Red faces as a rescuer ditches the bride
COMMENT : "Sweb has probably sealed its fate by embarking on such an escapade. It seems that the RECs are as naive about the cut and thrust of a City takeover battle as they are about everything else"
Saturday 12 August 1995
But the London Evening Standard's embarrassment in publishing a headline that read "Sweb neighbour steps into the bid fight" when in fact it was stepping out, is as nothing against the damage that Sweb has done its cause in failing to consummate the marriage. The fight may not be entirely over, but Sweb has inflicted on itself a possibly fatal blow.
As it happens, Southern was getting cold feet about the whole thing even as the story of its nuptials leaked to the Financial Times. It is only possible to speculate on whether the leak was a deliberate attempt to bounce a reluctant Southern into a deal; suffice it to say that it was Sweb, not Southern, that confirmed the talks to the Stock Exchange early yesterday. Whatever the truth, it is nearly always fatal when a white knight scuttles off before engaging the enemy. By the close of play, the talks were off, regulatory uncertainty cited as the reason.
Sweb insisted not, but in truth there were clear regulatory issues involved. As the first merger of two regional electricity companies the deal was certain to be referred to the Monopolies and Mergers Commission; as a quid pro quo for allowing it, the regulator was bound to demand a substantial and costly benefit for the consumer. That would have made it even harder to make the figures stack up.
Southern was in any case under strong pressure from its leading shareholders not to do this deal. As soon as they learned of the talks, representations were made. Helping a friend in need at no benefit to itself was not what they expected of Southern. Sweb has probably sealed its fate by embarking on such an escapade. It seems that the RECs are as naive about the cut and thrust of a City takeover battle as they are about everything else.
The dollar rallies - at long last
The dollar rally has been a long time coming - but it seems finally to have arrived. Dealers are starting to eye the objective of 100 yen. If that level were reached the dollar would have retraced its steps to the level at which it started the year.
In the course of this apparent madness on the foreign exchanges, the rise and rise of the yen earlier this year has not just brought the much hoped for Japanese recovery to a shuddering halt but come close to pushing the economy off the cliff into a Thirties-style slump. Yet at the very height of the yen bubble in April, when it touched 79.70, governments professed themselves impotent against the power of the markets. Intervention could not work, we were told repeatedly. Central banks were as pygmies, unable to match the gigantic sums of money swirling their way through the markets every day.
The lesson seems to be the reverse. When historians look back on this extraordinary episode, they will surely draw the conclusion that the yen bubble was an object lesson in the power of governments to move markets. The turning point in the dollar's fortunes was the decision at the end of June by the US to pull back from the brink of its threatened trade war with the Japanese over access to the car market.
Before then, the administration smiled upon the trauma of the super-yen, regarding it as a further weapon in its trade battle with Japan. Since then, the US has joined forces with the Japanese government in trying to force the yen down.
A change in attitude on the part of the US has been matched by Japan eventually waking up - and owning up - to the seriousness of the crisis afflicting the economy. Instead of hoping, ostrich like, that denial of the possibility of recession would sustain recovery, it belatedly accepted the economy had stalled. Interest rates were brought down and the Japanese are indicating a determination to deal with the bad debt problem.
None of this necessarily changes the long-term prospects for the dollar. The bear case against the dollar remains strong as long as the US continues to build up its position as the largest net debtor nation in the world. However, governments are largely to blame for its yo-yoing fortunes this year. Central banks may no longer be able to gainsay markets through intervention when they are going against the grain. But governments can still determine that grain - if they want to.
A glimmer of light remains in the tunnel
If Sir Alastair Morton, chief executive of Eurotunnel, is to be believed, the banks are out to deprive the company's long-suffering shareholders of ownership and get their grubby hands on the Channel tunnel as soon as they can. In truth, however, bankers will be far from keen to push the company over the edge. If there is any reasonable case for not going into a full-scale and bloody refinancing next autumn, they will take it.
Much better, as far as bankers are concerned, to drip-feed more of their cash into Eurotunnel in the form of new loans, to be recycled immediately to pay the interest. That is what happened in the spring, when they released pounds 300m to take Eurotunnel through to October; if they can possibly find a reason for doing it again, they will.
Anything else would be dreadfully expensive for the banks' shareholders because of the size of the bad debt provisions that would have to be recognised. Looked at that way round, the key question is how can bankers find a way to justify releasing the next tranche of the loans they agreed in principle at the time of the refinancing last year?
The one thing they will not be concerned about is the present shortfall in revenues from last year's wildly optimistic rights issue forecasts. The banks have known the projections were wrong, and getting more so month by month, since soon after the refinancing.
What they will concentrate on is not the exact level of current revenues but the rate of build up over the next couple of years. A delay of a year in reaching a given level of income is not critical as long as the banks can be sure that at some point Eurotunnel will be able to service its interest bill from its own income.
The exact point at which this happens is less important for the banks than reassuring themselves it will happen within a reasonable timescale.
The banks will have to be confident both in the technical reliability of the system and - the biggest hurdle of all - they will have to believe that Eurotunnel's forecasts are for the first time credible.
If they are not reassured in the autumn, and if the date at which interest will be serviced without new loans recedes into the distant future, the banks will move in. Nonetheless, there remains a faint glimmer of hope for shareholders.
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