Michael Harrison's Outlook: OFT may find the Abbey habit too hard to kick

BAA's monopoly; Permira/WH Smith
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The Independent Online

After being the market's favourite takeover target for months, a suitor for Abbey National has finally emerged blinking into the sunshine. Step forward Banco Santander Central Hispano. You may not have heard of it before unless you are an Abbey shareholder, in which case you may recall a funny-sounding foreign bank scurrying away earlier this year after its interest in the UK's sixth biggest lender was leaked.

After being the market's favourite takeover target for months, a suitor for Abbey National has finally emerged blinking into the sunshine. Step forward Banco Santander Central Hispano. You may not have heard of it before unless you are an Abbey shareholder, in which case you may recall a funny-sounding foreign bank scurrying away earlier this year after its interest in the UK's sixth biggest lender was leaked.

But they have certainly heard of Santander in Spain where it is the country's biggest bank. It is also becoming better known in Rio de Janeiro where Santander paid $4bn not so long ago for one of Brazil's biggest lenders.

Assuming Santander does bid, perhaps as early as Monday, and pays in shares, as was being rumoured yesterday, then there will have to be some mechanism to allow Abbey's retail investors and a slew of UK institutions to convert their useless Spanish paper into cash. It will probably also have to bid close to 600p a share - a price not scented by Abbey's shareholders for more than two years. There will be nothing for the Spanish in the way of "synergies" - a word which, for bank employees at least, translates straight into job losses. Rather, the prize will be an instant UK presence for Santander through a well-known brand with 18 million customers and more than 700 branches. Luqman Arnold, who took over Abbey 18 months ago, has also done a lot to clean up the mess he inherited from his predecessor Ian Harley by exiting wholesale banking, selling off a pile of high-risk bonds and shoring up Abbey's life business.

The question, of course, is whether an agreed Spanish bid will tempt other sharks into the water. Fred Goodwin at Royal Bank and Eric Daniels at Lloyds TSB could obviously afford to bid more but would they be allowed to? Unlike three years ago, when Lloyds was blocked from buying Abbey, it is said that the dynamics of the British banking scene have changed sufficiently for the regulators to contemplate allowing a domestic merger. Then, Abbey was a player in the corporate banking market, particularly among small businesses. Now it has largely given up. Then, Abbey was the hoped-for fifth force in UK banking. Now it has been usurped by the success of HBOS.

Don't be so sure. This sounds suspiciously like Messrs Goodwin and Daniels rehearsing their speeches to the regulators. The Office of Fair Trading appears to exist these days only to refer bids. Having been denied the opportunity of getting its teeth into a Philip Green takeover of Marks & Spencer, would the OFT pass up a chance of crawling all over the banking sector once again? Not on your life. Some Abbey habits are too hard to kick.

BAA's monopoly

It is not generally a great idea to pick a fight with one of your biggest customers. The airports group BAA has managed to do just that with not one, but two, of them. The headlines this week have been all about its battle with Ryanair at Stansted over landing charges and fuel duties. After simmering since April, the dispute has now gone to court and, needless to say, Michael O'Leary's earthy turn of phrase has ensured maximum coverage. But another and potentially more serious row has been brewing for even longer with the Star Alliance over landing charges at Heathrow, the real cash cow of the BAA business.

Mr O'Leary does not see why he should have to pay increased landing fees at Stansted when the "rapists" (his word) of BAA are overcharging him for refuelling his aircraft. Likewise at Heathrow, the Star Alliance, and in particular its British partner bmi, do not see why they should have to bear a 40 per cent increase in landing charges just to pay for Terminal 5, which will be used exclusively by British Airways and its oneworld alliance partner Qantas. An incandescent Sir Michael Bishop of bmi is now threatening to reach for his lawyers in the same way that Mr O'Leary has.

Lying at the heart of both tussles is frustration and anger at BAA's alleged use of its south-east airports monopoly to disadvantage its customers. So far BAA has been able to fend off demands for the break-up of its monopoly on the grounds that its airline customers are broadly happy with the arrangement and the supposed network benefits that are gained by having Heathrow, Gatwick and Stansted under one roof.

But BAA is starting to skate on thin ice. Sir Michael has not yet gone as far as to call for the abolition of the monopoly, but he does believe that if a third runway and sixth terminal are built at Heathrow they should be run by someone other than BAA. For his part, Mr O'Leary has no hesitation in demanding the break-up of BAA.

The current skirmishes with Ryanair and Star are, of course, but an appetiser. The real fight will come when charges across the three airports are reviewed again in 2008. Indeed, Mr O'Leary, with characteristic understatement, has promised BAA the "mother and father of all battles".

Ryanair's discounts will, largely, have come to an end by then and, instead, it will be looking at a whopping increase in charges to pay for a second runway and associated facilities. Mr O'Leary has already told BAA that if it thinks it can get away with building a Taj Mahal at the airlines' expense, then it can think again. BAA has offered to halve the cost of the new runway to £2bn but Ryanair still thinks that is ten times more than it needs to spend.

BAA has hinted that it could fund a second Stansted runway by making airlines at Heathrow and Gatwick pay part of the cost on the grounds that more capacity at one airport will mean less congestion at the other two. The Civil Aviation Authority, which regulates airport charges, does not like that idea. But if BAA does attempt such a ploy, then it is not only bmi that will go ballistic all over again. BA and Virgin Atlantic will go to war with BAA as well. Ultimately, it would play into the hands of those who would like to see the monopoly abolished once and for all.

BAA suspects Mr O'Leary's real worry about a second runway at Stansted is the increased competition it would mean for Ryanair, the airport's biggest operator by some distance accounting for 63 per cent of all traffic.

Realistically, however, Stansted's single runway already has enough capacity to support plenty of new entrants. The airport presently handles 20 million passengers a year - it could double that before needing another runway.

There is a school of thought which says that a second Stansted runway will probably not be built because of lack of demand at the airport and will certainly never see the light of day if BAA were to be broken up. That would mean the Government reverting to BAA's preferred choice of a third runway at Heathrow, once the problem of air pollution around the airport had been addressed.

BAA says it will be broken up over its dead body. But if it meant sacrificing Stansted and hanging on to a three-runway airport at Heathrow, would it think again? Quite possibly.

Permira/WH Smith

In the end, not even a £150m bung into the WH Smith pension fund and a promise that the remaining deficit would be ranked alongside Permira's mountain of bank debt was enough to persuade the trustees to allow a nasty old private equity firm to get its hands on Britain's best-known newsagent.

It is hard to feel much sympathy for Permira and easy to see where the trustees were coming from. After all, what good would it have done pensioners to approve a deal that would inevitably have weakened the credit rating of the company and the security of their pension pot? None at all.

It does, of course, mean that WH Smith's prospects now hang entirely on Kate Swann's recovery plan paying off. Stage one is the sale of Hodder Headline. Expect at least some of the £200m in proceeds to go back into the pension fund. Shareholders who are inclined to complain should write to Martin Taylor.

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