Outlook: Knapp gives another master class in financial engineering

Argos comes good
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The Independent Online

Barclay Knapp will presumably be taking a job in investment banking after he's finally pushed out of his present position as chief executive of NTL, for whatever else he's good at, his talents as a financial engineer continue to impress. Yesterday's refinancing of the debt-laden cable company confirms the still youthful looking American as a financial wizard of genius. Were it not for the fact that the restructuring disentangles NTL from a mess entirely of Mr Knapp's own making, he would surely deserve some sort of a prize for corporate rescue of the year.

This is not yet a done deal. It still requires the approval of bankers, but since it will rid the company of approximately $800m of interest costs a year as well as provide NTL with an additional $500m of new equity finance, it is hard to see them objecting. There's many a slip between cup and lip, but, on the face of it, Mr Knapp has persuaded the company's bondholders to swop $10.6bn of debt into equity. Leaving aside the fact that Mr Knapp's manoeuvrings almost entirely wipe out existing equity holders, this is quite an achievement.

Mr Knapp seems deftly to have played bond holders off against John Malone, the US cable tycoon with whom NTL has been negotiating over alternative refinancing arrangements, in achieving this result. In the end, bondholders were persuaded that it was better to inject their own new equity finance than allow Mr Malone in on favourable terms. In the process, Mr Knapp has done it again. Only a few months ago the company was widely thought to be facing liquidation. Now Mr Knapp has pulled another rabbit out of the hat. That said, it is hard to see how he'll survive the completion of the refinancing.

For the time being, lenders need him, since NTL's byzantine financial structure is his creation and he's the only one who knows where all the bodies are buried. But once the company is returned to a semblance of financial stability, he'll be quietly given the bullet. Nobody ever doubted Mr Knapp's deal-making prowess, or his capacity for risk. But he's still pretty much unproven as an operational manager and, once the financial pain is eased, bondholders will want their own people in the key positions. Mr Knapp has destroyed value on an heroic scale, and NTL is second only to Enron as the biggest corporate insolvency of all time. That won't be allowed to go unpunished.

Mr Knapp wouldn't have got yesterday's deal through at all but for the fact that most of the bonds have been bought up by vulture capitalists at a fraction of their face value. Their calculation is that they are getting NTL on the cheap and, given that existing shareholders don't just take a hair cut, but are entirely clean shaven by Mr Knapp's latest act of financial wizardry, they may be right.

The only shareholder to emerge with anything of substance at all is France Telecom, which at least gets its 27 per cent shareholding in Noos back. There is no decent explanation for this other than it being part of the deal under which Noos was originally acquired. Even so, by British standards to give one shareholder better treatment than others looks pretty rum. Not that it will bother the British authorities. NTL's share capital is almost entirely owned by Americans, France Telecom and Cable & Wireless, the latter having already done well out of NTL, so it won't much care about writing off its remaining investment.

NTL was a spectacularly ambitious attempt to become the dominant UK cable operator. As the new economy boom gathered pace, investors and bankers queued up to finance Mr Knapp's hubris. This column warned all along that it was all too good to be true, but that didn't stop Michel Bon, chairman of France Telecom, helping to finance the deal that finally sunk Mr Knapp, NTL's acquisition of Cable & Wireless's UK cable assets. For all concerned, it was the deal too far, and it soon became apparent that revenues would struggle ever to match the costs of the debt NTL had taken on.

On the face of it, the refinancing will put NTL in a rather stronger position than Telewest for the final round of consolidation in UK cable. Telewest doesn't have as serious a balance sheet problem as NTL but it is a much smaller business and, after the refinancing, NTL will look by far the more financially robust of the two operators. Moreover, Telewest is a UK-quoted company with some big strategic shareholders in the form of John Malone's Liberty Media and Microsoft. It hasn't the same scope for playing fast and loose with its investors and bondholders, nor does it intend to. So the long-awaited end game of a merger between NTL and Telewest may take longer to achieve than generally thought. When it does eventually happen, it seems certain Mr Malone, who is after all the world's chief cable guy, will play the role of kingmaker and, whoever is by then running NTL, he'll want his own man, Telewest's Adam Singer, in the hot seat to ensure that the UK cable industry finally lives up to its full potential.

Argos comes good

If you were looking for one of the more surprising high street success stories of recent times, you would be hard pressed to find a better one than Argos. With its mammoth catalogues, eccentric ordering process and those stubby little pens for filling out the forms, it hardly looks like the retail concept of the future. But this strange beast is firing on all cylinders. Like-for-like sales are up by 13 per cent, one of the best retail performances around, and by the end of the year there will be 500 stores with more planned.

All this is a long way from what was predicted when Lord Wolfson of Sunningdale, then chairman of Great Universal Stores, stumped up £1.9bn for Argos back in April 1998. Argos was seen as a dated, ex-growth concept that had little reason to exist. A former part of BAT, the former Greenshield stamps business had suffered from chronic under-investment and a near-terminal lack of innovation. Lord Wolfson himself appeared to admit that he had bought a pup when he complained to the Takeover Panel after the deal went through that the Argos management had made misleading statements about the performance of its stores in the Netherlands.

This all came to nothing, but the last laugh goes to GUS. Never mind Burberry, it is Argos that is the jewel in the GUS crown with an estimated value of £3bn-plus. How on earth did this happen? The retail boom has helped, but there have also been big economies wrung belated from the deal by combining Argos' buying power with that of the GUS home shopping division, which includes old-fashioned catalogues such as Marshall Ward. Prices have been kept at rock bottom as a result. The product range has been extended to more than 9,000 items, including things such as garden furniture, and customers can also now choose to have their orders delivered to their homes for a small charge.

In a stock market littered with the corpses of so many failed, over-priced takeovers, Argos has proved a notable exception. Lord Wolfson has been vindicated, but that won't stop the stock market demanding change. With Burberry set for a partial float in June, GUS will look a odd creature with Argos on one side and the Experian financial information business on the other. There are some synergies between the two but not enough to justify the conglomerate discount the shares trade at. The time has come surely come to break up GUS completely.

j.warner@independent.co.uk

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