Robinson may bite off more than he can chew
Thursday 23 November 1995
Not everything is always as it seems, however, and as the City recovered from the excitement of the first punch, doubts began to creep in. Is this not mere empire building by Granada? A conglomerate that already combines broadcast TV with equipment rental and motorway service stations might seem illogical enough as it is, without making it more confusing still by loading on Forte's property assets. Certainly there is a suspicion in the City that Mr Robinson may be biting off more than he can chew. Furthermore, say Rocco's supporters, paid and otherwise, he is indeed his father's son and will surprise us all with a street fighter's defence. Forte has famously fought off hostile boarders before and will do so again.
In the spirit of backing one side or the other, however, here is the case in favour of Granada, which though it will clearly have to raise its offer a little, must remain odds- on favourite to win. The confusion in the City over strategy mainly results from the confusion at the heart of Forte itself, which likes to project itself as a top-of-the-range hotels group. Think Forte and you think the George V in Paris, the Cipriani in Venice and nowadays even the Savoy. In truth these businesses are about as relevant to Forte's core earners of roadside catering and mid market provincial hotels as a ten bob note, requiring almost totally different marketing and management skills.
Dispose of those bits and pieces, however, and you end up with a business which is highly relevant to Granada. Mr Robinson has been tracking Forte for three years or more and believes the fit as neat as that of hand and glove.The timing of this bid might be open to question, occurring apparently at the wrong point in the cycle with Forte recovering strongly. Even so, the opportunity for improvement still looks considerable. These are businesses the City has long suspected were badly run and controlled.
Gearing of 130 per cent, even after the planned disposals, seems high, but it is pursued as deliberate policy, for these are cash generative businesses being bid for. Mr Robinson has achieved the trick before of gearing up the company to unwind it later and deliver the value through to shareholders. Furthermore, the gearing sinks substantially when account is taken of Granada's BSkyB stake, in the books at just pounds 70m but worth pounds 650m on the stock market.
Long, long term, you have to wonder whether conglomerates such as Granada make a great deal of corporate sense. Certainly the media interests, if this takeover goes through, will begin to look distinctly out of place. Demerger and breakup, however, is a long way in the future. Forte is just the sort of business Mr Robinson ought to be able to work miracles with. Even so, a bitter fight can be confidently predicted. Rocco may or may not be up to the fight but the old man, Charlie, is still alive and he is not going to see his life's work disappear without serious bloodshed.
A difficult fit for Labour's new clothes
For much of this year, new Labour has been trying on the clothes of fiscal and monetary orthodoxy. The fit always looked tight, but now the corset appears to have burst as Gordon Brown tries to outdo Kenneth Clarke in the tax-cutting stakes.
The Shadow Chancellor didn't have much difficulty in exposing the Conservatives' sorry record in yesterday's debate on the economy. As he pointed out, even if Mr Clarke were to bring down income tax by 4p in the pound - costing some pounds 7bn - that would still leave him a long way off the 7p in the pound by which taxes have been raised this Parliament. Cuts on such a scale are out of the question in next week's budget, given government borrowing which is expected to run at about pounds 30bn this year. Whatever tax rabbits Kenneth Clarke pulls out of the red box, he will have to justify them with spending cuts. And whatever he claims about slashing expenditure, the City will be sceptical - and rightly so.
The new Tory mantra intoned by Mr Clarke is that they alone can bring down public spending to below 40 per cent of GDP. What ministers omit to tell the public is that although now in their 17th year of office, they have only succeeded in that objective in just two years - and those were at the height of the giddily unsustainable boom of the late 1980s. How much easier to redefine public expenditure - as the Treasury did in June - with the effect of bring down spending as a proportion of GDP by almost a full percentage point.
But if the Conservatives' difficulty in grappling with the hydra of public spending arouses legitimate scepticism, so too does New Labour's new penchent for cross-dressing in tax-cutting clothes. Gordon Brown had plenty to say earlier in the week about his desire to cut the starting rate of tax to 15 or even 10 per cent. He had nothing to say about the cost of doing so - a handy pounds 7bn - and how that money would become available.
One danger for investors in this competition to cut taxes is that Labour will come to power having stoked up unrealistic expectations and will end up being fiscally imprudent. Another is that Labour simply inherits the fiscal imprudence of an ultimately political budget. If nothing else, the fashion parade of political supermodels dressing in little other than tax-cutting pledges highlights the looming political uncertainties that seem set to overshadow markets in the months ahead.
Expect the 'smoothies' to come out fighting
Accounting Standards Board chairman Sir David Tweedie has repeatedly made clear that if he stands for anything it is transparency in accounts. Few ASB proposals better fit in with that idea than today's attack on the "big bath", or lumping together of anticipated costs, and other techniques much loved by the likes of British Gas and GrandMet.
The plan is to allow companies to provide against profits only whenthey are commited to expenditure on reorganisation or to meet environmental liabilities rather than, as now, once the board has formed the intention. This looks logical enough. However, it represents such a radical change that Sir David fully expects the smoothers - or proponents of managing earnings by giving companies scope to manipulate the amounts and timing of provisions - to come out fighting.
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