China House rides the economic dragon

Jardine Matheson survived the opium wars, the cultural revolution and Hong Kong's handover. Now the venerable family firm has hired a tough investment banker to help it ride the dragon of china's new economy
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The Independent Online

Few people noticed when Jardine Matheson, the Anglo-Asian trading group, quietly poached one of the City's most aggressive investment bankers last month. But students of Jardine's turbulent history knew that something was afoot.

Henry Keswick, chairman of Jardine and a direct descendant of Dr William Jardine, the group's founder, welcomed the new recruit thus: "I am delighted that Brian Keelan has agreed to join the board. He has been a trusted adviser of the group for a dozen years and will now enhance our planning and the implementation of strategic transactions as a colleague." But as one bemused rival banker puts it: "That is a little like Arsenal signing David Beckham from Manchester United and saying they hope he will score the occasional goal."

A Keswick aide explains: "Corporate activity is a constant dimension in Jardine. That means you have to have a merchant banking mentality present somewhere in the group and you cannot always farm that out. So you have to have someone in-house. The Keswicks have always had the feel of merchant bankers. It's in the culture. Merchant banking is quite close to wealth creation, and we think Brian Keelan will be a money-maker." Jardine also hopes that Mr Keelan will help build bridges with the Chinese government with whom he has done business.

Just more than a dozen years ago Oxford-educated Mr Keelan joined the London office of Swiss Bank Corporation, then a fringe player in a City still dominated by the old school tie. Mr Keelan had come from the New York-based Merrill Lynch, where he was described as "an expensive guy to employ, not the sort to hide his light under a bushel".

SBC, now part of the UBS financial giant, hired Mr Keelan to make waves and muscle his employer into deals. He helped Hongkong Land, part of the Jardine empire, to buy a 25 per cent stake in the ultimately doomed Trafalgar House hotels, construction and cruise liner group.

Mr Keelan so annoyed the famously feisty Sir Alastair Morton that Mr Morton, then head of Eurotunnel, was provoked into issuing a public statement specifically excluding Mr Keelan from taking part in a Eurotunnel rights issue. More recently, Mr Keelan was the brains behind the Co-operative Wholesale Society's surprisingly hostile defence against a takeover bid by the entrepreneur Andrew Regan. But when Mr Keelan's record is pointed out, a Jardine insider replies: "If you think he's aggressive you should have seen Brian Powers, who was our taipan a few years ago." It is a symptom of a lingering quaintness at Jardine that its managing director is still referred to as taipan, the Chinese name for the head of a foreign company.

Mr Powers is an American investment banker who led the defence against successive takeover bids in the 1980s by two Hong Kong tycoons, Sir Y K Pao and Li Ka-shing, and split the group into two interlocking corporate halves, Jardine Matheson and Jardine Strategic, that are virtually takeover-proof.

Jardine ­ based in Hong Kong, domiciled in Bermuda, run from London ­ has through long acquaintance with Asian culture absorbed the Chinese custom of recruiting senior people only after working with them for many years.

But, although Mr Keswick will have been observing Mr Keelan for a considerable time, it may be more than coincidence that he has been recruited at a time when Jardine is again under assault. This time it is not a straightforward takeover bidder but a shareholder agitator. For the past two years, Brandes Investment Partners, which manages $50bn (£36bn) of clients' money from its base in San Diego, California has tried to end the cross-shareholdings of Jardine Matheson and Jardine Strategic. Both company's shares are publicly traded, but JM owns 74 per cent of JS, which in turn owns 50 per cent of JM. The Keswick family owns a further 10 per cent of each in various ways. Result: no outsider can wrest control.

"We have never questioned the ability of the Keswicks to have an influence in Jardine," says Brent Woods, managing partner of Brandes. "This is not a personal issue for us, but the economic interests and the voting interests of this company must be more clearly aligned. By virtue of the cross-shareholdings, the directors vote on themselves in a way that is entirely immune to review by shareholders. We think this is wrong, and you have to question whether the directors have a conflict of interest, given the overlap of the boards."

