Harrods to float at pounds 2bn? Pull the other one

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The Independent Online
When Mirror Group Newspapers was floated on the stock market, the issue had to be priced to reflect what advisers called "the Max factor". This recognised that whatever was done to ring-fence the company from Robert Maxwell's other business interests, it made no difference. So long as the great man remained in situ, investors would demand a discount that reflected his checkered business record and his well documented tendency towards fraud. As it turned out, the market's view was wholly vindicated. Not until Mr Maxwell had gone and all vestiges of his legacy were swept away, did the shares begin trading at what might be considered a fair value for the business.

Nobody would suggest that Mohamed Al Fayed, owner of Harrods, has anything very much in common with Robert Maxwell, but there is one thing they do share: they have both been severely and publicly criticised by Department of Trade inspectors. By the time he floated his company on the stock market, Mr Maxwell had largely erased this from his copy book. When anyone asked him about it, he falsely claimed that the courts had overturned the inspectors' findings, and he tended to sue those who questioned his bona fides. Even so, few of those charged with managing other people's money forgot those damning Board of Trade findings. Every time he tried to tap the capital markets, they extracted their pound of flesh.

Mr Fayed, who is considering floating Harrods on the stock market, will find himself in a similar position. In 1988 the Department of Trade and Industry said of the Fayeds that they dishonestly misrepresented their origins, their wealth, their business interests and their resources to the Secretary of State, the Office of Fair Trading, the press, the House of Fraser board and House of Fraser shareholders, and their own advisers. In other words, they lied. Like Robert Maxwell before them, they have attempted to overturn these findings through the courts. The campaign has not been without some success, for the sheer weight of the legal and public relations effort has convinced many that the Fayeds were badly treated and the Board of Trade report was flawed. However, the inspectors' findings have not yet been struck from the register.

Mohamed Al Fayed would hardly be the first successful businessman to be accused of lying. And anyway, say advisers, it was all a long time ago. Even so, the Fayed factor, however many top names and celebrity non- execs are recruited to the board, is going to hang like a spectre over any flotation attempt. What makes this flotation doubly more difficult for Mr Fayed's no doubt handsomely paid advisers is that he is also demanding a valuation - about pounds 2bn - which looks like pure fantasy. Even without the Fayed factor, investors would never weather anything as fancy as this.

It is claimed that Harrods will, by the turn of the century, be making annual profits of pounds 100m. That's going it from last year's level of around pounds 70m, but let's be charitable and take it as read. Harrods would then stand on prospective multiple of about 30. Top international fashion businesses might just about command such a valuation. Department stores, even when the name is that of Harrods, do not. As British Energy and Railtrack are proving, anything can be floated if the price is right. But Mr Fayed will not get pounds 2bn for his company. Many will boycott him altogether.

Paying through the nose for common sense

The world is changing so significantly that competing in the near future will be very different from the way it has been in the recent past .... The words are taken from a recently published book by two consultants at McKinsey & Company, but they could have have been said by just about any management consultant over the past 20 years.

All the same, statements like this have struck fear into the hearts of Britain's boardrooms and made the occupants more ready than ever before to call on consultants to help them cope with the chaos and confusion of a changing world. Management consultancy is said to generate up to pounds 2.5bn a year in UK billings nowadays. The industry encompasses a huge range of talent, from the totally incompetent to the highly accomplished, but it is McKinsey which has acquired the mystique of the place to go to if you are being really serious. In recent months, Shell and fellow Anglo-Dutch multinational Unilever have publicised the firm's role in formulating their new structures. Now, the BBC's reorganisation for the digital age is reminding us of the help it has been giving to John Birt and his colleagues.

Much of its success can be put down to its policy of encouraging its people to leave its well-paid, high-pressure confines for positions where they can influence people and hire their old associates. Asda chief Archie Norman, Bank of England deputy-governor Howard Davies and CBI director general Adair Turner are all, like best-selling author and management guru Tom Peters, alumni.

But it also owes something to business people's belief in quick fixes. In going after McKinsey they are doing the modern equivalent of buying IBM because no one ever got fired for doing that. They are a bright lot and no doubt deserve whatever they are paid. But ask any of the handful of British companies that have managed to be successful over decades rather than a few years about their commitment to any of the fads management consultants like to hook their wagons to and as likely as not they will look at you blank-faced. Sure, they listen to the consultants, but they also make up their own minds. There is a limit to the number of times you can re-invent the wheel. As one senior consultant admitted recently, "good consultancy is essentially common sense". How strange that executives feel they have to pay so dearly for a commodity like this.

British Energy gets it with both barrels

We were obviously a little premature when we said in Saturday's business comment that neither Labour nor the environmentalists was particularly bothered about nuclear privatisation. While it is true that neither has been particularly vocal on the matter in recent months, they were giving it both barrels yesterday, as the British Energy prospectus was published. What they said about it distills down to just one thing though: the taxpayer is being ripped off. Now there's a thing. It is what Labour has said about virtually every privatisation to date. The effect, invariably, is to give the marketing process an unexpected boost, for if the taxpayer is losing, someone else is gaining.

Whoever you believe about all this, there is no doubt that British Energy is a very odd sort of company. As an investment, it is like a wasting asset, for dividends are to be paid for the foreseeable future out of capital. If you never expect to build another nuclear power station again, which is true of British Energy, then this seems not a bad policy, but it is one many investors will have some difficulty getting to grips with. Even so, British Energy has been priced to sell.