Outlook: Mervyn King's formula for success: Steady as she goes

Canary Wharf; Corus rights
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The Independent Online

Britain is going through a period of almost unparalleled economic stability. To find anything similar, you have to go back to the 1950s and 60s, and before that to the glory years of the Victorian age. Yet even these comparisons fail to match the present, record-breaking 12-year stretch of uninterrupted economic growth. For many companies, business today seems tougher and more competitive than it has ever been. We are also only now beginning to emerge from one of the worst bear markets for equities of the modern age. But for the economy as a whole, things have rarely looked so benign. Of course, it is just when everyone agrees that our economic ills have been solved for good that the wheels tend to start leaving the track.

That, however, is not an outcome the Bank of England's latest Inflation Report judges at all likely. For the Bank, the outlook is only for more of the same. At his quarterly press conference yesterday, Mervyn King, Governor of the Bank of England, was more sanguine on the various threats to stability than he's been in ages. To some extent, this is a stance dictated by the duties of office. It doesn't pay for the Governor of the Bank of England to worry in public about all the things that may go wrong, even if they do keep him awake at night, for to do so risks making them a self-fulfiling prophecy.

Yet Mr King also seems to have a genuinely relaxed view of the future. After a prolonged period when it seemed that no amount of interest rate therapy would return the economy to trend growth, things seem to be bouncing back nicely. Interest rates will have to rise further to choke off the inflationary pressures the Bank sees emerging towards the end of its two-year forecasting horizon, but not by so much that it risks creating a nasty demand shock.

According to Mr King, much of the necessary deceleration in consumption growth has already taken place. The slack thereby created ought to be compensated for by a pick up in business investment, and by continued high public sector spending. Disarmingly, he admits that the degree of confidence we can place in the Bank's assessment that house price inflation will be broadly flat by the end of the forecast period is close to zero. Yet he is surely correct in thinking the damage to the economy as a whole is quite limited even if there is an outright correction in house prices. Most householders have much more equity in their properties today than they did during the last housing crash in the early 1990s, reducing the likelihood of a significant negative equity problem.

For all this stability, there are, none the less, already clouds building. The "debt time bomb" may not be as serious a problem as some commentators believe. Yet very high levels of household debt, in combination even with only gently rising interest rates, will make many of us feel a good deal less well off than we have felt. Rising taxes and low earnings growth has already resulted over the past six months in a fall in real, take- home pay, the first such decline since 1995. Furthermore, there is evidence that Britons are beginning to lose their appetite for the compensating currency of debt. Bad times ahead? Not by the look of it. We may, none the less, already have had the best of the good times.

Canary Wharf

Paul Reichmann is standing aside as chairman of Canary Wharf so that he can raise the finance to make a cash bid for the company he knows so well and loves so much. If he succeeds, it will be the third time he's bought the east London property complex. The first time was way back when in the 1980s, when it was little more than the vision of an apparently crazy American financier, G. Ware Travelstead. The second time was when he bought it off the receivers in the mid-1990s. At the age of 72, it now seems that Mr Reichmann is just itching to do it all over again. Does the man never rest on his laurels?

Canary Wharf has already attracted two indicative offers since a calamitous profits warning earlier this year, but neither has passed muster on valuation. The one from Morgan Stanley private equity proved unacceptable to some shareholders because the equity element in the bid was to have been traded on the Alternative Investment Market, which precluded them from holding the stock. Stub equity rarely has much of a shelf life anyway.

Meanwhile, the board felt unable to recommend a 252p-a-share cash bid from the Canadian property company Brascan. With rents for prime London office space beginning to recover, it seemed the wrong time to accept a low ball offer. Mindful of the example of Arcadia, which with the benefit of hindsight was sold far too cheaply to the retail financier Philip Green, the board is sticking out for a higher price.

Mr Reichmann promises more than 255p a share, but whether he's prepared to offer the minimum 270p some shareholders think the business is worth is anyone's guess. Brascan thinks he's just bluffing and asks shareholders to ignore their board and accept its cash. But it rarely pays to underestimate Mr Reichmann, and in any case, shareholders would appear to have little to lose from a wait-and-see approach. At every stage, Mr Reichmann has confounded the pessimists, first in building the place, then in letting it, and finally seeing it through to the second and third stages of construction. He knows its potential better than any.

Yet like everyone else, he's also mortal. At his age, can he really hope to obtain the financial backing he needs? Brascan thinks not, but as Mr Reichmann delights in recalling, though his father, Samuel, lived "only" to the age of 79, he was in the office on Friday and dropped dead on the Sunday. Mr Reichmann Jnr is more driven still, especially when it comes to Canary Wharf.

Corus rights

The steelmaker Corus has trampled on the pre-emption rights of its shareholders with yesterday's hybrid share placing-cum-rights issue. But it is the hedge funds, who have been frantically selling the stock short in the past few months in the hope of making a quick killing, that will feel the greatest pain.

Share placings that double as rights issues have been tried before - but never on a scale such as this. The offer will net Corus £291m once Lazard and Cazenove have collected their £12m in underwriting fees - which is not bad for the 60 minutes it took yesterday to place the stock.

In many ways, the answer that Corus has come up with to bridge its funding gap is an elegant one. By circumventing the traditional deeply-discounted rights issue approach and timetable, the company gets its money in three weeks instead of six. Moreover, it has been able to price the offer at a discount of just 10 per cent, thereby limiting the number of shares it must issue and the potential dilution for those who choose not to subscribe.

In addition, Corus avoids the unseemly scramble of shareholders rushing to sell their nil-paid rights in the market and thereby undermining the capital-raising exercise - the trap which Royal & Sun so nearly fell into with its own discounted rights issue. The clear losers will be the hedge funds who gambled on Corus being forced to follow the same route as Royal & Sun, and who will now be forced to buy shares at high prices in order to cover their short positions.

Unfortunately, wider shareholder rights have also been infringed. Without any nil-paid rights to sell, existing investors in Corus have no choice but to take up their entitlement or watch themselves being diluted without any gain whatsoever. All in all, then, a neat if sharp piece of financial engineering which plugs the hole in Corus's balance sheet while the company sorts out its loss-making UK steels business. Whether it is the answer to the company's longer-term survival is anyone's guess. Given past experience of Corus, it would perhaps be unwise to raise expectations very much.

jeremy.warner@independent.co.uk

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