Outlook: Boeing's Condit muddies the waters on BAE takeover talk

Incorrect Tesco; Six Continents; April 9 Budget

The prospect of war in Iraq has divided Europe between those, like the British government, who support America and those, like Germany and France, who do not – "old Europe" in the dismissive words of the US Defence Secretary Donald Rumsfeld. Likewise, there is renewed speculation that the "special relationship" between London and Washington will be mirrored by a merger between the UK's biggest defence company, BAE Systems, and a US counterpart. Boeing is the current favourite.

Boeing's Phil Condit has been over in Europe this week from Chicago but the message he has left behind is about as clear as a Donald Rumsfeld soundbite. On Tuesday morning he told Germany's Die Welt that BAE was "an interesting merger candidate". On Tuesday night he told a small gathering of UK newspapers, including the Independent, that BAE is "not a merger opportunity" at the present time.

What's Mr Condit's game. Is he trying to tell old Europe that unless it submits to America's increasing hegemony in defence technology, then the US and Britain will join forces and leave Europe trailing behind in a dust cloud?

There is no doubt that BAE would love to do a deal with Boeing and that Boeing would be very interested in taking BAE under its wing. Just two problems. One is Airbus, in which BAE owns a 20 per cent stake. The European planemaker is one of the few success stories for BAE at the moment. Merging with Boeing would automatically mean having to sell its Airbus stake to preserve competition in the civil aircraft market.

The other is the BAE share price, which has bombed in the last year, largely due to the unerring ability of the BAE management to shoot itself in the foot. BAE shareholders would be unlikely to accept an opportunistic bid at a small premium to the present price. Long term, the shares are worth a lot more, they would figure. By the same token, Boeing would find it hard to sell a BAE takeover to its own shareholders at the sort of premium that might persuade BAE to accept. For a merger to be genuinely on the cards, then, would require a miraculous recovery in BAE stock. On present evidence, that looks about as likely as Tony Blair joining the peace marchers.

Incorrect Tesco

It just goes to show how little business is going on at the moment that so many normally level headed corporate leaders can find the time to rant and rave about the iniquities of the relatively innocuous Derek Higgs report on the role and effectiveness of non executive directors. It was wholly predictable that Sir Stanley Kalms, former chairman of Dixons, should describe the report's recommendations as "ludicrous", as he did the other night after receiving a life time achievement award. It is not in Sir Stanley's nature to mince his words, and wherever he senses regulatory creep, he'll be on to it like a shot. But in fact he's just one of a growing army of company directors queuing up to heap scorn on the report.

Mr Higgs, a former investment banker who would normally move with ease in such circles, must feel like a bad smell every time he walks into the room. Sir Richard Greenbury, former chairman of Marks & Spencer, very much regretted ever agreeing to conduct a government sponsored review of executive pay, which he came to regard as a poisoned chalice of an assignment. Mr Higgs must sometimes feel the same.

Yet the truth is that his proposals make a great deal of sense. What's more, much of the backlash against them is misinformed and hysterical. The rules are not being made obligatory, as Tesco, one of Britain's most highly regarded companies, underlined yesterday by announcing that a company time server, David Reid, would succeed John Gardiner as chairman in March next year. In theory, this is banned under the Higgs proposals, but Tesco has exercised its right to explain rather than comply, as many companies will.

Other companies that intend to play the same card include HBOS and Pearson, which share Lord Stevenson of Coddenham as chairman. Higgs stipulates that you can hold only one chairmanship among FTSE100 companies. Both boards would rather garrotte themselves than surrender such a personable and supportive chairman, and investors will happily accept that explanation.

With successful companies, shareholders are going to have no problem with non compliance. It is only in underperforming and unsuccessful companies that strictly correct corporate governance becomes an issue. In time, all the present heat and noise being generated by Higgs will be seen as a lot of fuss about nothing.

Six Continents

After a poor start to his bid for Six Continents, Hugh Osmond needed to get back into the game and yesterday he appeared to be doing just that. Under pressure from shareholders, Six Continents is preparing for a climbdown over the issue of EGM approval for its alternative demerger proposals.

Six Continents had been attempting to turn next week's EGM into a defining vote - reject Mr Osmond's bid, which lacks all credibility, and vote for the demerger instead or it will be off the table for good, was very much the pitch. The Osmond terms had left most investors cold, so with Six Continents refusing to adjourn the EGM there was every possibility that this is precisely what investors would have done. In bid battles it nearly always pays to keep all your options open for as long as possible. Voting for the demerger would have scuppered Mr Osmond's bid and closed off the possibility both of improved terms and of alternative offers.

It now transpires that shareholders can vote for the demerger, thus leaving that option open should the Osmond proposition eventually fail, but delay its implementation by voting against court approval. Six Continents insists that voting for the demerger next week never would have closed off any options for shareholders, as the board has always been able to delay seeking court approval. But as Michael Caine might have said, not many people knew that, and it was certainly a bit of an eye opener to some shareholders when they discovered it yesterday.

Anyway, the promised sudden death shoot out at next week's EGM now looks as if it is off the agenda. Shareholders can allow both rival proposals for Six Continents to run their course for some little while yet. Mr Osmond has scored a hit, but unfortunately for him, it doesn't make his offer any more acceptable to investors.

For that to happen he needs to put a lot more cash on the table, which he may struggle to raise, and he also needs to cap his diamond studded remuneration package. I've been speaking to a number of 6C shareholders, and all of them agree that 20 per cent of all further upside, in perpetuity, after the price hits 692p a share is an unacceptably high level of reward, given than Mr Osmond is taking virtually none of the risk. They won't buy it, and if Mr Osmond seriously wants to get back in the game, he will have to change it.

April 9 Budget

There is absolutely no significance, the Treasury insisted yesterday, in setting the date for the Budget after the end of the tax year. Never mind that it hasn't happened since 1979, with the exception of last year, when the Chancellor had understandable personal reasons for delaying the Budget. Never mind also that it creates untold practical and administrative difficulties for everyone involved in tax. If there really is no significance in the date, why didn't the Chancellor set it for a week earlier on 2 April. Try as he might, the Chancellor will not be able to quash speculation that the date has been set late to allow time for the war to be fought and won. I guess we'll just have to await his memoirs to discover the truth.

jeremy.warner@independent.co.uk