National champions unlikely to impress Labour

`The two companies refused to address the competition issues raised by the deal, choosing to stress that together they would have only 5 per cent of the world market for spirits'

In the run-up to the election, the assumption in business and the City was that Labour when in government would favour an old-fashioned, corporatist approach to competition policy. Predictably, there was a lot of noise about the need to support and promote the small business sector, but it was generally thought that what Tony Blair meant by partnership with business was an interventionist, national champions, Michael Heseltine- type approach to how to get the economy moving in the right direction.

This may never have been a particularly well-informed assumption, or rather it was probably dangerous to make assumptions at all given how little Mr Blair was prepared to give away about what he really thought on anything. But if New Labour ever favoured this approach, two events this week should significantly have shifted them away from it. One was the merger announcement from Guinness and GrandMet. The other was Sir Iain Vallance's astonishing explosion over the windfall profits tax. Both of them, I would contend, conspire to drive you into the pro-competition, anti-monopoly camp.

First, the Guinness/Grand Met merger, which was deliberately promoted under the national champions, big is beautiful flag. Indeed the two companies refused to address the competition issues raised by the deal altogether on the day it was announced, choosing to stress that together they would have only 5 per cent of the world market for spirits and that in today's global economy it was "necessary" to be as big as Nestle and PepsiCo. This should have sent out the strongest possible of warnings to me and anyone else who listened to it.

I have to confess, however, that in writing about it for the next day, I got it wrong. I was harsh but I should have been much harsher. I allowed my initial very hostile thoughts on the matter to be polluted by all that well-prepared national champions, marriage-made-in-heaven banter, and I pulled my punches. For that I apologise but I have since marshalled the arguments and more characteristic analysis has now been restored. This may or may not be a good deal for the shareholders of both companies, but it is not a good merger either for the cause of competition or the long-term health of the British economy.

The effect of this merger on the domestic market for Scotch, gin and vodka is bad enough, though it might be argued that because Guinness already has a dominant position in these products in Britain, the addition of a few extra percentage points of market share is hardly here or there. But it is in export markets that the real damage is done.

Combined, the two companies will have approaching 50 per cent of the world market in Scotch (more in some countries) and something not far behind for gin and vodka. This is not two British companies that are weak in export markets getting together to enhance their chances of beating the foreign competition. For Scotch there is no foreign competition as such; this is a product unique to Scotland. These companies are already strong in export markets; combining them is unlikely to make them stronger, rather the reverse.

Imagine trying to sell BMWs and Mercs under one roof. The customer will buy either one or the other, but rarely both. The same is true of Scotch. The US consumer might buy Dewars (Guinness), or he might buy J & B Rare (Grand Met). Both products are well distributed and marketed in the US already. Put them together and one will be promoted at the expense of the other; ultimately less will be sold combined than was sold separately. It is the way of the world.

There may be something in the argument that the two companies are complementary in terms of their geographic strengths. Guinness is particularly strong in the Far East; Grand Met is not. But again the benefit is probably exaggerated. Even a Japanese businessman can only drink so much Scotch, and if he's already drinking Johnnie Walker he's not going to want to drink J & B Rare too.

No, this is a merger driven primarily by its scope for cost cutting, which is not in any case huge, and the fact that both companies are becalmed and believe they have to do something. Why not this?

I'm not saying here that Tony Greener and George Bull (chairman of Guinness and Grand Met respectively) have sat down and conspired in an anticompetitive endeavour. Both are too honourable for that. They truly believe in their case, so much so on the part of Mr Greener, that he is prepared to put aside long-held doubts about the purpose of conglomerates - which is what this company will be once Burger King, Guinness Brewing and Pillsbury Foods are taken into account - in order to bring about the overriding goal of merging the two companies' liquor interests. But although doing down the public undoubtedly wasn't their intention, it could well be the effect.

In the end, my views on the matter count for little. What does the new Government think? Margaret Beckett, President of the Board of Trade, is understandably inscrutable on the matter. But her special adviser, Lord Hollick, is not a national champions exponent (notwithstanding the fact that he used some of those arguments to help support the merger of his own MAI with United Newspapers). He would probably be against the Guinness merger by inclination, though I would stress he hasn't told me that.

What he does say is that on the whole politicians shouldn't be taking these decisions - that they should fall to independent regulators. As it happens, it will be the European Commission in Brussels which decides this one. Its size and European dimension dictate it. So Labour's views on the matter may be irrelevant too. All the same, Guinness would be wrong to think the new Government more favourable to its position than the old. Guinness will not be able to rely on support from Mrs Beckett in the very likely event that regulators attempt to extract a price in the form of disposals and other measures for this merger.

If ever Labour felt inclined to back big powerful UK monopolies, that position must in any case have been sorely undermined by Sir Iain Vallance's public insistence on Thursday that he would not have voted Labour had he known it would hit BT for the windfall profits tax. For a company which must rely heavily on the goodwill of the new Government both to defend its present monopoly and to advance its aspirations in digital TV, this is a pretty silly thing to have said. One rival utility boss quips: "I would have voted Labour had I known BT was going to be hit as well."

BT is a utility and a monopoly; there is no reason it should escape just because it seems to be a relatively accomplished one. Let's hope that Sir Iain's ill-judged remarks will stir Labour into a rather more fiercely pro-competition stance towards business than it indicated in opposition.