There has been and remains a very real risk, in the absence of a settlement, that at some point the Department of Trade and Industry will find it impossible to continue to issue Lloyd's with a solvency certificate. That is the nuclear outcome but it is one that looks all too possible for this deeply troubled organisation. There will be some in this intensely combative market who will greet Mr Middleton's departure with relief. Rosalind Gilmore, the head of regulation who left recently after a year in the job, kept silent about the reasons for her departure but it would surprise nobody if one of her reasons was the difficulty of coping with the old guard that still exists at Lloyd's despite all it has been through.
Mr Middleton, despite his protestations yesterday that he enjoyed working with David Rowland, the chairman, has had a tense enough relationship with him. When in public together, this was painfully visible. The very difficulty of the situation could be a good enough reason for bringing in a new chief executive, since a fresh pair of eyes may see new solutions. None the less, many will see Mr Middleton's departure as a deepening of the crisis.
With the interests of different groups of names so at variance with each other, settlement requires a brilliant financier, a master tactician and a diplomat of the first order. Ron Sandler, Mr Middleton's replacement, was responsible for setting up Equitas, the financial vehicle at the heart of the rescue plan, and there is little doubt that he has the technical qualifications for the job.
On the other hand, it was Mr Middleton who appeared to be pushing earlier than his chairman for the much-needed renewal of attempts to resurrect the settlement with names that failed in late 1993. And it is he who knows the details of the tortuous negotiations and the sensitivities of all the individuals with whom he has dealt.
When two companies describe a deal as a "win-win situation" you can normally be sure that at least one of the parties is either being disingenuous or has missed something. Yesterday's unexpected asset swap between Wimpey and Tarmac, however, appears to come close to finding the corporate philosopher's stone. If it sets the ball rolling on the much-needed consolidation of the UK's beleaguered construction industry, it will be seen as a watershed. Having hoisted the For Sale sign over its housing operation in August, Tarmac came in for a welter of not unreasonable criticism. As a forced seller, it would be pushed to achieve net assets of just over pounds 300m, let alone the pounds 400m it was privately hoping for. The cash would then burn a hole in its pocket, be spent in a hurry and unwisely; even worse from the City's point of view, it would dilute earnings.
Exchanging the division for Wimpey's quarrying and contracting arms addresses all those issues and leaves its partner smiling as well. At a stroke, Wimpey becomes the dominant force in UK housing with a market share twice its nearest rivals, Beazer and Barratt. Both companies have also neatly avoided the twin likelihoods of having to sell assets at a discount and pay a premium when they come to spend the proceeds.
Which will be the long-term winner is a harder call. Wimpey faces a stagnant domestic market and a massive extra cash drain on its resources - it will cost pounds 200m a year just to replace the land it builds on. Tarmac, by contrast, has increased its exposure to a road programme the Government is showing increasing signs of abandoning, together with the supply of rocks and blacktop that depends on it. On the other hand, with pounds 1.75bn of turnover to play with, the potential for profit growth is large. Squeezing even a little more margin out of that scale of revenue will bring rich bottom-line rewards.
It has been a dismal year for the building industry as the hoped-for recovery disappeared over the horizon. Compared with a soaring stock market, the sector has been a damp squib, underperforming the All Share by 15 per cent. For the 1990s so far as a whole, building shares have underperformed the market by a half. Now that Wimpey and Tarmac have actually done something to correct the obvious overcapacity problem in these industries, rather than just talk about it, perhaps others will follow suit.
Rail link shows
The charade that is the Government's attempt to persuade the private sector to build and operate a high-speed rail link between London and the Channel Tunnel seems to have taken a turn for the better. The Department of Transport has brought in a BP secondee to adjudicate over the final stages of selection for the pounds 3bn project. Ministers took the view that only someone with private sector negotiating skills would be up to the task of exacting the best possible deal from the two remaining bidders, Eurorail (a consortium of BICC, Trafalgar House, Seeboard, HSBC and NatWest) and London & Continental (Virgin, Ove Arup and Bechtel among others).
The Government is due to announce its preferred bidder before Christmas. For work to begin, however, legislation is necessary, while the contractors, determined to avoid the cost overruns and other pitfalls that bedevilled Eurotunnel, want at least a year of detailed design and engineering planning before even putting a spade to the earth.
The private sector adjudicator is John Hawkshaw, provided gratis by BP for as long as it takes to complete the negotiation. This is being conducted in almost comic fashion with the Eurotunnel team taking the morning session and the rivals the afternoon. The hour's lunch break between is thought sufficient to prevent the two from meeting. The Government's purpose is to ensure that the level of subsidy (anything between pounds 1bn and pounds 2bn) is as small as possible. But there is a variable - the degree of risk that is assumed by the winning bidder. The higher degree of risk assumed by the successful bidder, the higher the level of subsidy demanded.
None of this means the high-speed link is actually going to get built. Post-Eurotunnel, bankers are doubly cautious in backing infrastructure projects of this sort. So are the equity investors that both consortia intend to tap. Even so, prospects for this badly needed venture now look better than at any stage in the last five years. With the more diligent approach to costs being adopted by all involved, as well as the revenue stream of Eurostar, the project looks a more hopeful private sector bet than the tunnel it will one day service.Reuse content