The gasman cometh, but how long will he stay?

British Telecom; Granada headache; Hewitt's way
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The Independent Online

It seems to be a British Gas takeover in all but name. Having recruited Philip Hampton from BG as finance director, British Telecom has bagged David Varney, another key executive in the break-up of British Gas, to front the demerger of its mobile phones arm, BT Wireless.

For BT, Mr Varney is a good catch, even if it is a bit of a mystery as to why the company needs to pay him a £125,000 bonus on top of a £500,000 salary for successfully implementing a demerger which is going to happen anyway. The general assumption in the City is that Mr Varney's reign as chairman of BT Wireless will be a short one. Investors would like him to engineer a value-enhancing consolidation with one of the remaining independent Continental operators as quickly as possible.

Mr Varney points out that nobody gave Centrica and BG much of a chance of independence when British Gas did the splits either, but all these years later they still thrive as individually quoted companies. BG Group has even done the splits again since then, separating the pipeline business, Lattice, from its exploration and production interests. Mr Varney sees no reason why Wireless shouldn't also prosper independently. Brave words, but it would be amazing if it turned out that way. BT Wireless is almost certainly a better business than it is generally given credit for, but it is also small compared with Vodafone and Orange, and in a market where scale is all important, its chief attraction is as a takeover target.

Under BT, it was starved both of management and resource. Joint ownership of Cellnet with Securicor made matters even worse, since BT had no incentive to invest as long as there was a chance of buying out Securicor at a knockdown price. This it eventually succeeded in doing, but the damage inflicted on the business in the process was shocking to behold. Cellnet fell seriously behind Vodafone and allowed Orange to overtake it.

Other Wireless assets include a promising but small licence in Germany and even smaller ones in the Republic of Ireland and the Netherlands. Cegetel in France is being deliberately held out of the mix so it can be sold to Vodafone to help paydown BT's debts.

It's hard to see how such a business can succeed in the long term against the big batallions of Vodafone and Orange. Still, the addition of Mr Varney might add a couple of billion to the valuation in any subsequent deal with Telefonica Moviles or Telecom Italia Mobile, and if it does, he'll be seen as cheap at the price.

Granada headache

IF IT has not yet had a mention in the Rover's Return, it has certainly got the tabloid press talking. Even the cast of Coronation Street is being asked to take a pay cut as part of Granada's belt tightening drive, outlined in more detail yesterday. But in the end, no amount of cost cutting and reorganisation can disguise a lousy set of results, and boy were yesterday's Granada figures bad.

When the ITV company floated on the stock market almost exactly a year ago at the tail end of the TMT boom, nobody could have dreamed that just 12 months down the line it would be reporting a thumping great loss. The shares were sold at an effective price of 280p, and but for a brief early burst of exuberance have have been sinking almost ever since. The chances of them reviving any time soon look limited, such is the state of the advertising market and ITV digital's continued capacity to eat money.

If it's any consolation, things might have been worse. ITV has managed to limit its loss of advertising market share over the last year to just one or two percentage points, which given the explosion of multi-channel TV doesn't look bad. What's more, Granada has significantly reduced the damage to top line advertising revenues of a veritable collapse in rates by improving the business mix. ITV advertisers are getting their airtime for 30 per cent less now than they were at the height of the boom, but in the six months to the end of last March, Granada's advertising sales were down just 5.4 per cent on the record comparable period.

The difference is explained partly by the improvement to advertising airtime approved by the ITC, and partly by the fact that Granada is selling more highly priced financial and automobile advertising and less of the lower margin food and consumer goods stuff. Even so, the situation is quite bad enough. In a declining advertising market, the two and half minute per hour extension in airtime has helped create a degree of overcapacity, which has all but destroyed Granada's ability to charge premium rates.

Even when things begin to pick up it's going to be hard to persuade advertisers to start paying those premium rates again now they've tasted the fruits of the lower ones. As it is, the situation has continued to slide since the half year end, and in the nine months to the end of June, Granada expects to post a 10.6 per cent fall in advertising sales. Meanwhile ITV digital will remain a struggle until Sky changes its spots or the Government switches off the analogue signal, neither of which are going to happen soon.

For Charles Allen, the chairman, a year that started so well with the successful IPO, a favourable Competition Commission report into the restructuring of ITV, and the acquisition Lord Hollick's TV assets, has ended on a sour note. But then that's business for you.

Hewitt's way

There may be a new broom at the Department of Trade and Industry but it has done nothing to reduce the cliché count. In her first speech yesterday as Secretary of State, Patricia Hewitt promised to help business "get to the future first" and much other fatuous mumbo jumbo besides.

Still, there was one policy initiative buried away. Ms Hewitt has decided to review the department's £1bn budget for business support. You can see why. At the last count there were 35 different schemes ranging from the Enterprise Fund and the Teaching Companies Scheme to the Link Programme and the Information Society Initiative. And let's not forget Eureka and the Smart Programme.

Ms Hewitt thinks there are too many of them and that streamlining the portfolio would improve the service to her "stakeholders". She should be careful, however, about slimming them down too far. Her predecessor, Stephen Byers, found plenty of gainful employment shuffling money between the various schemes and then pretending it was new funding.

Deprived of the juggling act, it's not entirely clear what Ms Hewitt is going to do. Her budget is so shrunken and most of it these days goes on compensation for dying miners. As a sponsoring department, it only has the Post Office left and its regulatory functions are slowly being chipped away too. Even its role in competition matters is to be given to independent regulators.

It is, however, a great place in which to get into trouble. The DTI is the graveyard of political careers and although Mr Byers survived, he came close after a near-death experience with Rover. Ms Hewitt is best advised to keep her head down while she ponders the question all her predecessors have eventually come to ask: what exactly is the DTI for?

j.warner@independent.co.uk

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