No free ride to Canary Wharf for Reichmann
Wednesday 04 October 1995
One of them was Canary Wharf, a project which, even before the property collapse, seemed wholly insane from a commercial point of view. When the end came, the Reichmanns blamed the Government, the City, the banks - everyone but themselves. To some extent, they had a point. The Government, having actively encouraged the development, failed to provide adequate transport infrastructure. The City did its best to sink Canary Wharf by sanctioning just about every alternative Square Mile developement that could be conceived of. The banks were unforgiving and refused to forgo their pound of flesh. But the other ingredient was hubris and that belonged entirely to the Reichmanns.
One of the generalisations that can always be made about white elephants is that the money to make them possible only becomes available at the top of the cycle. Another is that during the following upturn, often under new ownership, they have a tendency to come right, in part vindicating the visionaries who initially made them possible.
That is what seems to be happening with Canary Wharf, now 75 per cent let and rising, with the vital Jubilee lifeline only a couple of years from completion. Paul Reichmann has chosen his moment to regain his empire, as always using somebody else's money. Bankers don't like running things, and given the chance to get their money back, they were always going to take it, despite the promise of the future.
Whether any banker or investor is going to lend Mr Reichmann the money to begin work on the second and third stages of the development is another matter. Already there is an ominous feeling of deja vu about events and that is not just because of the return of Mr Reichmann. The Corporation of London will fight the phoenix-like rise from the ashes of Canary Wharf tooth and nail. Mr Reichmann stands a better chance of succeeding second time round, but he is not going to get a free ride.
A happy end in sight for BA
British Airways must scarcely be able to believe its luck. The investment in USAir has hung like a decaying albatross around its neck for so long, the whiff doing no good at all for its share price, that the sudden prospect of the bird being transformed overnight into a highly fragrant and much sought-after golden goose is verging on the corporate fairy tale.
The news that a bid battle is developing for the troubled American carrier has sent BA's - and investors' - hopes soaring. They see the prospect of a happy end to what has become a grizzly story of frustration, as BA watched other European rivals make more of relatively trouble-free links with US airlines, while it struggled with what became known in the trade as US-Scare. As one observer put it, "It's BA's get out of jail free card."
Certainly, it would take care of USAir's financing problems. BA, which earlier this year wrote off pounds 125m from its USAir stake - about half its investment - has said it would not put another penny into the company until its problems were sorted. Now, it seems, other operators are queuing up to do so. BA's 24.6 per cent stake cost about $19.50 a share, and yesterday's talk was that the bidding would start at around $20. With other American carriers, such as Delta or Continental, also rumoured to be interested, a bid war could send the value of BA's stake soaring. It would be in a position to write back its investment, and could expect to receive the pounds 15m or so in dividends that were deferred.
The big question for BA is, should it sell or should it sit on its rising investment? The company is clearly thinking of selling out if the price is right, and forming an alliance with another US carrier. But establishing another partnership in the all-important US aviation market carries its own problems and BA would do better to stick with USAir, especially as the worst of its cost trauma seems to be behind it.
However comfortable BA's position suddenly looks, it would be wise not to get too excited. The stumbling blocks in the way of the deal are many, not least the practicalities of a merger between two of America's largest carriers. An airline merger is a difficult task at any time, and would be more so in the case of USAir, which has a history of union recalcitrance. There are also monopolies issues. United and American are already the top two airlines in the US, and a combination of either of them with USAir would create a monster able to dominate the US aviation industry.
Lesson in currency co-ordination
Six months ago, when the G7 ministers met in Washington, they promised "an orderly reversal" of the currency gyrations that had driven the yen to unheard-of heights in the first quarter of 1995. Now, as they prepare for their meeting this weekend, they can take some comfort from the success they have had in bringing about a stronger dollar and a weaker yen. Wary dealers have been showing a hard-won respect this week for the ability of well-timed central bank intervention to get its way in the foreign exchange markets.
Clearly, however, it would have been much better if the yen bubble had never occurred. The turning point appears to have been the decision at the end of June by the US administration to pull back from the brink of a trade war over access to the Japanese car market. At the same time, the Japanese authorities finally woke up to the need to revitalise a moribund economy with long overdue cuts in interest rates, a further fiscal stimulus and the first tentative steps towards an earlier resolution of the banking crisis.
The lesson is clear: currency co-ordination can only work when it is being supported by national policies. Even so, the damage has been done, with the Japanese recovery set back by a year and European growth more sluggish as a result of the appreciation of the German mark against the dollar. Global growth has taken a hit.
This week's world economic outlook from the IMF is likely to confirm the gloomier outlook for global economic growth that the bond markets have been discounting for months. The effect of the slowdown has already been felt by Britain's exporters, contributing to the widening in the trade gap. The cause of international currency co-ordination may seem a remote one; the failure to achieve it has real consequences on the ground. Somehow or other, common ground must be found in complementary national policies to reduce the wild swings in exchange rates.
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