Dusseldorf burghers bankroll Fenchurch Street gamblers

City & Business
Click to follow
The Independent Online
AND THEN there were five. Britain's dwindling band of independent merchant banks now consists of Schroders, Robert Fleming, Rothschild, Lazard Brothers and Hambros. Barings has gone to ING, Warburg to Swiss Bank and now Kleinwort Benson is being wooed by Dresdner Bank.

Does it matter that formerly British-owned banks are falling into the clutches of the Dutch, the Swiss and the Germans? Not very much. Indeed, it is flattering to London that the big Continental battalions feel they cannot do without a substantial City presence. The oft-quoted threat of Frankfurt as a rival to the Square Mile looks laughable when three of Germany's biggest banks - Deutsche, Dresdner and WestLB have each snapped up a London merchant bank.

Not only that, they reckon it is worth paying through the nose for an established operator rather than building one up for themselves. Dresdner's offer of pounds 1bn equates to around pounds 300,000 per employee for what is essentially a people business where the talent can walk out the door.

Kleinwort shareholders should be thanking their stars. It was only five years ago that the City was writing off the bank as a dead (and horribly accident-prone) duck.

Will the takeovers continue? Probably. Investment banks are obsessed with size. First, they need big rock-solid balance sheets to indulge in risky areas such as derivatives trading. Second, they need operations around the globe to distribute the securities of their client companies. And third - this is a product of the Barings collapse - when they need to bolster the confidence of wary depositors, sheer size is undoubtedly a comfort.

Is it a good thing? Probably not. Commercial banking and investment banking used to be quite separate. The distinction is rapidly breaking down. Even in the US, the Glass Steagall Act, which kept them separate, is coming to an end. The business of regulating bankers gets ever more difficult as banks straddle national borders and indulge in risky proprietary trading. Even the safest of deposit-taking institutions seems to be diversifying into new, riskier areas.

If the Dresdner/KB deal is consummated, it will ultimately be the small savers of Dusseldorf whose deposits back the high-risk traders in Fenchurch Street. However many safeguards are put in place, that cannot be wise.

Flotation fever returns

JUST as the flotation bandwagon starts to gather pace again, there comes a timely reminder that fingers do occasionally get burned with new issues. And in some cases, entire hands and arms are frazzled. As our sister paper, the Independent, reported last week, the institutional investor Abbey Life is boycotting the securities house Smith New Court because of its role in the calamitous flotation of Aerostructures Hamble last year. It will not use Smith's for any UK equities transactions before the end of the year.

The Aerostructures affair was an extreme example of how new floats can, well, sink. The fiasco of Aerostructures having to issue a profits warning within weeks of arriving on the stock market has undoutedly deterred other market debutants. And it has certainly persuaded advisers who groom them for a listing to take a closer look before accepting the commission.

I suspect institutions slap sanctions on new issue advisers more often than comes to light. Mercury Asset Management is one of the more militant, cutting the commission it paid to NatWest Securities after another infamous flotation flop - McDonnell Douglas Information Systems.

But memories are short, and the new issue market is starting to gather steam. Four companies announced flotation plans last week. Oasis, the fashion chain, Stoves, the cooker maker, Kingsbury, the furniture group, and McBride, the manufacturer of own-label toiletries and detergents.

Of these, McBride is the most intriguing. This is a company that has waxed fat on the extraordinary growth in supermarkets' own-label products over the last two decades. Shoppers increasingly choose not the heavily advertised brands that their parents preferred but no-frills alternatives whose only imprimatur is the name of the store itself.

The trend is already well established in food. Across all food categories, supermarket own-label has captured 35 per cent of sales. Now, according to McBride's chief executive Mike Handley, the same surge is happening in that bastion of branded products - toiletries and detergents, where own-label has till now only managed to capture around 20 per cent. Taking market share from the likes of Procter & Gamble and Unilever is quite a challenge. But McBride has demonstrated it can be done. It makes Sainsbury's Novon, the own-label washing powder which has successfully poached customers from the big branded companies. Shoppers now have as much faith in a product saying Safeway or Sainsbury on it as one with Lever Brothers or Cadbury Schweppes on the label.

For the supermarkets, the margin benefits are a dream. Sainsbury, which this weekend launches a new advertising campaign starring Gladiators celebrity Ulrika Jonsson with her eight-month old son Cameron, needs just one advertising campaign to support all 16,000 lines it stocks. Branded goods makers have to shell out for a separate campaign for each product. The reduced marketing costs make a huge difference. Supermarkets make a gross margin of 8p to10p on a branded product retailing for pounds 1. On their own-label rivals, which would sell for about 75p, the margin might be 25p. The economics are unassailable.

This does not automatically mean a rosy future for McBride and other own-label manufacturers. The supermarkets hold most of the aces in the relationship, and legislation to curb "copycatting" will make life tougher.

McBride is already suffering a squeeze on margins with some raw material prices going through the roof. The price of high-density polyethylene, used to make plastic bottles, has risen 111 per cent since last July. Meanwhile, McBride's prices are frozen or even falling in some Continental markets.

Northern Foods has grown into a pounds 1.1bn company over the last decade by sticking to the seemingly dull business of churning out own-label foods for the supermarkets. It will be fascinating to see whether McBride can do the same in toiletries over the next 10 years.

Power goes to BT's head

BT insists it is a mere coincidence that just weeks after the stormy British Gas annual meeting it wants to increase its own chairman's powers. Plans to amend its own company rules were being drafted long before Cedric Brown's infamous mauling, it says.

I don't doubt it. But by giving Sir Iain Vallance what one incensed shareholder calls "dictatorial powers" and by trying to slip the changes through on the quiet, it risks being accused of the very boardoom arrogance which so angered British Gas shareholders.

The BT meeting next month is unlikely to produce the same fireworks. BT has an infinitely better story to tell - on customer service, shareholder returns and even directors' pay: Sir Iain's total pay fell last year, and he gives a wodge of it to charity anyway.

But large companies, especially the privatised utilities, need to understand that it is precisely the browbeating, Stalinist style in which big annual meetings are so often held that raises the temperature and creates the hostility.

Comments