Outlook: Kingfisher's plans get caught up in French farce

Cable & Wireles; Jarvis meltdown
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The Independent Online

Nothing is ever simple with Kingfisher. The retail empire built up by Sir Geoff Mulcahy has always been a morass of complicated deals and management structures only fully understood by Sir Geoff himself. Yesterday's "transforming" shake-up is supposed to change all that. Prodded into action by the new chairman, Francis Mackay, Kingfisher has finally bitten the bullet and opted for wholesale change.

The plans look good on paper. Kingfisher is proposing to buy out the 45 per cent of Castorama it doesn't already own for £3.2bn and then spin off the electricals business into a separate company. Perhaps equally significant, Sir Geoff, the great survivor, has finally agreed to stand down as chief executive. It's just what the City has been clamouring for.

Only it isn't working out that way. The French are already cutting up rough about Kingfisher's plans for the Castorama buyout. A bid is a bid and most managements would be quite happy to put it to shareholders and let them make up their minds. In France, nothing is ever quite that simple. Castorama wants to test the offer not in the markets but in the courts, where it intends to argue that the offer "violates statutes". On top comes the surprise disclosure that Kingfisher isn't going for a simple demerger of its electricals operation after all. The preferred route is instead a French IPO that would leave Kingfisher as the controlling shareholder, at least for a while.

The Castorama roadblock is potentially the more serious one. Even for Sir Geoff the small print of the relationship is a cracker. Kingfisher owns 55 per cent of the shares but the French have management control. Kingfisher has the right to buy out the minority but the price must be audited for fairness by an independent bank "of the first order". If the bank agrees, Kingfisher gets automatic control regardless of what the shareholders do. If shareholders none the less vote against it, as the Dubois family with around 10 per cent of the shares might, then Kingfisher would be in the embarrassing position of winning control but having to hand back the £2bn it is raising from a rights issue.

All this is not to say that Kingfisher is doing the wrong thing. Splitting DIY and electricals will remove the conglomerate discount which weighs on Kingfisher shares. It will also clear the way for bids. Home Depot and Lowes of the US would be interested in the DIY business and Dixons would love to get its hands on Darty.

What is to become of Sir Geoff is anyone's guess, but it is a curious thing. He still hankers after running Woolworths again, 20 years after the Kingfisher adventure began with the buyout of Woolies from its then American owners. Are there any venture capital companies out there willing to back Sir Geoff in doing it all again?

Cable & Wireless

What's a £4bn write off between friends? Not much at all judging by the blasé way in which the stock market ignored the asset impairment charges and goodwill write-offs reported by Cable & Wireless yesterday. Time was when charges on this scale would have sent the market into a blind panic, but among telcos and anything else to do with the one-time boom sectors of the New Economy they have become so much par for the course that investors no longer seem to care.

BT is today expected to announce a further £2bn of write-offs in respect of BT Ignite. Against the mountainous writedowns already taken on the chin by BT investors, the new charge scarcely warrants a mention. The asset impairment charges expected to be announced by Vodafone later this month will be a good deal larger but, again, the City has already long ago did its panicking about the plummeting value of Vodafone's businesses. The write-offs are no more than an accountant's recognition of a reality that has long been reflected in the share price.

All the same, this is real money and real loss of value, and the scale of it continues to shock. Companies are acknowledging that assets they bought and invested in at the top of the market are now worth only a fraction of what they paid for them. The excesses of the bubble, now being faithfully recorded through such charges in accounts across the globe, almost defy belief.

At least C&W remains awash with cash, having managed to sell assets at the top of the market as well as acquire them. Few other telcos are in such an enviable position. C&W's chief executive, Graham Wallace, reckons the company's relative financial strength is a selling point among corporate customers against the carnage all around, and for the time being he's resisting calls for more cash to be returned to shareholders.

Will the City buy it? Maybe. The shakeout in telecommunications is proceeding at a cracking pace. WorldCom, Global Crossing, Energis and now KPNQuest, the alternative carriers seem to be falling like nine pins. The way things are going, only the incumbents and C&W are going to be left standing by the time the music stops. With its mountain of cash, C&W can afford to buy up capacity merely to switch it off, thus improving the prices for what's left switched on. It's a bizarrely upside down world that makes capacity worth more dead than alive, but that's the one telcos have come to inhabit.

It is probably not yet time to call a cyclical rebound in the telecommunications industry. More pins have to fall before that point is reached. But the time may be near.

Jarvis meltdown

A week is a long time in the railway maintainance industry. Seven days ago, shares in Jarvis were still riding high on the belief that the public private partnership on rail and the Underground was a one way ticket to the bank. Then the Potters Bar train crash struck and the shares have been in meltdown ever since.

If Railtrack decides to take maintainance back in house again, the contract gravy train will be brought to a complete halt. Worse, Jarvis could be held grossly negligent, in which case its liability insurance will fail and the company might become insolvent.

It was not supposed to be this way when the track maintenance contracts were doled out at the time of privatisation. Jarvis and its fellow contractors thought they had booked a comfortable ride on the gravy train. What they have ended up with is a blaze of damaging and deeply negative publicity and a serious threat to their livelihoods.

The structure of the privatised rail industry always looked like an accident waiting to happen, splintering the network into a hundred different parts as it did. The idea was to introduce financial tension between the different moving parts of the system and so drive costs down and efficiency up. Another outcome seems to have been to separate lines of management, confuse responsibilities and encourage a culture of blame and buck-passing.

A head of steam is building up for the rail industry to be re-united. But the advocates of re-integration have yet to explain why this is so essential for rail when the aviation industry, where safety is every bit as critical, functions perfectly well under a fragmented, privatised structure. The airports, the airplanes and now the airspace are all managed and run by separate, private operators. And yet no one seriously suggests this has compromised safety or affected regulators' ability to police the industry. Don't forget, even more damning examples of failure in rail safety abounded when British Rail was an integrated, government-owned monolith.