Outlook: Centrica puts its foot on the gas

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The Independent Online
FIRST THE good news. Those windfall cheques should be dropping through the letter boxes of 4.6 million full members of the Automobile Association this October. Now the bad news. If the car breaks down, they'll have to wait in between 9am and 1pm the following Thursday to have it fixed.

Centrica's pounds 1.1bn acquisition of Britain's leading roadside breakdown service is the worst-kept secret in motoring since they decided to phase out the August number plate change. The pounds 240 bung on offer to AA members may not have been enough to tempt the typical carpetbagger out of bed but it is still money for nothing for a business most members never knew they owned, and certainly it represents another small nail in the coffin of mutuality.

Having resolutely held the line against conversion, the AA's ruling committee finally wilted when it saw the RAC fall to Lex Service. Cendant's decision to put Green Flag back on the market, where it can be bought by someone who knows how to run a breakdown service, can't have helped either.

Apart from the windfall, there is not much in it for the average motorist (other than discounted AA membership if they agree to buy Centrica's electricity) and even less in it for the AA staff, who are more likely to get a P45 than an RAC-style employee bonus.

On the other hand Centrica's Roy Gardner had the look yesterday of a second-hand car dealer who has just bought a Merc for the price of a Mondeo. After taking the AA's pounds 306m in cash into account, the price per member works out at about the same as Lex paid for the RAC. In return Centrica has inherited twice the market share along with an insurance business and a driving school to boot.

It has also acquired an organisation ripe for a spot of engine tuning. Even the old buffers of the AA had identified pounds 65m of cost savings and Centrica reckons it can raise that figure by a half again.

The opportunities for cross-selling in the enlarged Centrica are almost certainly overhyped. But Mr Gardner has his foot on the gas and there is no stopping him. Next Centrica will be selling telephone services alongside gas, home security, plumbing and goldfish cards. After that he intends to conquer Europe.

At some point Centrica's management risks becoming too thinly spread to handle all this, but right now, with his shares at an all-time peak, Mr Gardner is deservedly basking in the glory of a strategy the City seems to like.

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Interest rates

HOUSE PRICES are probably as good a barometer of the British economy as any. This is despite the fact that the house price cycle is far more pronounced than the underlying economic cycle. It is this very exaggeration that makes the market such a useful gauge. Once house prices have started bubbling up, it generally means the rest of the economy is on its way towards boiling point too. Rising interest rates won't be far behind.

We have not yet got to this stage, in part because the dire experience of the last cycle has made everyone in the housing market more sensitive to the temperature. Lenders are sensibly cautious about loan to income ratios and valuations. And while there are clear house price hot spots in London and other thriving cities like Leeds and Cardiff, there are severe lows in other parts of the country. In the round, the position isn't yet anything to worry about.

Even so, the early wavering of the barometric needle in the housing market is one reason why it would not be wise to count on further cuts in the cost of money. The Monetary Policy Committee is not expected to reduce rates this week after its slightly surprising cut last month - a cut which was not, by the way, passed on to customers by most mortgage lenders.

The longer-range forecast also shows little scope for further reductions. With the economic outlook clearly brightening, interest rates are near their low point. They may even be at it.

This makes it a good time for those who do not have a fixed-rate mortgage to switch. Indeed, the prospect of double-digit capital gains on properties in some areas combined with these low mortgage rates is what makes housing such an appealing investment at the moment. Even better, there is no danger of punishing hikes in mortgage rates, early 1990s style, for if the boom is not yet getting out of hand, the bust is unlikely to either, thanks to the benefits of an independently determined monetary policy.

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Choice sell-out

BY THE look of it, the City is about to do it again - sell a perfectly good, well performing management down the river. Led by Phillips and Drew, Gartmore and Baring, the big investment institutions are shaping up to reject First Choice's proposed merger with Kuoni and wait instead for David Crossland's rival Airtours bid to be renewed. The bird in the hand is not worth as much as the two in the bush, the City figures.

This perhaps says more about the short term needs of P & D and others than their long term judgement. They all desperately need to improve on their lousy investment performance, and Airtours' terms certainly look a good deal better than the alternative. Even so, First Choice has put up a very reasonable case for the Kuoni merger, while the Airtours proposal is dependent on regulatory clearance from Brussels, which is questionable.

Ian Clubb and Peter Long, chairman and managing director respectively of First Choice, have brought the company back from the dead in the two and a half years they have been in control, raising profits from nothing to a forecast pounds 60m this year and stock market value from pounds 120m to pounds 700m. Margins have been restored to the industry average and sales are storming ahead. In return the City is proposing to sell the company to the competition, which is predictably prepared to pay a big premium for monopoly.

It is not, it might reasonably be said, the City's job to worry about the effects of a takeover on competition - rather the reverse if it means more profit. That job is for regulators. But it is the job of fund managers to form a view on the likely regulatory outcome. For reasons which have yet to be explained, the task of safeguarding the interests of the British consumer has been left by the Government to Karel Van Miert, the European Competition Commissioner.

He shows few signs of doing what Mr Crossland wants; it is naive of the City to believe Airtours is going to be allowed a free run at First Choice. Mr Crossland has already profoundly misjudged the regulatory issues once, by assuring the City there was nothing to worry about. Now he's doing it all over again.

So perhaps the last laugh will be on the fund managers afterall. If Airtours is unable to renew its bid on similar terms, First Choice may end up remaining independent. By rejecting Kuoni, meanwhile, the City will have lost the opportunity to create a new travel industry force with earnings per share to match Airtours. But what of it? Just the outside chance of creating another FTSE 100 company (Airtours is highly likely to secure a FTSE 100 position with First Choice under its wing) is worth any number of birds in the hand, the City seems to be saying. How short sighted.

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