Redstone's epitaph to telecoms boom and bust

Gallaher/Austria; Strong sterling

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Redstone fights for survival with desperate 1p-a-share equity issue

Gallaher beats rival Imperial to seal £1.3bn takeover of Austria Tabak

Fears of eurozone recession as confidence dives

Few companies better epitomise the boom to bust of the telecommunications sector than Redstone Telecom. Even the performance of the Welsh national rugby team, which Redstone sponsors, is left looking good alongside the disastrous plunge into the abyss of the Redstone share price.

You've heard of the 90 per cent club – that is companies that have lost 90 per cent of their value since the technology bubble peaked last March – and, yes, there are quite a few that belong to the 99 per cent club too. But Redstone seems to be in a category all of its own in boasting a 99.9 per cent loss of value.

Barely more than a year ago, the company tapped the City for £122m in fresh equity, yet to the horror of investors, group cash had dwindled to little more than £10m by the beginning of last month, when Redstone dispensed with the services of its finance director, Alan Harold. Nobody outside the company has a clue what's going on, and it seems more and more doubtful than anyone inside has got much idea either.

Yesterday the company said it was hopeful of raising approximately £22m via a placing of shares at 1p each, but nobody was prepared to elaborate. Such an exercise requires the issue of an astonishing 2,200 million shares, or nearly 20 times the number already in issue. Small wonder the company lost half its value again yesterday as investors drew their own conclusions and bailed out.

Well, maybe Redstone might still worth something, though the company's admission it needs the extra money for "working capital" will lead many to suspect otherwise. The way things are going, anyone interested in buying Redstone would be better advised to wait for the liquidators and pick the assets up on the cheap than bid for the equity. It's possible Redstone's chief executive and co-founder, Graham Cove, has found a business prepared to reverse itself into the Redstone roadcrash, but it would be unwise to bet on it.

Redstone's fight for survival has hardly been helped by British Telecom's slowness in opening up its exchanges to DSL competition. But BT can hardly be blamed for all the world's ills and Redstone is largely the architect of its own demise. It was always hard to understand precisely what it was trying to do – targeting SME's for telecommunications services was just too vague to succeed – and were it not for the TMT boom, it would have struggled to float on the stock market at all.

That Redstone will stand as an epitaph to those heady days scarcely looks in doubt. The bigger question is how many others are heading in the same direction?

Gallaher/Austria

Ever since the technology bubble burst in March last year, tobacco has been one of the top performing sectors. This is a pariah industry for many, and in the developed world tobacco smoking has long been in gentle or even precipitous decline. None the less, it's easy to see why it should be an investor's favourite once more.

For all its faults, the tobacco industry generates oodles of cash, the bark of the litigants seems for the time being to be a lot worse than their bite, and growth prospects in many parts of the world are still excellent. Chasing rainbows in the dot.com boom was great fun while it lasted, but eventually there is a need for profits and dividends. Tobacco companies have helped satisfy that demand.

Even so there were some raised eyebrows in the City yesterday after Gallaher announced the acquisition of Austria Tobak. At 2.13bn euros including debt, Gallaher seems to be paying a very full price, while its promise to keep Austrian and Swedish tobacco plants going, which apparently helped secure the prize from rival bidders, leaves limited scope for cost cutting and synergy benefits. Gallaher's stated aim of reducing its reliance on declining UK sales seems reasonable enough, but it's hard to see how buying the monopoly tobacco seller in a market as mature as Austria helps.

Austria Tobak already has nearly 90 per cent of the market, so there's no scope for growth there. The company's location may give some advantage in the still growing markets of Eastern Europe and the former Yugoslavia, but the competition in these regions is predictably cut-throat. In these circumstances it is hardly surprising that the City reacted negatively to the acquisition. That there is to be an equity element in the funding hardly helps either.

Gallaher was up against some well heeled rivals in bidding for Austria Tobak and it seems more than possible that it's overpaid. In any case, Nigel Northridge, the chief executive, faces an uphill struggle in persuading the City he has not. This is Mr Northridge's second acquisition since becoming chief executive 18 months ago and he doesn't intend to stop there. He's chasing at least eight other "opportunities" in the fast consolidating tobacco industry. Let's hope he knows what he's doing, or he'll end up getting consolidated himself.

Strong sterling

The spoof history textbook 1066 and All That famously divided all major events in Britain into "good things" and "bad things". Quite where the Chancellor and the Governor of the Bank of England would place the strength of the pound after a week which has seen both of them talk down the prospects of early euro entry, is unclear.

In his Mansion House speech, the Governor, Sir Edward George, seemed to be saying that the strong pound was "a good thing". The effect has been to tighten monetary conditions and allow interest rates to be lower than they would be otherwise. That's helped push mortgage costs to their lowest level for 40 years. Meanwhile, cheaper imports have driven down the price of fancy goods such as TVs, computers and mobile phones. Foreign holidays have become cheaper too, especially in Europe.

But there are many people for whom a strong pound is a "bad thing". Chief among these are businesses exposed to the international market. Exporters have struggled to sell their goods to overseas buyers who have to fork out larger and larger amounts of their own currency to buy them. So they have responded by cutting their workforce or, in the case of the car giant Nissan, taking more of their supply contracts away from UK suppliers, thereby creating more opponents to a strong pound.

Even for them, however, a falling pound wouldn't be entirely benign. As Sir Edward made clear at the Mansion House, a fall in sterling to a level at which exporters would be happy to join the euro would involve higher inflation and interest rates.

This in turn creates a problem for the Government. If interest rates rise, perhaps to 7 or 8 per cent, convergence with continental Europe would be as far away as ever. The point that Sir Edward and Gordon Brown were making was that a short cut to euro entry would be a "bad thing". We are not yet ready for it, they were implying, and they are right.

But that's not quite the same thing as saying the strong pound is a good thing. Indeed there is growing concern at the Bank of England at the structural distortions it is causing. Low interest rates and cheap imports are fuelling consumer spending at a time when the strong pound and the weak international outlook is causing industrial production to slump. So not such a good thing after all. Confused? Not half as much as they are.

j.warner@independent.co.uk