Scorched earth policy may be too hot to handle
Wednesday 03 January 1996
The package of goodies announced yesterday - a combination of break-up and scorched earth defence - may be enough to see off Granada. Certainly Gerry Robinson, its chief executive, is going to have to pay a lot more to win. For an executive who in part has built his reputation on underpaying for assets, that's a tough one.
But first, let's slap down the Forte defence a bit, for it is not quite as brilliant as it seems. The buy-back puts a temporary floor under the share price of 340p but the support level will not be there for ever. Moreover, the tax top-up is only available to gross funds; humble taxpayers do not get the added value. Once all is said and done, what is left is a pure hotels group with substantial debt, hardly a natural for the aggressive investment programme necessary to drive the business forward and the ambitious dividend strategy outlined in the defence. The danger is that Forte becomes caught in a kind of poverty trap; to maintain dividend cover at present levels it is going to have to double profits in three years. The business will need to be run for cash, with the hatchet cutting deep into both investment and cost.
Even on the promises made by Forte yesterday, it is not until next year that dividends recover to the level they were at in 1992/3. If you take that as your starting line, the growth in dividends through to the end of the three-year horizon of promises is just 46 per cent - not too hot, really. Nor is the prospective dividend yield any better than the market average at 3.8 per cent.
Forte has demonstrated that it is prepared to take bold and painful action in its defence, but is it enough? At this stage the battle seems to have developed the feel of an Oxford and Cambridge boat race, with Forte, the underdogs, leading at half-way by a good few lengths. Without a quite substantial rise in the bid, shareholders will certainly give Forte the benefit of the doubt. It won't be enough merely to lift the offer to 360p a share; 380p might do it but Mr Robinson would have to answer to his own shareholders for such a price. Over the next week he will have to talk long and hard, not just to Forte shareholders, but to his own, too.
It is nonsense to argue, as some have, that failure will mark a turning point in Granada's fortunes as dramatic as that which befell Hanson after its fruitless assault on ICI. But setback it will certainly be. And it will be doubly so if Granada raises the bid, with all the expense that involves, only still to fail.
Sainsbury's needs a big new idea soon
A clever enough marketing wheeze, Sainsbury's move to cut the price of 200 product lines this month, but hardly sufficient to put the once-star performer of food retailing back on track. In fact what was announced yesterday was no more than the annual re-run of similar campaigns Sainsbury's wheels out every January. It gets a good slug of cheap publicity and provides a much needed boost to sales, which are at their most sluggish at this time of year.
However, Sainsbury's needs more than this to restore its fortunes. Figures released yesterday show that Tesco and Asda are still motoring ahead while Sainsbury's market share is eroding further. Sainsbury's has tried hard not to fight the battle on price but found itself dragged back into the scrap time and again.
Trumpeting customer service, wider car parking spaces and children's trolleys are all very well but they are plainly not all that matters to the company's pampered customers. Loyalty cards, too, were spurned only to see Tesco and Safeway sign up millions of customers who like the idea of a little discount and special offers. In the cost conscious 90s, price seems to be the thing that matters. Sainsbury's has a new marketing director but it may need more management changes if it is to really turn the corner. Most of all it needs a big idea, and soon.
Housing recovery not likely to raise pulses
The housing market is set to recover - that is the encouraging message coming, not just from those with an axe to grind in the property business but from some independent City analysts too. They've been wrong before - but that doesn't mean they aren't right this time. The trouble is that even if the house price cheerleaders are now looking at the right crystal ball, the recovery they have in mind won't be occasion to crack open the champagne.
The Halifax - whose price index showed a fifth consecutive monthly increase in December - is predicting a modest 2 per cent rise in 1996, with transactions up by 10 per cent. The Council of Mortgage Lenders says prices will rise by 3 per cent in 1996. Price increases of this order will barely dent the levels of negative equity that still hold the market back. According to Rob Thomas, housing analyst at UBS, a 10 per cent rise in house prices would be necessary to float three-quarters of the million households still in negative equity out of their predicament.
This block of people will continue to act as a brake on the market, as will the collective experience, so painfully learnt in the 1990s, that both nominal and real house prices can fall as well as rise. Set against these brakes on the market are some potentially powerful accelerators. House prices have fallen to levels of affordability in relation to income which haven't been seen for a generation. So, too, have mortgage interest rates - and the direction still looks downward, with the City pencilling in base rate cuts of a further half per cent by mid-year.
However, historical analogies can be misleading. The upswing in house prices that got under way in the 1960s was related to a long term rise in inflation. It was also based on a lavish subsidy from the Treasury in generous mortgage interest tax relief. In stark contrast, the 1990s are turning out to be a decade of falling inflation. The tax relief has been whittled away to a niggardly amount and housing must now compete as an investment with tax-exempt PEPs and Tessas. Mortgage interest rates may be low in nominal terms, but they remain high in real terms. A housing market recovery is now overdue. But if and when it occurs, it will feel like the overall recovery of the 1990s - nothing much to write home about.
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