Cross-shareholdings are common in Asia and any conflict is denied, but the Keswicks' argument runs deeper than that. Insiders say they argue, somewhat high-handedly, that the arrangement has stood the group in better stead "than any conventional institution is capable of understanding". They say the cross-holding has given a stability to the operations and will help to recruit good people whose employers have been taken over. In the end, the house case comes down to saying, "If you don't like it, don't buy the shares".

Brandes won fewer votes at this year's annual meeting than in 2000, partly because Jardine has spent $906m (£656m) to buy back some of its shares, stifling the anti- vote. But there is a weary air of resignation in the Jardine camp that the Californian group will not go away. "Brandes has said it thinks the family connection is very valuable," says a confidant. "But it says they will keep coming back. They play hard man, soft man. It's very hard to watch them." So it will do no harm to have someone with Mr Keelan's sharp eyes on the board. But, as he could have told Mr Keswick for less than the price of a directorship and all the flights to and from Hong Kong he can stomach, the best way to see off prowlers is to keep the share price up. Although there have been recoveries in the Jardine Matheson and Jardine Strategic share prices this year, they are still below prices they reached four years ago.

Despite a ringing pledge by the present taipan, Percy Weatherall ­ cousin of Henry Keswick ­ that the group's aim is to maximise returns to shareholders "by every means at our disposal", the Jardine ethos is to act like a private company and take the long view rather than worry about this year's results. That is not inconsistent with maximising returns, but in the fallow years it can mean the shares are more lowly rated than they would otherwise be. This can leave a company vulnerable to predators whose own shares have soared in the volatile Asian markets, because they could then buy Jardine on the cheap by exchanging expensive shares for more lowly-rated equity.

The periodic need for a strong man such as Mr Keelan or Mr Powers to face down such threats to Jardine harks back to the early days of the company, as immortalised in James Clavell's novel, Noble House, and authenticated in a weighty corporate chronicle by the historian Lord Blake. Dr William Jardine was the first strong man, hired by the legendary East India Company as an 18-year-old straight out of Edinburgh medical school to be a surgeon on an eight-month voyage from London to Canton in 1802. Crews of East Indiamen, as the ships were known, were allowed cargo for their own private trading, and Jardine did so well at this that he set up on his own in 1817. Jardine Matheson was founded 15 years later after the ex-surgeon met another Scots trader, James Matheson. They had been operating together for only a couple of years when the East India Company lost its monopoly on trade with China, enabling the young pair to send the first private shipments of tea to England in 1834.

India had not started producing tea, which, because of its popularity, accounted for a tenth of the British government's tax revenue, so China had the market to itself. Silk was another big Chinese export to the UK. The problem was what the British could sell in return, because China was largely self-sufficient. The answer lay in Indian opium.

Although the common image of this base form of morphine is Chinese men getting stoned smoking it in long-stemmed pipes, opium was also regarded as a natural remedy for ailments. It was legal in Britain and usually taken in laudanum as a painkiller or even a daily tonic. Jardine Matheson soon seized on the opportunity to trade opium for tea, and Canton, on the southern Chinese mainland, became alive with foreign merchants. But this was anathema to a rigid and xenophobic Chinese élite, concerned at the spread of the opium habit, who also wanted to crack down on the foreign commercial invasion.

The outcome was two Opium Wars, in which Jardine became closely involved as a go-between for the British and Chinese governments. Under the Treaty of Nanking in 1842, Hong Kong, an offshore island near Canton, became a British colony, and a series of Treaty Ports was created for foreign importers. Jardine took advantage of this to open offices in Shanghai, Canton, Amoy and Fuchow. It was to have a major Chinese presence until its property was confiscated after Mao Tse-Tung's Communist revolution in 1949.

Over that century, the group became the first foreign trading house to become established in Japan and expanded its activities to bring coal, metals and machinery from the industrialised west to the east, as well as expanding into shipping, banking and insurance. From the outset, Jardine bought land in Hong Kong and elsewhere, and started a construction division to develop its property. The island, now part of China again, owes much of its pre-eminence as a world financial centre to Jardine's efforts.

