Outlook: Trotman tries out some new chemistry at ICI

Knapp sack; Sir Howard's way  
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The Independent Online

Lord Trotman has only been chairman of ICI for a month but he has not wasted any time in grasping the nettle. His first act will be to clear up the mess left behind by his predecessor, Charles Miller Smith. For shareholders the sting in the tail is an £800m rights issue to bring ICI's groaning debts back under control. The alternative is the humiliation of a junk bond rating for this one-time bellwether of British industry and a £60m increase in interest payments. Hobson's choice.

ICI has laboured under an unsustainable debt burden ever since Mr Miller Smith left Unilever for ICI in 1995 and then splashed out £5.9bn two years later for his previous employer's speciality chemicals business. Still, never let it be said that ICI bears a grudge. Mr Miller Smith's latest employer, Goldman Sachs, is earning a nice fat fee for advising on the refinancing of ICI.

At one stage the debt mountain topped £6bn, but that did not matter too much when the company was worth £9bn. Now ICI is valued at just £2.4bn but its borrowings are still £3bn.

The debt might have been manageable had ICI not bought at the top of the market and then found itself having to sell off its bulk chemicals businesses at the bottom of the cycle to bring borrowings back under control.

The effect was to leave ICI struggling for air. Every time it got its head back above water along came another bow wave to sink the company, in the shape of an emerging markets crash or 11 September. It did not seem to matter how clever the new management team under Brendan O'Neill was in re-inventing ICI as a flavourings business enjoying more in common with Christian Dior than chlorine.

Aside from the collapsing share price, which at one time touched the heady heights of 1,250p, investors have had to put up with a halving of the dividend. ICI's desperate attempts to conserve cash even enabled it to discover that it was paying £70m too much a year into the pension fund.

But there comes a point when the gimlet-eyed boys from the credit rating agencies stick a wet finger in the air and say enough is enough. ICI was not about to breach its banking covenants. But there was enough concern about its ability to service its debts to warrant marking the commercial borrowings down to sub-investment grade. This would have made a large number of institutions forced sellers and placed the business in even more of a straitjacket.

ICI bridles at the idea that this is in any way a "rescue" rights issue and insists, in true football chairman style, that Lord Trotman is 100 per cent behind his chief executive. But shareholders do not have much to look forward to. The measly dividend is about to be spread even more thinly and there is no sign of a takeover bid on the horizon. ICI needs the approval of its shareholders but it does not need their cash since the rights issue is underwritten. Nevertheless, it has an awful lot to prove.

Knapp sack

Regrets, he's had a few. Well, 12 billion to be precise, and all of them with the Queen's head stamped on one side. Barclay Knapp was in town yesterday to confirm what the rest of the world has known for some time – that his cable company NTL is in a deep hole and £12bn in debt. Unless he can persuade banks, bondholders and shareholders to refinance half that amount, it is curtains for the brash boy from New York and his little empire.

The scale of the challenge makes ICI's rights issue look like a little local difficulty indeed. But is Mr Knapp sorry for all trouble? Well, just a little, just a very little. He "regrets" what has happened over the last six months to the company and its shareholders. But Barclay, you began the spending spree nine years ago.

Let's not even dwell on the £8.5bn paid for Cable & Wireless Communications. What about the stake in Leicester City Football Club, now firmly anchored to the bottom of the Premiership? Or the fancy Manhattan headquarters and the jets? Or the fact that here is a business which has nearly all its assets and operations in Europe but has been run, if that is the correct word, by remote control from New York?

Mr Knapp is an eternal optimist. There is, he says, no danger of NTL breaching its banking covenants. There is no liquidity crunch. There is no lack of cash to pay the wages. In short, there is no crisis. Some companies are too big to fail or the projects they promote too big to collapse. Eurotunnel, which had its bankers over a barrel from day one is the prime example.

But NTL, for all its mountainous debts, does not fit that category. After Enron, anything is possible. Rival cable operators could just as easily snap up Mr Knapp's customers or his underground cables at distressed prices as shareholders are likely to accept being diluted into oblivion by the debt-for-equity swap now envisaged.

NTL may or may not survive the six months it will take to negotiate a rescue. Since he knows where all the bodies are buried, Mr Knapp is probably a necessary fixture for that period. But, after that, also supposing there is still a NTL to broadcast, he is surely toast.

Sir Howard's way

There may be no end in sight to the shower of P45s raining down on the Square Mile, but in one quarter of the City they've never had it so good. Despite the mass lay-offs it seems the Financial Services Authority just can't get the staff and is having to pay through the nose to hang on to those it has got.

You would have thought that redundant financial services professionals would be forming a queue outside Sir Howard Davies' plush glass-fronted offices in Canary Wharf. The regulation industry is booming after all. In November the FSA took over responsibility for investigating insider dealing from the Department of Trade and Industry, gaining the power to press civil charges in the process thereby making prosecutions much more likely. It is also charged with punishing market abuse such as share price ramping and corporate slander. Yet for all the excitement of policing the world's largest financial centre, today's graduates would rather toil for a struggling investment bank working on deals that are never going to happen.

Then again, no one knows better than Sir Howard that regulation is a thankless job. Your work gets noticed only when things go wrong, and the rest of the time everyone complains about the bureaucracy and the fees. The crisis at Equitable Life and the collapse of Independent Insurance have set an ugly backdrop to the birth of the FSA, and probably only the most dedicated public servant would want to take even partial responsibility for spotting and preventing the next financial meltdown.

While the insurance industry is coughing up for the FSA's new recruitment drive through an increase in fees, it is doubtful whether the type of chaps Sir Howard needs will be motivated by money alone. All the same, with the collapse of Enron raising fresh doubts about the credibility of the claims companies make, anything that attracts City folk to join the gamekeeper is welcome.

m.harrison@independent.co.uk

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