Northern should be put out of its misery
COMMENT: `In the long run, the furore over this affair might finally lead to the outlawing of the system whereby advisers are allowed to buy shares in companies they are defending, something which rarely serves the wider interests of other shareholders'
Tuesday 24 December 1996
To those outside the City, the dispute raging between Northern, the US bidder CE Electric, and their respective advisers, might seem par for the course. Just the normal shenanigans you get in the dying days of any contested takeover.
But for those most closely involved in the drama played out before the Takeover Panel in the past week, it is clear that reputations and jobs are on the line. If heads roll then it will be an admission of guilt. If they do not then those outside the confines of the Square Mile will wearily interpret it as one more example of how, in the end, this cosy, self-policing club always looks after its own. Either way the standing of the City is diminished.
The "facts" of the case, in so far as we can unravel them from the miasma of explanations proferred by the Northern camp as it has dug itself ever deeper, are briefly these.
A week ago today BZW, Northern's brokers, asked for a "performance fee" of pounds 250,000 for its conduct of the defence in addition to a flat fee of pounds 1.5m. Northern declined to commit itself. The following day BZW and Northern's bankers, Schroders, went into the market, with the approval of the panel, and bought 2.3 per cent of Northern - a clear spoiling tactic designed to thwart the bid.
The next day, Thursday, Northern agreed, after all, to pay the performance fee. On Friday, the day the bid closed, BZW decided to inform the panel of the performance fee, having failed to do so on two previous occasions.
When the votes were counted, BZW's 2.3 per cent turned out to be crucial, the bid having failed by less than 0.3 per cent. All hell broke loose and the panel agreed to extend the bid deadline until 1pm today.
BZW now asks us to accept that there was no link between the fee and the purchase of the shares. Indeed, it now says that the fee did not relate to this bid at all but to its help in defending Northern against Trafalgar House 18 months ago.
So far, so clear as mud. But wait, there is more. Acceptances rolling in over the weekend tip CE Electric over the magic 50 per cent mark.
This prompts the Prudential, number one member of Northern's fan club with 11.35 per cent, to start a frantic phone round in an effort to persuade shareholders who had accepted the offer to withdraw their acceptances and sell to it.
The Pru is now facing some tricky questions itself. One is whether it is acting in concert with Northern, in which case should it be allowed to buy shares. Another is why the Pru is prepared to spend even more investors' money to frustrate the bid - an outcome which would see the value of its investment crumble.
So too is the panel facing a post-mortem into its handling of the affair. It does not help that the chief policeman in all this, Alistair de Friez, director general of the panel, was, in a former life, the Warburgs merchant banker who helped Northern see off Trafalgar House. Nor does it help that the Pru's head of fund management, Derek Higgs, was previously head of corporate finance at Warburgs.
But the biggest questions of all remain to be answered by BZW. The investment bank was already having a hard time under its new chief executive, Bill Harrison. Since his arrival on a pounds 5m package, morale has collapsed under an avalanche of sackings and defections. The questioning of its behaviour in the Northern bid could not have come at a worse time.
In the meantime, there is a slim prospect that CE Electric will lose the bid when the offer closes today, having thought it had won. That would represent an unfair victory for Northern and its advisers.
In the long run, the furore over this affair might finally lead to the outlawing of the system whereby advisers are allowed to buy shares in companies they are defending, something which rarely serves the wider interests of other shareholders.
But we would still be left with the dread prospect of Northern Electric Mark Three. For everyone's sake at this time of goodwill to all men, let us hope that this regional electricity company is put out of its misery once and for all.
Pressure is on to push up interest rates
House prices are rising at three times the rate of inflation, shopkeepers appear to be having a good Christmas, unemployment is falling unexpectedly fast, and the Government's 2.5 per cent inflation target is looking rather elusive.
Given these pressures, there is no doubt that the next monetary meeting between the governor and the Chancellor in mid-January will be more than usually interesting.
The City is convinced the Bank will be angling for a further rate rise. There almost certainly should be one or more, if only to keep the housing market under control next year.
According to the minutes of the October monetary meeting, released yesterday, the Chancellor agreed with the Bank's recommendation of a rise in interest rates. But, not surprisingly, he expressed no view on the Governor's clear suggestion that further upward movements would be necessary. Indeed, the minutes show him bluntly rejecting the Bank's view that the strength of sterling is not helping to curb inflation.
Politically, January will be very different in atmosphere from October, when the worst of the cabinet's single-currency crisis was still to come, and the election might have seemed a whole winter away. The polls will be looming very large indeed, and Mr Clarke would need all his toughness to defy his political colleagues and side with Mr George. A spring of rising mortgage rates is not the best of backgrounds for an election.
There are a number of clear indications that inflationary pressures are building. But the one the Government has most difficulty in reconciling with its anti-inflationary stance is the housing market, since a recovery is so essential to the feelgood factor.
Building societies claim that overheating in parts of London is an oddity caused by an influx of Hong Kong money and by enormous City bonuses, and they insist that this localised bout of wild inflation will not seep out into the rest of the South-east or into other regions. The Chancellor took the same hopeful view in the October minutes.
But since then, there has been a growing consensus that house prices nationally will rise 7 to 10 per cent a year for the next few years, a rate which most forecasters agree will lead to the long-awaited surge in house sales. The idea that the London market is different and self contained has been proved wrong in every previous house price boom, and will be again this time. Though it will read badly in the headlines, the housing recovery is getting to the point where it will not be stopped by a few more quarter-point rises in rates.
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