Michael Harrison's Outlook: More Egg on face for Prudential's Bloomer

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The Independent Online

You can't sell an Egg without breaking a few rules. After Prudential's failure yesterday to dispose of its interest in the internet bank, the yolk is on the chief executive, Jonathan Bloomer. One of his rules was that the business would not be sold for any less than he thought it was worth and when no bidder was prepared to match the price, the auction was called off.

You can't sell an Egg without breaking a few rules. After Prudential's failure yesterday to dispose of its interest in the internet bank, the yolk is on the chief executive, Jonathan Bloomer. One of his rules was that the business would not be sold for any less than he thought it was worth and when no bidder was prepared to match the price, the auction was called off.

Sometimes, however, it is more important to just move on. The market had become conditioned to the idea that Egg would soon no longer be part of Prudential's portfolio and had even begun to draw up a wish list of the things Mr Bloomer could spend the money on instead. Now it looks like an unwanted child still tied embarrassingly to the parent company's apron strings and destined for a future of neglect.

Jonathan has made some bloomers in his time, from the failed bid for American General to Prudential's attempts to ratchet up his pay just as policyholders' bonuses were going in the other direction. Last year's cut in the dividend showed that he is just as much at home handing the pain to shareholders.

Prudential did well out of its initial sale of a 21 per cent stake in Egg when the business floated four years ago at the height of the technology boom. It says that none of the bids for its remaining 79 per cent stake reflected the full value of the shareholding. At close of play yesterday, that was £264m less than at the start of the day, meaning that anyone who went to work on an Egg will have gone home sorely disappointed.

The Bloomer plan for rebuilding and then realising value for its shareholders looks like a tired old retread of existing strategy - pumping more M&G funds (another less-than-inspired deal) and Prudential insurance policies through the Egg network.

Plenty of others have proved that bancassurance does not work very well, at least in the British market. As for Egg itself, it has proved to be of the curate's variety. The "unique and powerful brand" that Prudential talks of has really only bought it a presence in the overcrowded and cut-throat credit card market.

Prudential should have cut and run. Mr Bloomer's failure to do so may end up costing him dear.

Nuclear war

Murrayfield has witnessed many an epic sporting battle but tomorrow it will play host to a somewhat different contest: the hedge fund versus the board of British Energy.

Polygon Investments is furious that the proposed financial restructuring of the nuclear power generator will leave shareholders with just 2.5 per cent of the action and give bondholders the rest. But it is even angrier at British Energy for threatening to delist the company if shareholders vote down the restructuring, thereby leaving them with nothing at all. Look how electricity prices have shot up since the restructuring was signed off, wails Polygon. It is only equitable to let equity holders have a bigger slice of the cake.

Polygon intends to say as much at British Energy's annual meeting in Edinburgh tomorrow. But even before the two sides have entered the stadium, let alone taken to the field of battle, the tactics have gotten dirty. The other side accuses Polygon of having been one of the bondholders that signed up to the original restructuring last October, before deciding that there was more upside to be had in holding the shares and switching allegiances.

"Crap, bollocks and lies," responds Polygon, which we can safely take as a denial. What it does not deny is that it did buy bonds in British Energy after the restructuring deal was voted through and subsequently sold them. The bondholders' action committee says that, in order to do this, Polygon would have actively had to sign up to the terms of the restructuring. Meanwhile, its website is encouraging small investors to pile into British Energy even though they cannot be aware of what Polygon's overall trading strategy is. There are even mutterings about bringing in Plod in the shape of the Financial Services Authority.

Confused? Then try being one of British Energy's 230,000 private shareholders. It is hard to deny that they are getting anything other than a raw deal. Based on the premium the bonds are changing hands at, British Energy is worth more than £1bn, but it is valued on the stock market at just £133m.

But it sticks in the craw to see a hedge fund suddenly parading itself as the champion of the small shareholder, particularly when it was, until recently, burning the candle at both ends.

It bears repeating that the only reason there is a company to fight over at all is because a deal was struck with creditors last autumn. Equity is risk capital but debt is an obligation. Like it or not, equity holders rank pretty much at the bottom of the pile when a distressed company is fighting to stay alive.

Those who have piled into British Energy shares in recent weeks, driving the price to a level which bears no relation to the underlying value of the equity, seem to have ignored this fundamental principle.

Polygon is sitting on a nice profit on its initial £5.5m investment in British Energy shares which it can hardly trade in without losing face. But it is a hedge fund, not a charity, so who knows how the risk has been laid off. For less sophisticated investors, the game promises to end in tears

Rate debate

The full half-point or just the quarter? Yesterday's more subdued news from the high street should be enough to persuade the Bank of England to heed the advice of its chief economist and not clobber the consumer with the first half-point interest rate rise in a decade. But a second volley of back-to-back quarter-point increases, starting with one tomorrow, looks like a decent bet, not least because the manufacturing side of the economy is beginning to fire on all cyclinders.

The British Retail Consortium reckons there is no need for a rate rise at all, arguing that the consumer boom which the Monetary Policy Committee is trying to tame is in fact a paper tiger. The National Institute, on the other hand, believes that only by sanctioning the first half-point increase since its formation will the MPC finally shock the consumer into his senses.

Between the two opposing views lies a sea of conflicting evidence. Mortgage lenders continue to report annual house price inflation well into double figures but housebuilders such as Taylor Woodrow put it nearer to 6 per cent, while Wimpey reckons it is only 3-4 per cent and Rightmove actually thinks prices are falling. The BRC says shops cut their prices in July for the second month in a row, which does not paint a picture of overheating consumer demand, while the CBI says July sales were well below retailers' expectations. On the other hand, the official retail sales figures continue to show consumers motoring along at a faster rate than the Bank is comfortable with.

So a quarter point now and the same again in September would enable the MPC to steer a middle course, particularly as its quarterly Inflation Report will be sandwiched in between. The Bank gets very angry when anyone suggests that the forecasts are being massaged to fit the policy action. But apart from the rising cost of a visit to the hairdresser or one from the plumber, there is little evidence of inflationary pressures anywhere but the service sector. If the Bank's back-to-back strategy works then we may just be surprised at how quickly the debate moves on to when the first interest rate cut will come.

m.harrison@independent.co.uk

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