. The extra 90p represents an 11 per cent improvement on Ferrovial's opening shot of 810p and values BAA at £9.7bn. But is it enough?

The market clearly did not think so and although the BAA share price climbed, it is still a long way adrift of 900p, suggesting concern that the bid will fail, sending BAA's share price hurtling back down to earth just as rapidly.

Last week the fear was that the bid would collapse because of the large rock thrown into the pool by the Office of Fair Trading which announced it was considering launching an inquiry into BAA that could lead to the break-up of the company and the scattering of its prize south-east airport monopoly to the four winds.

That would have been sufficient to sink most highly leveraged consortium bids of this nature. And yet amazingly Ferrovial's urbane and unflappable chairman Rafael del Pinto has shrugged off the threat of regulatory intervention, persuading his two partners, the Singapore government and one of Canada's biggest pension fund investors, and even the banks that their money is safe.

Never the less, the Spanish have been forced to set the bar high. In order for the bid to be declared unconditional the banks want acceptances from 75 per cent of shareholders - the minimum necessary for them to be able to secure their loans against BAA's prime assets, Heathrow, Gatwick and Stansted.

At the same time, virtually all the extra cash being put on the table - amounting to some £1bn - is in the form of equity. Typically, Ferrovial likes to finance its infrastructure investments with 80 per cent debt and 20 per cent equity. In the case of BAA, that ratio has fallen to 60:40, meaning that Ferrovial will have to make the assets really sweat just to earn a return on a bid pitched at 900p.

And sweat them it most certainly would. Yesterday, the Spanish referred for the first time to the job losses that would follow a takeover. They also nodded in the direction of Ryanair's Michael O'Leary by promising that the development of Stansted will be less Taj Mahal and more local curry house. As for BAA's overseas assets, including the recently purchased Budapest airport, expect a clearance sale to get debt levels down from the eye-watering £12bn they would hit post the takeover.

Whether Ferrovial will reach the promised land is another matter. The consortium has until next Monday to improve its offer. By striking with a week to go, it still has enough time to gauge shareholder reaction and then raise its bid again. How much wriggle room Mr del Pino has left is not clear. But one thing seems certain. Unless he offers more - and 950p has a pleasing ring - then it looks as though he will be flying back to Madrid empty-handed.

Sarin buys himself time at Vodafone

A billion here, a billion there and pretty soon you are talking serious numbers. Vodafone, the company that brought us the world's biggest ever takeover, yesterday announced Europe's biggest ever corporate loss. Not surprisingly, the two are linked. The £15bn pre-tax loss that Vodafone recorded last year was the product of a £23bn goodwill write-down, most of which related to its £101bn acquisition of Mannesmann six years ago.

The secret of goodwill write-downs, of course, is to make them so big that investors look straight through them. That is what the market did yesterday, preferring instead to concentrate on the vision for the future laid out by Vodafone's chief executive Arun Sarin, a man for whom the adjunct embattled might have been invented.

Broadly speaking, it liked what it saw. Vodafone has decided to refashion its balance sheet so that significantly more cash will be returned to shareholders than expected. Indeed, going forward, the company will be paying out 60 per cent of its earnings in dividends, turning it into a utility-like investment, and throttling back on acquisitions.

There could be no better indication that its dreams of world domination and its days as a go-go growth stock are over, at least for now. That doesn't necessarily mean that the company has gone ex-growth. Convergence between mobile, fixed-line and broadband telephony gives Vodafone the chance to sell more services to a market which is now mature in terms of the number of subscribers that can be added, although it is competing in an increasingly crowded market. Think about being able to download your favourite tracks to the PC but then listen to them on the mobile.

The V word did not feature in Mr Sarin's strategy presentation. But then again, he can afford to wait for Verizon's majority shareholder to make an offer which is remotely in the ballpark and in the meantime enjoy watching the value of his stake continue to grow.

The boardroom purge of the last few months has removed the last vestiges of opposition to Vodafone's chief executive and in Sir John Bond he has a supportive chairman. The balance sheet re-engineering, meanwhile, ought to appease most investors who have been pressing for a bigger return of capital. In the longer term, there is always the prospect of Vodafone's "mobile plus" strategy starting to bear fruit. In short, Mr Sarin has bought himself time. It could have turned out a lot worse.

A Goldman back in the US Treasury

For the second time in a few weeks, Goldman Sachs has come galloping to the aid of a troubled President. Immediately after Easter, Josh Bolten, an earlier alumnus of the mighty Wall Street investment bank, took over as George Bush's chief of staff. He set in motion a staff shake-up that yesterday led to the appointment of no less than Goldman's boss, Henry 'Hank' Paulson, as the new US Treasury Secretary. Just possibly the new man could be the difference between Mr Bush's Republicans winning and losing the crucial mid-term elections in November.

Nothing frustrates the White House more than Americans' refusal, evidenced in the polls, to give it credit for their surging economy, which has grown at 3.5 per cent or more for most of Mr Bush's tenure. John Snow, Mr Paulson's predecessor, was held to have done a poor job in getting the good news across. If Mr Paulson can manage that, then Karl Rove and his ilk believe that the Republicans still have a real shot of retaining control of Congress this autumn.

Non-Americans, however, will be taking heart from this new Goldman gambit for different reasons. Back in 1993, the newly elected Bill Clinton won over a dubious Wall Street by installing Goldman's then co-chairman Robert Rubin to be his chief economic adviser. In 1995 Mr Rubin was promoted, to become one of the most influential and internationally respected Treasury Secretaries of modern times, leading the US into a golden age of strong growth, low inflation and balanced budgets.

After more than five years in which the Treasury Department has been little more than an adjunct of the White House press office, this President may belatedly have reverted to the Rubin model that served Clinton so well.

But the challenge facing Mr Paulson in many ways is even tougher than Mr Rubin's 13 years ago. Global markets are increasingly leery of the dollar - and this time there is no Alan Greenspan to pour impenetrable words of wisdom upon troubled financial waters. Ben Bernanke, the Fed chairman since February, is still an unknown quantity. If Mr Paulson can impose himself as a truly authoritative Treasury Secretary, not only the US but the entire world will benefit.

m.harrison@independent.co.uk

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