Michael Harrison's Outlook: Saving the planet and serving shareholder interests are not mutually exclusive

Leighton's future is on the line; Online gamblers place merger bets
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The Independent Online

The Stern report, all 580 pages of it, is the doorstopper to end all doorstoppers. Already the global warming gainsayers have taken to musing on the size of the hole left in the Amazonian rain forest just by printing it. But the views of a small if vociferous band of sceptics should not be allowed to detract from the essential truths it conveys. The science of climate change has been proven to the satisfaction of all but those on the fringes of the debate. Neither are the economics in dispute. Whether the cost is 5 per cent or 20 per cent of global wealth, the fact is that it will be vastly less expensive to tackle global warming now than 100 years hence. Unlike the recovery from the two great wars or the economic depression of the first half of the last century - the parallels Sir Nicholas Stern draws - a world under water cannot be rebuilt. Global warming cannot be undone.

But its biggest and most inconvenient truth is the assertion that climate change represents the greatest market failure the world has ever seen. There is an opportunity to fix that failure. Unlike the Institute of Directors, which managed to damn Stern with faint praise while inveighing against any unilateral action by the UK or anything which required business to share the pain, there are far-sighted companies which see the threat of global warming as an opportunity. As Stern says, the world does not need to choose between averting climate change and promoting growth and development. Those companies which meet the challenge can actually make themselves more profitable in the process. The climate change market alone is potentially worth $500bn. London, as the world's pre-eminent financial centre, is ideally positioned to be the hub of a potentially enormous emissions trading market. Saving the planet and serving the interests of shareholders are not mutually exclusive.

Leighton's future is on the line

Allan Leighton is not lacking in the self-belief department. So perhaps the criticisms by MPs of the Royal Mail chairman's plan to gift 20 per cent of the business to its workforce will simply bounce off him. The Commons Trade and Industry Select Committee concluded there were simpler and less controversial ways of incentivising the organisation's 160,000 employees than by giving them shares in the company they work for, as Mr Leighton successfully did when he ran Asda.

Controversial is the word. If the Government, which after all owns 100 per cent of Royal Mail, accedes to Mr Leighton's demand, then it will have important consequences for the public finances and the dividends the Treasury is able to extract from the company. Moreover, it will set itself on a collision course with 199 of its own backbenchers who have signed a Commons motion rejecting the plan.

If, on the other hand, ministers turn Mr Leighton down flat, then it will be seen as a victory for the Communications Workers Union which has led a highly vocal campaign of opposition to the employee share ownership scheme. Not only that, the Trade and Industry Secretary Alastair Darling would have little choice but to sack Mr Leighton and his chief executive Adam Crozier if he really believes Royal Mail should be treated like any other commercial company. When shareholders disagree fundamentally with management, they change the management not the strategy.

So, the Government and Royal Mail find themselves in a Mexican stand-off. Admittedly, it is largely one of Mr Leighton's own making, thanks to his back-me-or-sack-me ultimatum.

But there is a further complication. Back in May the Government sanctioned a £3bn rescue plan for Royal Mail, involving £1.3bn to sort out the Post Office branch network, £900m to help modernise Royal Mail and £850m to ease the deficit in its pension scheme. Only later did it become apparent that Mr Leighton would only implement the plan if ministers also agreed to his employee share ownership scheme.

The lack of a deal has left the postal regulator Postcomm in an awkward position. For it only allowed Royal Mail to raise prices this year on the understanding that the extra revenue would help finance modernisation. Royal Mail's pension trustees must also be watching the impasse with a growing sense of unease. For they only agreed to allow the company to pay off its £5.6bn pension deficit over 17 years rather than the usual 10 because of the guarantee that £850m would be available in an escrow account should it be needed to help plug the hole.

Uncertainty reigns, therefore. Rather than managing its way through, Royal Mail has responded by sitting on its hands. As for Mr Darling, his political instincts may well get the better of any instinctive sympathy he has for employee share ownership.

The message from Whitehall seems to be that Royal Mail needs to get its first Christmas featuring size-based pricing safely out of the way before any decision can be made on handing a share in the business to its employees. The chances of Mr Leighton getting his way are, at best, evens. That means the first letter he writes come the New Year could yet be the one tendering his resignation.

Online gamblers place merger bets

Talking of odds, who would have bet against the online gaming industry being engulfed by a wave of takeover activity following its enforced expulsion from the US market? Only a punter with money to burn, one suspects. Yesterday 888 Holdings confirmed that it had held takeover talks with a number of third parties. You could have safely put your chips on that one. Even without an American gun at its head, the industry was likely to have begun consolidating sooner or later. With it, mergers have become inevitable.

The market leader PartyGaming has, it emerges, been in talks with 888 for some weeks and must be favourite to swallow up its smaller rival. Other bidders such as Ladbrokes cannot be discounted - if for no other reason than the fact that they, unlike PartyGaming, could afford to offer real money as well as shares to the long-suffering investors who took a gamble on 888.

But the savings that would flow from a merger with PartyGaming - or perhaps even Sportingbet - would far outweigh those that could be achieved by jamming 888 together with the fledgling online operations of a bookmaker such as Ladbrokes.

The punters only see a website when they log onto PartyGaming. But beneath the surface is an army of operational and support staff, paddling furiously to keep the bets rolling - 2,000 in the case of Partygaming. Admittedly, most of those are low-paid workers in an Indian call centre. Neverthless, the scope for synergies is large - the brokers at Numis reckon it could be as much as $45m within two years. The opportunity to cross-sell to 888 customers would be icing on the cake. It would be unwise to make too much of brand loyalty or brand recognition in such a new industry where customers can change supplier at the press of a key. But it is probably worth something.

What is harder to assess is the extent to which these savings will be eaten up by the cost of having to service an increasingly disparate customer base which speaks in many different languages in many different parts of the world. Up until it lost its shirt in the US, PartyGaming largely needed to worry only about an English-speaking clientele. Now it will have to try to broaden its customer base even though potentially huge markets, such as China, remain offline.

What is harder still to assess is whether the online gaming industry has a long-term future or whether the business model has been fatally flawed by the loss of all those American punters which gave it the all-important scale and liquidity.

Maybe it can stumble along with a smaller revenue base and hence smaller profits. But if you were a betting man, you would have to think seriously about folding.

m.harrison@independent.co.uk

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