Swiss Bank is advising Trafalgar House on its £1.2bn bid for Northern Electric. The fee it might earn from doing so, however, looks like being a mere bagatelle compared to the hundreds of millions of pounds it stands to make by playing the market in electricity shares.
Yesterday it emerged that Swiss Bank holds some 8.2 per cent of shares in Yorkshire Electricity as a market maker. That led to speculation that similar stakes will have been built up by Swiss Bank in a number of regional electricity companies, with the purpose ultimately of passing them on to potential bidders.
The alternative explanation - that the Yorkshire stake is no more than a complex hedging operation against Swiss Bank's interest in the Northern Electric bid - seems just a little hard to believe. Swiss Bank, which owns the Chicago-based futures firm O'Connor, is famous for ingenious hedging techniques of this sort. But an exposure of £130m seems a trifle large for a rinky dink hedge. No, this has to be more of an arbitrage stake than anthing else. If corporate finance work can be extracted off its back, that's an added bonus.
The story of how Swiss Bank's Yorkshire stake was unmasked bears some repeating. Market makers are exempt from normal disclosure rules because it is thought that if a market maker's book is exposed to the world, then effective and profitable market making becomes impossible. All other shareholders are obliged to disclose the moment their shareholdings rise above 3 per cent.
Swiss Bank was sitting pretty behind the market maker's exemption until about a week ago when, increasingly concerned about the build-up of such a sizeable holding, Yorkshire filed off a 212 notice. It's us, replied Swiss Bank and then pleaded the marketmakers' exemption. To no avail. Yorkshire went ahead and unmasked the Swiss anyway. It scarcely needs saying that this has made the gnomes uncomfortable and unhappy. The market is now alive with speculation on what they might be up to. Rivals claimed that, if nothing else, the Swiss were abusing the market maker's exemption.
Maybe, maybe not. One thing is certain, however. A big balance sheet now seems an essential tool of investment banking. Would Warburg or Smith New Court have taken on a hedging or arbitrage exposure of this magnitude? Probably not. Those without the firepower to do it may find themselves left behind.
Ford puts Heseltine on a slippery slope This surely wasn't quite how the privatisation of the UK car industry was meant to turn out. The news that Ford has put the squeeze on the Government for up to £100m of aid to help finance the development of the new Jaguar is full of little ironies. Just as it seemed we were finally shed of the British Leyland yoke, here we are again with the British taxpayer being asked to subsidise the building of cars in this country.
The supplicant this time, what is more, is not short of a bob or two. Ford is arguably the most successful of the big three American car manufacturers and made profits of $6.6bn before tax in the first nine months of last year. Its chairman wants to invest more than $40bn on capital expenditure and product development over the next five years, including a replacement model for the Escort. On that perspective, the £500m or so that will be tied up in the new Jaguar model is relatively small beer.
No doubt Ford will argue that Britain is lucky to get the chance to build the car here at all. In retrospect, the timing of its purchase of Jaguar could not have been worse. The price that Ford paid was so rich that Jaguar's directors and shareholders atthe time could not in all conscience turn it down. Since 1989 Ford has had to absorb pre-tax losses of getting on for £800m - not quite the kind of return you expect when you dole out more than £1bn to buy a company. Jaguar never even managed to dun thetaxpayer for that amount when the company was still in state hands.
But having taken the pain for so long, Ford now has an obvious incentive to drum up all the financial support it can to support the new model on which Jaguar's long-term future depends. Its bargaining card is the obvious one that it will simply move production to another country where the incentives are greater, or the labour costs are cheaper. This is the reality of what globalisation of the industry means.
In deciding whether or not to stump up, the Department of Trade and Industry's problem is not just that Jaguar has 7,000 workers whose jobs might otherwise be at risk. Its recent well trumpeted success in attracting Japanese and Korean companies to invest in Britain has clearly not gone unnoticed at Ford, or at other multinationals. They scent, reasonably enough, that the Government's new pro-manufacturing and employment rhetoric - not to mention its weakness in the polls - makes it more vulnerable to threats of this kind than before.
The trouble is that once you give way once to a well presented case, it becomes harder to do so again. Michael Heseltine is standing on that slippery slope now. If the new Jaguar model can sell 100,000 cars a year, and draw on Ford's engineering skills and distribution capacity, it will be a genuine advance for British manufacturing industry. But is that goal worth £100m of taxpayer's money? And is Ford bluffing with its threat to move Jaguar production overseas? Mr Heseltine would be well advised to drive as hard a bargain as he can. Otherwise it will be open season for more companies coming cap in hand.
Too much at stake in Mexico Much of the discussion of the crisis triggered by the Mexican devaluation and subsequent capital flight could have been copied wholesale from the debate a decade ago on Latin American debt. There are key differences, however.One is that much of the international capital at stake this time around takes the form of equity rather than debt. The old debt overhang has been securitised, and new money invested in the region in the 1990s has mainly gone into the stock markets. A second is that the industrial world has more at stake. Mexico is a partner of the US and Canada in Nafta. Companies from the northern neighbours will press their own governments to help the Mexicans.
Last May, Mexico was admitted to the Organisation for Economic Co-operation and Development, the club of the world's richest nations. The other members would find it too embarrassing to let the latest graduate slip back into the ranks of the banana republics. Famous last words, but at this stage crisis doesn't look as if it will end in disaster.Reuse content