Outlook: Bankers count the cost as Marconi woes deepen

With profit reform; Corbett's curse
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The Independent Online

Reports of Marconi's recovery are proving somewhat exaggerated, as Mark Twain didn't say. Yesterday's trading update may not have been as calamitous as the corkers it produced last year, but the news was still uniformly grim. The sales target Marconi's new management set for itself just four months ago has already been torn up and replaced by a yet more modest one. In order to make money from ever lower revenues, the company is taking the hatchet to the workforce again in what looks ominously like an escalating spiral of decline.

The one glimmer of light at the end of tunnel is that Marconi has achieved its debt reduction target ahead of time. But even this may turn out to be the headlights of the onrushing train rather than the first glimpse of the sunlit uplands. Leaving aside the proceeds from disposals, Marconi's debt mountain is continuing to rise, with a £45m net cash outflow from the core business in the third quarter. As things stand, the company is technically bust and if interest rates were not at a 37-year low, then the banks would surely have lost patience and pulled the plug by now. How the management duo of Derek Bonham and Mike Parton are going to keep Marconi alive is not clear when they are running out of assets to pawn and see no upturn in their core telecoms market for at least another year. Mr Parton mysteriously says he has no "immediate plans" for a rescue rights issue. Oh for that even to be an option. More likely is a debt-for-equity swap which will obliterate what little value there is left in the business for shareholders.

These days, banks do not like to put companies such as Marconi out of business completely, especially when they are owed so much money. But it still looks touch and go as to whether Marconi can survive. The worst UK corporate collapse of last year could yet prove to be the first big corpse of the current one.

With profit reform

One of the Association of British Insurers' proudest achievements is something it calls "the raising standards initiative". This is a voluntary code of conduct which aims to improve standards transparency and compliance across a wide range of issues affecting long-term savings products. It would be churlish to knock the ABI's efforts, since anything is better than nothing, but the raising standards initiative is also the sort of thing that industries only do when they have to. On the principle that it is always better to do it yourself than let the regulators do it to you, the life assurance industry is moving slowly but surely to reform itself.

Unfortunately for life assurers, it may already be too late. Over the last week there have been two initiatives from the Financial Services Authority which strongly suggest a very serious crackdown on the life assurance sector is in the offing – the consultation document on transparency and proposals for a radical shake-up of the financial advice industry. All this -before Ron Sandler, the former Lloyd's of London chief executive commissioned by the Treasury to conduct a review of the long-term savings market, has even begun to get his teeth into the industry.

Yesterday he was a key note speaker at a conference in London organised by the ABI. You didn't need to be a clairvoyant to realise he has some serious reservations about the "with profits" life funds that still dominate the long-term savings market. His report isn't due until the early summer and his conclusions won't yet be set in concrete, but it's hard to believe he'll be pulling his punches.

The chief drawback of with profits saving has always been its lack of transparency. Actuaries and trustees are governed by what they call "policyholders' reasonable expectations" in setting bonuses but as Equitable Life has all too painfully demonstrated, this can be made to mean just about anything they want it to.

In practice what happens is those who cash in when stock market returns are high subsidise those who cash in when they are low, and those who cash in early subsidise those who stay to maturity. Both terminal and annual bonuses are routinely manipulated to place particular products at the top of the performance tables and then quietly cut when the life assurer has moved on to other things.

The picture is further confused by lack of clarity in what belongs to the policyholders and the conflicting claims of the company's shareholders. When companies are fined for mis-selling, the fines are invariable paid from the policyholders' orphan assets, and so on and so forth. Few industries are more opaque or less governed by the normal rules of competition, in the sense that its constituents compete for customers on the basis of value for money.

Plainly it wouldn't be right to abolish with profits saving outright, nor would it be feasible. But it will be interesting to see how an industry that relies so heavily on opaqueness to sell its wares stands up to the brave new world of transparency that is undoubtedly coming. Life assurers are in for a painful period of adjustment and many of the smaller players will struggle to survive.

Corbett's curse

Gerald Corbett is an irrepressible optimist, but it is fair to say that his attempt to relaunch his career post the disaster of Railtrack has not got off to the best of starts. True, he managed the demerger of Woolworths from Kingfisher and in the process saw off Sir Geoff Mulcahy's attempts to derail him. That is no mean achievement in itself.

But to report falling sales in one of the strongest periods of high street growth since the Lawson boom hardly heralds a new dawn for the newly independent Woolies. Mr Corbett is new to the company, but he cannot wholly escape blame for such a poor showing.

Woolies' buyers seem so concerned not to repeat last year's clanger where they bought too much stock and had to discount it that they bought too little instead. This left the stores chronically short of hot-sellers such as DVDs. You couldn't get a Pearl Harbor or Bridget Jones's Diary in a Woolies for love nor money. Woolies bought so few PlayStation2s that it sold out two weeks before Christmas.

Meanwhile, the supermarkets have been nibbling away at Woolworths's traditionally strong confectionery sales. Market share in Christmas decorations was lost to the DIY sheds. Even so, Mr Corbett can point to successes. The excess stock inherited from the Kingfisher days has been sold off, even if it proved more costly than expected to do so. The £200m of debt Kingfisher left Woolies with (thanks again, Geoff) has been paid down too.

Mr Corbett has also delivered on his promise to bag a new chief executive. Trevor Bish-Jones from Dixons seems a good catch, giving Woolworths the retail talent at the top it has for so long lacked. Conveniently, it also gives Mr Corbett someone to blame if things go pear shaped. If he plays his hand well, the much-criticised Railtrack fall guy will be able to wind down to a well-paid two-day-a-week post while the executive team does the work. But Mr Corbett may need some luck for things to fall into place. And that's something he hasn't had for a while.

j.warner@independent.co.uk

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