Outlook: Germany in recession should teach Brussels a lesson

Accident Group; Baby bio blues; Kings' ransom
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The Independent Online

It is always darkest before dawn, or so the European Commission must hope. The tide of stagnation which is lapping across the eurozone duly reached the shores of its biggest economy yesterday as Germany lapsed back into recession for the second time in two years. In doing so, it joined Italy and the Netherlands in the recession club with a second successive quarter of declining output in the three months to the end of June. Greece only avoided recession by the skin of its teeth, and figures due out next week from France are likely to show the eurozone's second biggest economy bumping along the bottom.

Never mind. Always look on the bright side of life, is the commission's Monty Pythonesque motto and accordingly Brussels chose to highlight the growth it expects to see showing through later in the year. In fairness, there is some cause for faint optimism. Since the end of June, the euro has fallen against the dollar and the country's monthly business confidence barometer has remained in positive territory. Germany's labour minister, faced with a claimant count of 4.5 million, has even visited a dole office in Streatham to learn the secret of the UK's success in combating unemployment. The labour market reforms Germany is pursuing are slowly beginning to bear fruit and domestic demand did rise in the second quarter, even if it was not enough to offset the export decline. But there is more that the eurozone's institutions can be doing. The European Central Bank held interest rates too high for too long for the comfort of Germany. Brussels could make amends by loosening the strings of its Growth and Stability Pact to allow some more stimulus of Europe's economy.

Accident Group

The "Enron of the North West" may be pushing it too far, but there was plenty of anger on display as well as hyperbole at yesterday's meeting in Manchester of creditors of the collapsed personal injury firm The Accident Group.

Mark Langford, the company's founder, was not there. Perhaps he was sat in his country pile in Cheshire texting someone. Or maybe he was in the mansion in Marbella, counting his share of the £8m dividend the directors managed to pay themselves last year before the business imploded. When the administrators from PricewaterhouseCoopers first turned up, Mr Langford declined their invitation dip into his payout to honour the wages of those employees who were sacked by text message.

It was left to PwC yesterday to spell out the grim truth to those employees and other creditors. Unless you are the VAT man, the taxman, or an employee who was lucky enough to be on maternity leave at the time, then you will get diddly squat from the winding up of this unpleasant company. Even these preferential creditors are only guaranteed 8p in the pound.

PwC have already run up a bill of £500,000. The judgement which creditors now have to make is whether it is worth risking more money to pursue a claim of wrongful trading against Mr Langford and his fellow directors. Allegations of this nature are notoriously hard to prove and the founder himself has vigorously denied he was extracting money from the business as it was going down the plughole.

But if this is a route the administrators go down then it will not just be Langford and Co who are in the firing line. Some awkward questions will also be asked of KPMG, which took over the TAG audit from Andersen, and Clifford Chance, which advised the directors.

From a pre-tax profit of £18m in 2002, the company slumped to a loss of £50m in the eight months to the end of April, this year which is a dramatic decline by anyone's standards. Inevitably, PwC is now investigating how real the profits were or whether claims managers manipulated the system to allow a rash of fraudulent claims to pass through the books and then pocketed the cash. Its findings will be passed onto the Department of Trade and Industry. They can always reach Mr Langford by text.

Baby bio blues

It's tough being a biotech minnow these days and so on the principle that a trouble shared is a trouble halved, Xenova and KS Biomedix announced their marriage yesterday. The press release is full of the usual buzz words about synergy benefits and enhanced product pipelines and positioning for growth. But the harsh reality is that the two companies have only one drug between them, the brain cancer treatment TransMID, and that will require bucketloads more cash if it is to survive Phase III clinical trials and ever get to market.

Biotech companies have been rushing into each other's arms with mixed success since the bursting of the technology boom and the prognosis for this latest merger does not look hopeful.

Xenova, itself the product of an earlier merger with Cantab, does not have a drug hope of its own, its cancer treatment tariquidar having failed earlier this year. As for KS Biomedix, its desperation to be taken over is reflected in the discount to market price that its directors have agreed to sell out for and take their severance cheques.

But bringing together two weak and cash-strapped companies may only succeed in doubling their woes. The "synergy" benefits (ie job losses) identified by the two companies will eat into their dwindling £17m cash pile and further trials of TransMID will finish off what is left, forcing the merged business to go to the markets for additional funding.

In a world where the rewards are big for the rare drug that makes it but the stakes are even higher, the £9m extra that Xenova's chief executive David Oxlade is looking for does not seem a lot. But at best it will provide him with 12 months' breathing space.

But it is a moot point whether the merged company will be around long enough to enjoy the benefits of the slash and burn strategy it is about to embark on. Yesterday's announcement tells us that KS Biomedix specialises in developing treatments for conditions where "survival prognosis looks poor". The same, alas, looks like being the case for this latest biotech union.

Kings' ransom

There is no shortage of buyers for supermarkets in this country, but in America Marks & Spencer is finding it impossible to get the upmarket Kings chain off its hands. M&S has now failed three times to find a buyer since it put the business up for sale in March, 2001. The chief executive, Roger Holmes, blames the inability of buyers to raise enough money from the financial markets to pay a decent price. Looked at another way, perhaps Mr Holmes is asking too much. Moreover, there have been enough trade purchases of businesses lately to suggest the debt markets are not entirely closed to deals priced correctly.

When M&S sold its preppy US menswear chain Brooks Brothers two years ago for $225m, it recouped less than a third of its original outlay. Mr Holmes does not have to sell Kings at that sort of a discount but if he is intent on holding out for a premium to the $110m M&S originally paid then he is destined for a long wait.

m.harrison@independent.co.uk

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