Today the group is in financial services, supermarkets, consumer marketing, engineering and construction, motor trading, property and hotels, mainly in Asia and the UK but also in Australia and the US. It is split into two holding companies, Jardine Matheson and Jardine Strategic, with their interlocking shareholdings. JM has two wholly-owned subsidiaries, Jardine Pacific and Jardine Motors Group, and 33 per cent of the UK-listed Jardine Lloyd Thompson, one of the world's biggest insurance and reinsurance brokers. Pacific in turn holds a collection of Asian operations ranging from construction to finance, shipping services to restaurants and retailing. It has franchises for Pizza Hut, Taco Bell, IKEA and Securicor. And Jardine Motors is a car dealer which owns dealerships in the UK, France, India, Hawaii and Los Angeles.

Jardine Strategic has stakes ranging from 26 per cent to 62 per cent in four businesses: Hongkong Land, Mandarin Oriental, Dairy Farm and Cycle & Carriage. Hongkong Land owns five million square feet of prime office and retail space in Hong Kong's central business district in a portfolio that stretches to mainland China, Singapore, the Philippines, Indonesia and Vietnam.

Mandarin Oriental is a $1bn (£700m) hotel group which owns the Hyde Park Hotel in London as part of an upmarket chain of 20 outlets led by the Mandarin in Hong Kong and the Oriental in Bangkok. Dairy Farm operates supermarkets, convenience stores and chemists in Asia, including three 7-Eleven franchises. It used to own KwikSave in Britain, but sold it to Somerfield after deciding it could be too costly to compete with Tesco. Cycle & Carriage is a Singapore-listed property and car dealer.

This widespread, largely Asian, collection of businesses is run from an anonymous set of rooms by Bank Tube station in London. William Jardine was given an office there by a grateful customer when he returned from the Opium Wars, and he gradually took over the building. The address, 3 Lombard Street, like the restaurant two doors along, is misleadingly labelled because of a quirk of historical fate.

Lombard Street, the ancient heart of the banking industry, originally started at the Mansion House, the Lord Mayor's official home, but the first few numbers have long been cut off from the rest by the growth and spread of King William Street into a major road.

This anonymity probably suits the Keswicks. Anyone wishing to contact the group will search the J section of the London telephone book in vain for Jardine Matheson. There is an entry for the Jardine Group of Companies, but that is at an entirely different address.

Although the Lombard Street office is not listed, it is reached by contacting the Matheson Group of Companies, where Jardine Matheson Holdings appears in small print. Peering through the windowed second-floor front door at No 3, the office appears empty.

Press the buzzer and, after an interval, a pinstriped butler appears. Tea or coffee are served in fine china on a silver salver. The wood panelling is impeccable, hung with pictures of ancestors and Asia. But, from this modestly understated setting, the phones are constantly ringing every morning with calls to and from Hong Kong and China, as the Keswicks make the key daily decisions about their sprawling empire.

Relations with China have been, at the very least, delicate since the 1949 expulsion. In 1984, Jardine moved its official domicile to Bermuda ahead of Hong Kong being handed back to China 13 years later.

The official reason is that the group had always been under the British system and, with the change of status, it wanted to continue to be under British jurisdiction. No assets were sold, but the move set off some discreet squawking at the Foreign & Commonwealth Office in Whitehall.

"Relations with Beijing are extraordinarily good now," I was told by a Jardine source. "The Chinese weren't at all worried about our move to Bermuda ­ they understood what we were doing.

"We have a good advantage that we have been around for such a long time, and they do value that despite the odd hiccup. With any slow-moving society like China it's hard to deal with people who are here today and gone tomorrow. They have always known where we stood. We have been very pro-China, but equally we are also out-and-out capitalists.

"Now that China itself is becoming very entrepreneurial, they value the knowledge that we have gathered through thick and thin. Nothing is easy. But if you are patient, China is going to be one of the great economies of the world.

"In 25 years it's going to be a colossal power-house economy. And Jardine is used to that sort of perspective." Nevertheless, Jardine does not have many assets in China these days, beyond Hongkong Land's property.

But while the group has had successes and failures in Britain, the East is where its heart lies and it gives the impression that it is merely awaiting the opportunity to march back in again. Perhaps Brian Keelan is destined to be the taipan who will unlock the door to China for the Noble House once again.