Counting the hidden costs of competition
On MMC inquiries and the break-up of hambros
Saturday 20 December 1997
Now that Labour is in government, why not turn the tables and insist that government pick up the costs of the bidders when the Monopolies and Mergers Commission waves a takeover through? After all, the Prime Minister never tires of telling us that Labour is the party of business.
This week the MMC has approved both the takeover of ScotRail and Central Trains by the coach operator National Express and the merger between PacifiCorp of the US and Energy Group, owners of Eastern Electricity. But only after long and costly investigation.
In cases where the MMC decides a merger may not be expected to operate against the public interest, there is nothing the Secretary of State, in this case Margaret Beckett, can do. Her hands are tied. However, the MMC's verdict in these latest two cases does raise questions as to whether either bid need have been referred in the first place.
In the case of ScotRail, the Director-general of Fair Trading, John Bridgeman, advised against a referral on condition that National Express was made to dispose of its competing Scottish bus service. After six months examining the merger, the MMC came to an identical conclusion.
As for PacifiCorp/Energy group, both Mr Bridgeman and the electricity regulator Professor Stephen Littlechild advised against a referral. Mrs Beckett decided, however, that one was necessary, citing her concern that the present regulatory framework might not be able to cope with the merged company.
The MMC has taken a different view. It has concluded that the regulatory safeguards proposed by Professor Littlechild last August are entirely adequate and that no other conditions or undertakings need be attached.
The upshot is that PacifiCorp and Energy Group have wasted four months arguing their case before the MMC when the Government itself conceded that the deal raised no competition concerns - the main basis for referring bids.
In the case of National Express the waste of time and money is even more apparent because the remedy recommended by the MMC is the one that was available to Mrs Beckett right from the beginning.
The cost to the MMC of the two inquiries will have been about pounds 600,000. This will be borne by Mrs Beckett's department since the MMC's funding comes out of its budget.
But everyone else is left to pick up their own costs. For Energy Group these are reckoned to come to about pounds 3m. PacifiCorp has probably spent the same - flying teams of executives over from Oregon on the US West Coast and putting them up in the Savoy does not come cheap.
These costs may not seem large when set against the size of the deals. The PacifCorp bid valued Energy Group at pounds 3.7bn. Nevertheless, it is the kind of money that shareholders tend to get very irritable about when they discover it has been frittered away on a pointless exercise.
Mrs Beckett would argue that just because the MMC finds no threat to the public interest in a bid does not mean that it should never have been referred in the first place.
That may be true. But the DTI struggled yesterday to pick many crumbs of comfort from the MMC report on Energy Group. The best that can be said is that it has cleared the air and provided some input into the wider review of utility regulation currently being undertaken by the DTI.
It may also provide a model for the way other regional electricity companies are regulated henceforth. PacifiCorp is not the first US utility to bag a British REC - seven others are already under American ownership. In all cases, the bids were heavily debt-financed but not as heavily so as the one from PacifiCorp which would have ended up with $12bn of debt, some of it in the form of junk bonds. It was, as the report makes clear, the sheer scale of this debt funding and the fear that it would have to raid Eastern for dividends to service the debt - that concerned the MMC most.
So it would not be surprising to see the kind of licence conditions imposed on PacifiCorp being extended to other foreign-owned RECs.
Whether the report gives Ed Wallis of PowerGen the green light to go ahead and buy an electricity supply company is harder to say. Energy Group is both a big supplier and generator of electricity. But the issue at stake here was ownership, not whether vertical integration is desirable.
Another day, another British merchant bank disappears into foreign ownership. The trend that began when Phillips & Drew was sold to Union bank of Switzerland in 1985 has turned into a rout.
The sale yesterday of Hambros' investment banking business to Societe Generale of France virtually completes Britain's exit from a business in which it once led the world. Morgan Grenfell, Barings, SG Warburg, Kleinwort Benson, Smith New Court. They have all gone. And now what investment banks do we have left of any size? Only Schroders, which ironically enough played handmaiden in delivering Hambros to the French, Rothschilds, Lazards, and, at a pinch, Close Brothers.
Does it matter that we have given up the ghost and conceded that only American, Swiss, German and French banks have the kind of balance sheets and stomachs to underwrite an investment banking business? Perhaps not. Perhaps Barclays and NatWest are better off leaving their Continental rivals to put up with the abysmal returns that merchant banking seems to deliver these days.
Perhaps what matters is that the business is still conducted in the Square Mile, albeit with a foreign brass plate on the door. After all, we no longer have many British-owned car companies or electronics firms to speak of but that does not appear to have harmed either industry.
We may not mourn the passing of Hambros after 158 years. It neither had the partnerships that give Lazards its strength nor the fund management business that underpins Schroders. So it had probably already had its chips even before it got into bed with Andrew Regan and his ill-fated Co-op bid. But it must make Sir Evelyn Rothschild wonder sometimes whether there is a future in running an independent investment bank.
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