Don't blow that Halifax windfall

The Investment Column
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The Independent Online
When dealings start in its shares at the beginning of June, Halifax will be one of the largest quoted financial services companies in the UK, controlling around a fifth of Britain's mortgage market. Freed of mutual ownership, it is also set to be a force to be reckoned with on the stock market, boasting total assets of pounds 115bn and more than pounds 3bn of spare capital to fund acquisitions.

For the 8 million or so members who look like receiving windfall share handouts worth on average pounds 1,700, the question they must answer is what to do with that bonanza. In the past week they will have been asked by Halifax whether they want to receive a share certificate, hold their shares in a nominee account or simply have the bank-to-be sell their entitlement and credit their account with the value of the shares. What should they do?

If precedent is anything to go by, almost certainly what they should not do is take the money and spend it. Those lucky enough to have received Abbey National shares when that society demutualised in 1989 have seen them rise more or less in a straight line ever since. Yesterday they closed up 20p at another all-time high of 846p.

It is not a wholly fair comparison. Abbey has benefited during that period from the cost-cutting and ability to push a wider range of products that all this year's batch of flotations will enjoy. But it has also enjoyed the more general re-rating of the banking sector as a whole, which has seen a narrowing of the gap between the multiples of earnings of financial shares and those of industrial companies. Nonetheless, there is plenty of evidence that the true valuation of Halifax and its peers will not emerge for months following their flotation.

Partly that reflects what analysts expect to be a wave of takeover activity in the sector, a bonanza Halifax may miss out on given that an expected market value of pounds 13bn would be out of the reach of most buyers. Even so, if the sector's ratings are driven upwards by takeover speculation, Halifax is unlikely to remain on the discount rating most analysts are using as the basis for their calculations.

The biggest potential with Halifax lies in its ability to follow Abbey's lead and diversify away from its core mortgage business. Although the flotation is well-timed, ahead of an expected upsurge in housing market transactions and so greater demand for home loans, mortgages are a mature market and Halifax needs to expand its insurance and other long-term savings products so that, like Abbey, it can generate a substantial proportion of its profits from non-mortgage activities.

If it succeeds, a sub-market multiple of say 14 times expected earnings to reflect the inherent cyclicality of financial services would be justifiable. That would imply a price in a year or so of perhaps 650p, a healthy increase on the 500p at which they will probably start dealing in June. With such a return in prospect, the shares should be held.

Euro Disney has

few attractions

Battered shareholders of Euro Disney, owner of the Disneyland Paris theme park, have precious little to show for their investment. In the five years or so since the park first opened, the share price has collapsed from a high of 763p in March 1992 to 103.5p, down 4p yesterday.

The standstill agreement organised with the banks nearly three years ago, after debts of Fr22bn (pounds 2.6bn) threatened to overwhelm the group, is proving all too brief.

Yesterday's first-half results show net losses at the group have climbed from Fr169m to Fr210m in six months to March, hit hard by an interest charge which is on the rise again after two years of decline. This is a result of the gradual phasing out of the 1994 agreement, which is expected to see the finance bill rise by Fr200m in the full year and another Fr100m next. Lower interest rates helped reduce the burden a little in the first half, but net finance charges up Fr68m to Fr356m still dwarfed operating profits, even though they doubled to Fr120m.

This gives a clue to the scale of the problems facing Euro Disney's management. In fact the trading figures for the traditionally weaker first half were quite respectable. Higher attendances at the theme park, better occupancy rates in the hotels and more business through related attractions boosted combined sales by 14 per cent to Fr2.17bn.

There should be more to come. The franc's weakness against currencies such as the pound and the dollar will only increase the park's attractiveness. But the real bonanza should come next year, when France is host to the World Cup and several key heats, including the finals, are held in Paris.

A good 1998 may make it easier for the group to launch a new cash-raising exercise, either from the markets or by selling some of the hotels, a move which was planned from the early days of the business. Without such an infusion of cash, Euro Disney faces an increasing squeeze not only from interest costs, but also the onset of royalties and management charges payable to its 39 per cent shareholder, Walt Disney of the US. Prince al-Waleed bin Talal, who rode to the rescue in 1994 and now sits on 24 per cent of the company, may not be so keen to do so again. Avoid.

Shell greases

Cairn's palm

Joint ventures have always been a feature of the oil and gas industry, particularly in the upstream exploration and development end of the business. But lately the deals have become much more wide-ranging and innovative. Last year's BP and Mobil downstream link-up paved what could be a way out of chronic overcapacity in Europe. Yesterday's unlikely link-up between the oil giant, Shell, and its much smaller rival, Cairn Energy, showed what a bit of co-operation might do in a "frontier" part of Asia.

The basic structure of the deal is that the two companies form a strategic exploration and production alliance in Bangladesh and India. Cairn will immediately transfer one-quarter of its interests in Bangladesh, including an 18.75 per cent stake in the all-important Sangu gas field. The two companies will then bid as equal partners for new Bangladesh acreage and, if successful, Cairn will transfer another 25 per cent of its Bangladesh assets to Shell.

The joint venture agreement, under which Cairn will receive an immediate $130m, signals that the Indian sub-continent has come of age as a hydrocarbon area. But the deal, which is partly dependent on the two companies winning new acreage in the forthcoming Bangladeshi licensing round, has other effects on Cairn.

It reduces the risk in the company's sky-high share price while also in effect signalling that Cairn is no longer an obvious bid target. Shell is not an enthusiastic predator but other companies will see its stake as a providing at least some takeover protection.

The potential of Cairn's Sangu gas find in Bangladesh set its share price alight last year, sending it soaring from 113p in January to 417p 12 months later. Yesterday the deal with Shell brought further uplift, with the price rising 8.5p to 594.5p.

Cairn will probably enhance its position soon by announcing a deal to offload assets picked up when it bought Command Petroleum of Australia last year. Even after their storming performance, shares in Cairn, which now capitalise the group at pounds 1bn, are probably still worth holding.

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