Paying the high price for being in fashion

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The Independent Online
ON TUESDAY, BAT Industries revealed it was paying dollars 1bn (pounds 660m) for American Tobacco, whose US brands include Pall Mall and Lucky Strikes. On Thursday TeleWest, Britain's biggest cable television company, announced plans to float on come to the London stock market in a float that will value it at around pounds 1.7bn.

Other than their massive size, the two deals have nothing in common. The two industries are at the opposite extremes of financial fashion. The US tobacco sector is deeply out of favour. Consumption is shrinking. Smokers are ostracised in some circles. Manufacturers are under attack on all fronts, plagued by a price war and deserted by their friends in Washington. A 75-cents-a-pack 'sin tax' is proposed to help pay for health reforms. The powerful Food and Drug Administration has suggested that manufacturers have been spiking their products with extra nicotine to make them more addictive. There is even talk in Congress of regulating tobacco as a narcotic. (Before you laugh, remember that this is the country that introduced Prohibition in the 1920s.)

British cable TV, by contrast, is the ultimate in financial chic. Cable is in. This is not the half-hearted, under-capitalised, local TV industry of ten 10 years ago. ventures of ten years ago under-capitised and rather pathetic local TV. This time, so the techno-freaks will tell you, the information superhighway has really arrived on the doorstep, delivering phone and TV services, not to mention tele-shopping, tele-commuting, tele-learning, tele-dating, tele-everything.

But fashion has a price. The old squares at BAT are getting their dull acquisition for just nine times earnings. Telewest is loss-making and cannot predict when it will start to make profits, so it cannot be valued in the conventional way. expects to get into the ribs of investors for around 90 times its annual sales. Yet by any measure, it expects future shareholders to pay top whack. Its broker Kleinwort Benson, discounting future expected cash flows to a present net value, believes prospective investors will be prepared to pay a price which that values the company at more than pounds 500 for each home in its franchise regions, or pounds 10,000 per currently connected home.

Its broker Kleinwort Benson has devised a method of valuation to justify the float price, discounting expected cash flows in the future back to a net present value. The ambitious float price gives a value to TeleWest for each home in a franchise area at more than pounds 500; or each connected home at pounds 10,000.

There were some doubts as to whether British investors are ready for this kind of investment. But KB has clearly decided it can sell the idea.

Expect to hear lots of parallels comparisons with the (successful) cellular phone market, though not so many with Eurotunnel and Euro Disney, whose shares were also valued using discounted cash-flow techniques.

TeleWest has novelty value on its side. And rarity value: institutions will doubtless feel they have to put some kind of toe in the water of cable. TeleWest will be the only large pure quoted cable operator. However, it is not market potential or sales growth or even earnings that ultimately determine share prices, but return on capital. And it is often easier to lift return on capital from a shrinking assets base than from a growing one. Dwindling, unfashionable industries can still produce superb stock market performers, as companies consolidate, sell assets and cut capital spending. You could not get much more out of vogue than the US weapons industry in 1989, when the Cold War ended. Yet defence stocks have performed outstandingly since then, even as the companies themselves have shrunk or merged. Sales at General Dynamics, maker of nuclear subs and jet planes, have plunged from dollars 10bn to dollars 3bn in the last past four years. Yet its return to shareholders has been something over 500 per cent.

It is a good augury augurs well for BAT. Maybe it knows how fickle fashion can be.

Consultant, heal thyself

I'M A bit prejudiced against management consultants, I admit. There's only so much Business Process Re-engineering, only so much Benchmarking, only so much Total Quality Management a man can stomach. But even I was surprised by the leaked Cabinet Office report last week on the public sector's use of consultants.

This showed that the Government spent pounds 565m on external consultants last year, but could identify just pounds 10m in annual savings achieved as a result of their costly advice. The findings were rightly attacked as a scandalous waste of public money. But they also appear to be an embarrassing indictment of the consulting industry.

Are consultants really that bad? Is the return on investment any better in the private sector? Are Britain's 20,000 consultants worth the pounds 1,000-a-day fees they typically charge? Is British industry getting value from the pounds 2bn it spends each year on outside expertise?

Amazingly, the consultants haven't tried to answer that question. The last serious attempt was in America in 1963. While analysing, and probing and commenting on every other industry, they haven't put their own under the microscope.

Of course, consultants argue that it is impossible to measure their impact on a company. They point instead to customer satisfaction, which is generally high, but then it would be. Managers love consultants because they can usually be relied up on to support their decisions. The imprimatur of Bain or Andersen can help swing the most recalcitrant board. And the same

It's not that hard to measure performance: 99 per cent of consultancy in the private sector is ultimately about trying to cut costs or lift revenues. At least that is what shareholders are led to believe.

Consultants are Perhaps the reality is that they don't deliver great bottom-line results. They are popular with managers because their 'expert' support can add credibility to their decisions. The same consultants can then be conveniently blamed if the decision turns out to be a complete disaster.

But their value to shareholders is more doubtful. Management consultants are good at demonstrating managements like them. Manchester Business School last month found that 95 per cent of large companies rated their consultants satisfactory or above; 93 per cent said they would hire a consultancy firm again in the same situation.

Well, they would say that, wouldn't they. They're undoubtedly useful to managers. But do they work in the best interests of shareholders. It's time quoted companies divulged how much they use them. That would concentrate minds wonderfully on whether the it's money is well spent.

A fight for Lasmo

Graham Hearne, the chain-smoking chairman and chief executive of Enterprise Oil, must be cursing. He'd been eyeing up Lasmo since Christmas, wondering whether to pounce on the ailing oil company. But he decided to wait until it published its annual results in March. He wanted to make sure there were no more skeletons in that mausoleum of a company before launching a bid.

It was a big mistake. While Enterprise was studying the figures, Lasmo came out with its pounds 219m underwritten rights issue, which was reasonably well received in the City. Suddenly one of Britain's least loved companies had managed to win a few grudging friends. Institutions which that helped underwrite the issue were now committed to the Lasmo management.

Enterprise was then caught napping a second time, forced by the Takeover Panel to admit it might make a bid 24 hours before actually doing so on Thursday. It was a lousy start. Even even with his pounds 1.45bn bid on the table, Mr Hearne's arguments for the takeover still sound hastily put together.

When we spoke on Friday night, he described the planned takeover first as putting together two halves of a lemon, then as fitting like a hand in a glove, then as a poker hand with more cards than the opposition. The analogies are all a bit fogged. There may well be synergies to be got from bolting together two oil companies, but I'm still not sure what they are.

The financial fit is more compelling. Enterprise has strong cash flow and is looking for investment opportunities. Lasmo has wonderful projects and exploration prospects, but not enough cash to finance them speedily. And, of course, Enterprise will win any contest on the track records of managements.

It's early days. We'll know more when Enterprise publishes its offer document on Tuesday. But what would have been a walkover for Enterprise if it had attacked two months ago, now looks like a closer contest.

One Two other factor will add some spice:. One is the American connection: US institutions have accumulated 25 per cent of Lasmo in the last 18 months and will play a key role in the bid battle. The other is Rudolph Agnew, the newly appointed Lasmo chairman. He successfully saw off a bid from Minorco when he was chairman of Consolidated Gold Fields, ruthlessly attacking Minorco's boss Sir Michael Edwardes. Mr Hearne will have to clarify his arguments and unmix his metaphors if he isn't to be lacerated by Mr Agnew's sharp tongue. The sharp-tongued Agnew will make mincemeat of Hearne's stumbling explanations and mixed metaphors, if he doesn't better articulate the benefits of his bid.