Picnic time nears as the bears await their share
COMMENT: 'The nervous state of the Treasury bond market and the giddy heights reached by the bond-equity yield ratio suggest a fall in share prices that would swamp the impact of better profit prospects'
Saturday 22 June 1996
There are two underlying questions. One concerns the economic fundamentals, the other liquidity flows. The consensus Wall Street forecast for corporate earnings is that they will grow by about 6 per cent this year, but this is based on the assumption that economic expansion is modest.
Recent economic indicators, along with anecdotal evidence from the companies, suggest that the pace of growth is turning out to be stronger. That will mean better company profits, so forecast upgrades could underpin the Dow for a bit longer. However, better growth prospects will also incline the Federal Reserve towards raising short-term interest rates - perhaps as early as the next meeting on 2-3 July. The nervous state of the Treasury bond market and the giddy heights reached by the bond-equity yield ratio suggest a fall in share prices that would swamp the impact of better profit prospects.
The second risk is the possibility that purchases of US equities by mutual funds will slow from their equally giddy heights, with nothing obvious to replace them in their role as sponge for the record level of new issues. Those predicting a big correction have been wrong for so long that it is easy to scoff at their continued warnings of bad times to come. But even if we are not talking full-scale crash here, the bull case looks increasingly hard to sustain. And the growing number of signals flashing red point to something worse.
Paris says 'non' to Anglo-Saxon arbs
Sacre bleu!!*! Those nasty Anglo-Saxon speculators from the City are trying to export their methods to the Paris bourse. As if Anglo-French relations were not bad enough already, SBC Warburg's arbitrage department is creating a minor beef crisis all of its own by launching an effective pounds 700m bid for CIP, a French investment company largely owned by Banque Nationale de Paris. Quite a stink it is causing, too.
CIP is essentially a vehicle through which BNP holds stakes in its banking clients, curious enough in itself by the standards of the City, where that sort of thing is taboo. Some years ago, a small minority holding in CIP was floated off, and the shares have traded at a substantial discount to the value of the underlying securities ever since.
Arbs are trained to sniff out potential money-making opportunities like this, so in they marched demanding fair value for the minority. Eventually BNP reluctantly made an offer - one of its shares for every one CIP share. This was an advance of sorts, but it still represented a big discount to real value. That discount widens by the day as the BNP share price heads steadily south. "Rip off," screamed the arbs, who then took their case for fair value to the French regulatory authorities.
Here, by all accounts, the whole sorry saga began to take on truly comic aspects. The French refused to conduct proceedings in English because they were in France dealing with matters affecting a French company, and the English refused to speak in French because they couldn't.
Translators failed to close the communications gap, which seems to be as much cultural as linguistic.
So now SBC Warburg has called BNP's bluff by launching its own higher cash bid. BNP, as majority shareholder, is under no obligation to accept, but its position is none the less a highly embarrassing one. If it doesn't accept, it will be accused of depriving the minority of fair value. And if it does accept, it loses the prize of all those CIP assets on the cheap. Ah, the perils of free Anglo-Saxon markets.
Mind you, there's nothing particularly French about the spectacle of a powerful majority shareholder attempting to crunch the poor minority.
It happens in the Anglo-Saxon world the whole time too. The difference is that in Britain and the US, shareholders are alive to it, and generally they get protection. But for SBC Warburg, BNP would have got away with it.
Media barons in a muddle
What on earth are Europe's media barons up to as they prepare for the launch of digital television services in Germany and across the Continent? At first, it all seemed so perfect. There was the not unexpected news that Rupert Murdoch had finally settled on a partnership in Europe, teaming up with Canal Plus, the French pay-TV giant, Havas, the French media holding company, and Bertelsmann, a big publishing and television conglomerate run by Michael Dornemann. Their aim was to tap the woefully underdeveloped German market for subscription television, where a pitiful 3 per cent of the television population has signed on, against 25 per cent penetration by BSkyB and cable companies in the UK. With the prospect of new programming, delivered via digital satellite, penetration rates are likely to soar. Independent forecasters believe more than 6 million homes in Germany will be multichannel subscribers by 2004 - in line with Europe-wide growth that will see the number of pay-TV homes rise to as many as 33 million.
The only fear for the broadcasters was that a "standards" battle would erupt in Germany, the key market. Leo Kirch, the Bavarian media baron, looked intent on developing his own digital standard which ignored Bertelsmann altogether, despite his joint venture in analogue pay-TV, Premiere, which boasted Bertelsmann as a partner.
Mr Murdoch talked first to CLT, then to Kirch, and then to Bertelsmann, keeping his options open. In March, the "dream team" alliance was unveiled, grouping Mr Murdoch's BSkyB, Canal Plus and Bertelsmann. Only Kirch and CLT, the Luxembourg-based broadcaster, were sidelined.
Since then, the situation has deteriorated radically, and the fault is largely Mr Dornemann's at Bertelsmann. The first sign of trouble came with a lightning deal between Dornemann and Michael Delloye, of CLT, to merge the two companies' television interests. Thereafter, progress was so slow and fraught with tension that the alliance crumbled, with Bertelsmann now scrambling to woo its partners back. Mr Murdoch, through his BSkyB, says he is still ready to listen, that the door is still open.
For the German consumer, two set-top boxes, and two separate digital services, don't make sense. Sky and the old British Satellite Broadcasting ended up merging in the end. It seems unlikely there is enough room for two fully-developed German digital systems. Mr Dornemann would be well advised to swallow his pride and extend an olive branch to Canal Plus and Mr Murdoch. On past form, it is better to be with Mr Murdoch than agin him.
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