Mr Horton faces the patronage pressure

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The Independent Online
If ever there were a sign that a decision was near in the dispute over Railtrack's debts, it was the suggestion dropped to the Financial Times this week by an anonymous minister that Robert Horton Esquire, the company's chairman, was unlikely to make it to "Sir Bob" in the honours list unless he saw reason. In Britain's patronage-riddled system, chairmen of large state companies that have successfully floated into the private sector have been as entitled to a K as a permanent secretary.

As night follows day, state industry chairmen always fall out with the Treasury over debt write-offs a few weeks ahead of publication of the privatisation prospectus. That is the point at which the maximum pressure can be brought to bear by the company because a sale cannot proceed without the signatures of the chairman and his board on the prospectus.

The same panto is being played at British Energy, the nuclear company. There has never yet been a case where the argument has not been resolved at the 11th hour after semi-public abuse.

The honours threat was a particularly nasty little blow below the belt to Mr Horton, who was forced out of the chairmanship of BP - another company where the top job usually brings a knighthood - before his turn arrived for the Palace.

But this backdoor pressure on Mr Horton does not mean the row between the company and the Treasury over how much of Railtrack's pounds 1.5bn debt should be written off is at all out of the ordinary. These rows are inevitable, because the lower the inherited debt, the easier it is to borrow again to expand, so for most chairmen the ideal debt is nil. The Treasury, not surprisingly, has always been against writing off more debt than necessary. The value of a company does not increase pound for pound with the amount of debt written off, so there is no profit for the taxpayer in being over- generous.

This point has been driven home by the electricity and water privatisations, where the Treasury gave away far more than was necessary, and in the case of water handed over a dowry as well. The result for water and electricity was a bonanza for shareholders.

The gap between the Treasury and Railtrack is about pounds 500m. The company is willing to accept privatisation with a debt of pounds 750m, writing off half the debt. The Treasury is pressing to keep the debt at pounds 1.25bn, a write- off of only a few hundred million. Railtrack cites its pounds 1bn-a-year investment plans, but the Treasury thinks it is exaggerating the difficulty of financing them out of cash flow and new borrowings, and ministers also want to keep up the pressure on the company to find cost savings.

Another issue yet to be settled is whether Railtrack will have to borrow hundreds of millions to finance Thameslink 2000. A decision on that project is due shortly, but could be negative.

Either way, it looks as if the future Sir Bob may have to settle for debt closer to pounds 1bn than pounds 750m. We should know in early March.

Take the banks' good story with pinch of salt

When banks start telling a good story, it is high time for caution. There was a warm glow to the Lloyds TSB figures yesterday, as the newly merged group kicked off a reporting season that will display bank coffers groaning under the volumes of cash being generated. Then there are the wannabe banks among the building societies, such as Woolwich and Alliance & Leicester, which have recently been painting bright pictures of prospects leading up to and beyond their conversion to plc status. But the rumblings from the gathering clouds over the retail financial market sound far less pleasant.

A good slab of the banking industry is already operating under intense margin pressure. Corporate lending is cut-throat - banks have been prepared to accept a give-away margin of three-hundredths of a percent in the fight for business.

Competition in the mortgage market may not yet merit the description war, but there is some pretty belligerent activity out there. Offers of a fixed-rate loan at 2 per cent a year, less than the cost of borrowing, signal growing desperation. But this has not got through to the bottom line, thanks to preservation of earnings on interest margins by penalising savers with miserable rates.

Anyone who believes these current levels of retail margins are sustainable is living in a fool's paradise. The past 12 months have, for a variety of reasons, been benign. But if there should be a pick-up in consumer activity through 1996, as the pundits suggest, then savings deposits will start to be run down, and there will be incentives for banks to become more aggressive in their bid for retail funds to finance expanding consumer loan books.There is a world of difference between margins going up and going down, especially at a time of low volume growth. Things could get tough out there; the comfortable assumptions underpinning many of the good figures we are seeing could deteriorate rapidly, and prospects with them.

The pressure for consolidation is likely to increase. 1995 was the year in the US when the urge to merge really overwhelmed the market, because banks found it too tough to grow income. Cutting costs then becomes an imperative, not a strategic choice. Lloyds TSB has a head start on its rivals, but will have to work hard to stay there.

Rentokil indulges in overkill

Rentokil's opening campaign against BET has not been well handled and everyone has been wrong-footed - except for the sharedealers who will make millions thanks to Wednesday's leak. Clive Thompson, normally so self-assured, was forced to rush out his pounds 1.8bn bid in a panic.

Rentokil's volte-face, from desire for agreed deal to frontal assault, was made in under 24 hours. Better, surely, to have pitched an offer at around pounds 1.7bn and awaited BET's response before going hostile and slagging off its management. At least it would have given Rentokil time to regain composure. As it is, Mr Thompson may have boxed himse

lf in by offering a pretty full price as his opening shot. If the offer is priced much higher, then Rentokil's remarkable annual 20 per cent profit and earnings growth will be jeopardised. Another 10p for a stock that last week was worth 135p, and is now 194p, is a bit steep.

We have yet to see BET's detailed response, and yesterday's rejection contained nothing but platitudes. But Mr Thompson's savaging of BET's recent record is unjust, and certainly at odds with most analysts, who like what John Clark is doing.

Rentokil's claim that the overlap between the two businesses is 70 per cent, providing enough fodder for Mr Thompson to work his magic, is suspect. The real overlap is more like 50 per cent, meaning a lot of BET will be new to Rentokil and therefore poses a management challenge to the predator. Another few pence on the offer might tip the balance, but it is by no means in the bag.

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