Outlook: Huffing and puffing as Telewest refinancing hits the buffers

GlaxoSmithKline; New man at Hays
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The Independent Online

The Board of Telewest Communications, the beleaguered UK cable company, has a lot of explaining to do. Refinancing talks aimed at persuading debt holders to swap their bonds into shares have been dragging on for more than a year now, and still there isn't even a credible road map in place let along an end in sight.

For shareholders this may not seem to matter very much as come what may their equity will get diluted virtually out of existence. Yet even for them there's something left to play for and as for bankers and employers, the stakes remain high. "We are close to a definitive agreement with all stakeholders", the managing director, Charles Burdick, confidently announced last July. I don't know what planet Mr Burdick lives on, but it certainly doesn't seem to be the same as everyone else.

The definitive agreement Mr Burdick was referring to has it seems been agreed only by the Telewest board and one of its bondholders, an American vulture capitalist called William Huff. Mr Huff played a key role in the way NTL, Telewest's cable TV rival, was refinanced, and he seems intent on doing the same with Telewest, presumably with the eventual intention of using his position as a player in both companies to bring about a cost-cutting merger.

Telewest is in no position to dictate terms to anyone. The company has been in default on its bonds since last October, but nor as it happens is Mr Huff, who according to the company owns a maximum of 20 per cent of the bonds, and possible a lot less. This is not of itself enough to veto anything. Mr Huff can huff and puff all he likes, but he cannot alone blow the house in. Mr Huff may have the support of other bondholders, but if he does, this has not yet been explained to other stakeholders.

All of which makes surprising the board's willingness to accept his terms. Telewest has already admitted that the new proposals involve an even greater degree of dilution for shareholders than what was previously on offer. Ninety seven per cent of the equity was apparently not enough for bondholders; they wanted even more, which Mr Burdick agreed.

As to the rest of the agreement, there appear to be some gaps in the story. According to documents obtained by The Independent, the plan also involves shifting the company's domicile from Britain to Delaware in the US, the same place as NTL.

This would be extraordinarily disadvantageous to Telewest's bankers, with more than £2bn of loans outstanding to the company, as Telewest would then fall within the scope of American bankruptcy laws, and the present, privileged position of bankers among creditors could be lost. There is a high degree of anger among bankers that the board could have agreed a proposal that so much ignored their interests.

Yet there is worse. Telewest has paid $1.5m (£0.9m) it doesn't have in fees and expenses to Mr Huff for his work on the deal. Furthermore, on completion, Mr Huff would have the right to appoint two of his representatives to the Telewest board and have a major say in the appointment of the chairman and chief executive. Mr Huff already has similar rights at NTL. With the rebound so far this year in telecommunications stocks, the value of obtaining equity control of UK cable is fast appreciating.

In time, the merger of these two companies would lead to vicious cost cuts and job losses in the UK cable industry. So much for the definitive agreement of other stakeholders. Bankers and employees seem to have been almost wholly ignored. On the other hand, Mr Burdick has not wholly forgotten his own interests. He stands to get the curiously precise sum of £863,738 in termination payments once the deal goes through.

This is a terrible set of proposals for virtually everyone other than Mr Huff and his supporters. No wonder it is taking Mr Burdick so long to obtain agreement. Had the Telewest board dowsed the place in petrol and set light to it, they could scarcely have done worse by their company.

GlaxoSmithKline

For enterprises whose whole raison d'être is to improve public health through the discovery of life enhancing medicines, the big pharma companies have become incredibly unpopular beasts. Which is why a small Canadian drug maker called Apotex has decided it is worth the risk of launching its generic version of GlaxoSmithKline's antidepressant, Paxil, before the issue of whether this infringes patents is finally settled in the US courts.

Apotex's gamble is that public and political opinion against the high cost of patented drugs is now so strong, that no US court will uphold Glaxo's claims. Privately, even Glaxo would admit that it is probably right. After the salutary lesson of Prosac, which lost 75 per cent of its market overnight when it came off patent, drug companies have become better at preparing themselves for patent expiry, and more prepared to accept their patents cannot indefinitely be defended.

With Paxil, for instance, Glaxo has already migrated 40 per cent of prescriptions on to Paxil Controlled Release, an enhanced version of the same product where the patent is still safe. It has also agreed to manufacture generic Paxil for distribution in the US. All the same, the damage will still be significant, and furthermore, the generic onslaught has started earlier than anticipated. The same thing is happening with Augmentin, Glaxo's best selling antibiotic.

Both patent expiries have overhung the share price for some years now, so there may be some merit in the bad news being finally lanced. Unfortunately, the pressure for lower pharma prices which is at the root of the generic problem for Glaxo and other major players will not be going away.

Jean-Pierre Garnier, Glaxo's chief executive, is hoping to announce a drug development pipeline positively alive with exciting new products when he holds his research and development away day for City analysts in early December. He'll be preaching to the converted when he insists that if this is to remain the case, then drug companies have to be allowed to make good profits. That message is proving much harder to sell to legislators and policymakers.

New man at Hays

Colin Matthews at Hays is not the first chief executive to have restructured himself out of a job and he will not be the last. What marks him out, however, is that he is disappearing just 10 months after he arrived, and barely six months since completing the root and branch review he was brought in to conduct.

Hays does not have a happy record when it comes to retaining chief executives. The previous one lasted for an even shorter period than Mr Matthews. In fact the ship has been in trouble almost from the day the group's modern-day founder Ronnie Frost cashed in his chips and went off to spend more time with his sheep down on the family farm.

Mr Matthews says he is going because he is shrinking Hays back to a pure personnel recruitment company and he has no desire to run such a business. You might have thought that would have been apparent back in March when Mr Matthews decided to sell off Hays heritage by dumping its haulage and private mail businesses along with business process outsourcing (call centres to you and me). Obviously not.

Hays' new, or perhaps that should be next, chief executive will be Denis Waxman, who likes the recruitment business and already runs Hays Personnel anyway. As for Mr Matthews, he is developing something of a reputation for being a corporate gadfly. He lasted less than a year in his previous job with Transco, and at the tender age of 44 has already been through six changes of job. To some that might seem like corporate virility, to others a sign of fecklessness. Only his next employer can judge.

jeremy.warner@independent.co.uk

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