Outlook: Transatlantic experience points to more turbulence for BA

Debenhams; Marconi indignity
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The Independent Online

It is hard to imagine a more self-destructive industrial dispute than the one staged by up to 500 British Airways check-in staff last weekend. Just in money terms alone, it may have cost BA £20m in lost revenues and compensation, most of which will go straight through to the bottom line at a time when the airline is still struggling to emerge from the disastrous effects on traffic of the Iraq war. Just recently Standard & Poor's caused much opprobrium at British Airways by downgrading its corporate credit-rating to junk. It looks as if S&P may have been right.

Yet it is in the damage to reputation that the chief mischief occurs. The past few days have been a public relations disaster of monumental proportions, which has spread the message throughout the world that BA cannot run a bath let alone a modern airline. With the low-cost operators snapping at its heels, this was the last thing BA needed.

The backdrop is Rod Eddington's Future Size and Shape programme, which is intended eventually to trim £1bn off the annual cost base. The whole process is eerily reminiscent of Bob Ayling's Business Efficiency Plan back in the late 1990s, which ultimately ended in Mr Ayling's ignominious exit after he lost the trust and respect of the workforce.

Perhaps it's his Down-Under charm but, so far, Mr Eddington, a quietly spoken Australian, has largely managed to avoid the downward spiral in labour relations presided over by his predecessor, despite a cost-cutting programme of equal magnitude. So far may be the operative phrase, for it could be that as the new working practices begin to bite, Mr Eddington has only succeeded in storing up problems for the future.

Of necessity, Mr Eddington walks a dangerous tightrope between the need on the one hand to modernise his airline and on the other to avoid the sort of damaging débâcle that occurred last weekend. Failure in either department spells disaster. BA's employees only need to look to the United States, where the older, full-service airlines with their powerful unions and outdated working practices are well on the way to being wiped out by upstart low-cost operators to see their future if they fail to adapt.

Change is always difficult and painful for incumbent workforces, used to operating in a particular manner and proud of the service they provide, but there's always some guy out there prepared to think the unthinkable and thereby develop new, cheaper ways of doing the same thing better. BA staff are only digging their own graves by engaging in action of the type that has brought large parts of Heathrow to a virtual standstill these past few days.

Debenhams

Small wonder that shareholders in Debenhams are becoming more public and vocal in dismissing as inadequate the mooted 425p-a-share bid from Permira, the private equity group. Yesterday's trading statement points to a company which is still positively flying along, with like-for-like sales in the past 10 weeks up 5 per cent and the gross margin in the past 20 weeks up 0.6 of a percentage point.

Belinda Earl, the chief executive, could hardly have been more upbeat about trading if she'd tried, which was generous of her given that she'll get a cut of the action in any venture capital offering. She also benefits from the crystallisation of existing share options that any bid entails, but her main interest as a participating shareholder in the private equity venture is in talking the price down, not up.

Anyway, it's too late now. Both Isis and Standard Life went on the record yesterday to say that 425p a share, worth about £1.54bn in total, wasn't enough. Bidders would need to pay more to get their vote. Permira is said to be quite close to finishing its due diligence and ought to be in a position to make its bid either later this week or early next.

The rival venture capital bidders, CVC Capital Partners and Texas Pacific are not so well advanced but, even so, there's every possibility of a bidding war developing. In any case, the 425p a share Permira first suggested, subject to a satisfactory due diligence, looks like history. The successful bidder will have to pay more.

Even then he might struggle to convince shareholders. The consumer boom which has fed the re-evaluation of the retail sector in recent years is plainly abating, but there is no reason to suppose it will go into sharp reverse and there is every possibility of Debenhams continuing to grow.

The rush for retail assets is already causing private equity buyers to live with lower returns than they are used to in order to win their quarry. Shareholders in publicly quoted companies seem determined to squeeze them even further. Many would prefer not to sell to them at all on the argument that if there really is more juice to be extracted from these companies they'd very much like to keep it to themselves.

There's plainly a point in all private equity takeovers where the price gets so high that the numbers fail to stack up and the necessary debt finance therefore proves impossible to raise. Shareholders may wish to test that point with Debenhams. Certainly it is hard to see how independent directors of Debenhams can recommend an offer as fair and reasonable that they know the private equity buyer thinks he'll make a reasonable turn on. If the private equity players can do it, why cannot Debenhams do it for its existing shareholders?

Marconi indignity

There are not many indignities that shareholders in Marconi, the British-based telecoms equipment manufacturer, managed to escape as their company sunk beneath them, but one final kick in the teeth still awaits ­ to be compulsorily sold out of their company altogether.

Marconi is planning to achieve this under the cover of a five-for-one share consolidation. "If you hold less than five shares at the time the proposed consolidation takes effect", the circular announces, "you will not receive a new share". Instead shareholders will receive the net cash proceeds of the sale of their fractional entitlement", which with the shares trading at just 69p won't buy even so much as a packet of fags.

Because of the recent debt-for- equity refinancing of Marconi, which diluted pre-existing shareholders virtually out of existence, there are a surprising number of people in this position. Around 125,000 shareholders out of a total shareholder register of 185,000, or nearly 70 per cent, have fewer than five shares in the new Marconi. Unless they buy more before the consolidation goes through, they'll be sold out of the stock whether they like it or not. Marconi is not shy in admitting that the purpose of the consolidation is to get rid of these shareholders, who apparently cost up to £450,000 a year to service.

The company is sugaring the pill by offering shareholders a free dealing service so that at minimum cost they can increase their holding to a level that allows them to participate in the consolidation. So Marconi can hardly be accused of some kind of heinous corporate crime against its own shareholders, and, in any case, the listing authorities say it is all perfectly legal.

All the same, the plan still looks crassly insensitive. Derek Bonham, former chairman of Marconi, fought long and hard to salvage something for shareholders from the wreckage of Marconi's demise. They must be wondering why they bothered. Many small shareholders don't want to put even as much as an extra penny into Marconi given the losses they have already suffered, yet they would quite like to hold on to what they've got in the hope that maybe one day the shares might be worth something again. It's the principle of the thing that matters but, as usual, Marconi seems determined to ride rough shod all over it.

jeremy.warner@independent.co.uk

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