Wait till we see the colour of Rocco's money

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The Independent Online
How seriously should we take Sir Rocco Forte's bid to reclaim at least a part of his empire? The concept is splendidly romantic, as well as making the last two months of bitterly contested takeover battle seem like theatre of the absurd.

Just think of it. Granada bids pounds 3.8bn knowing that to make the bid work it needs to dispose of more than pounds 2bn of assets. Then back comes the Forte family, in conjunction with its advisers and JP Morgan of the US with a highly leveraged bid designed to buy precisely the same assets as Granada now needs to sell - the Meridien chain, the Exclusive hotels and the Savoy stake. How much simpler and less costly if they had all sat down and done this in the first place?

Whether it can be made to work depends critically on what Sir Rocco can and is prepared to pay. If he can pay the asset value attributed to these properties in the defence, then Granada may feel obliged to deal. Until we see the colour of Forte's money, however, the offer looks like little more than the bravado of a defeated man.

McAlpine shows way out of insanity

There's nothing like a bid to galvanise otherwise bumbling management. Shareholders in Alfred McAlpine, including the increasingly peeved McAlpine family trusts, can probably thank Amec's half-hearted approach at the end of last year for kickstarting yesterday's withdrawal from the cut- throat construction market.

Investors in the most oversupplied, inefficient sector to clutter British industry must wonder what else has to be done to persuade McAlpine's peers to follow suit. Only in contracting could an industry-wide turnover of around pounds 50bn result in an aggregate loss.

The outlook for the sector is hardly encouraging. Total output fell by 3 per cent in 1995 and forecasts suggest it is unlikely to recover until 1997. The worst of it is in the heavier end of the sector, which is being clobbered by the Government's insistence on sacrificing infrastructure to a housing and consumer recovery. At the same time, low inflation means continuing cost-cutting is the only answer for materials companies.

The recent asset swap between Tarmac and Wimpey and Kvaerner's bid for Amec added a degree of excitement to a sector that has otherwise been a dead loss for four years. But amid the recent action it is easy to forget just how rare such moves are in the contracting business. Beside the recent excitement at Amec, there have only been two hostile takeover bids in this sector in the last 10 years (YJ Lovell for Higgs & Hill and Lilley for Tilbury); both failed and the aggressors went on to suffer severe trading problems with Lilley eventually going bust.

There are several reasons why the insanity of construction is hard to cure. The abundance of small players means reducing capacity among the larger contractors has little effect. With no assets to talk of, contractors' balance sheets are difficult to value, putting off potential bidders. Moreover, merging two companies rarely increases the chances of winning big contracts. Where there were once two bidders for the contract, there is now just one. The normal rationale for mergers (one and one making three) is reversed.

So, McAlpine is right, the only way to solve the mess is to pull out altogether. Whether increasing the company's relative exposure to civil engineering and housebuilding is the answer remains to be seen, but at least the company has shown the disgruntled McAlpine family trusts that it is doing something.

German model loses its looks

Angst is a national condition in Germany, so the self-doubt that has crept into this great powerhouse of the European economy is hardly new. For once, however, Germany is right to worry. There is little doubt that economically things are going badly wrong. The effectiveness of the German government's response to this looming crisis will be watched closely by a wider world, not least in the UK, where the German model is seen as the main inspiration for Tony Blair's stakeholder economy.

Like Daimler-Benz, the German economy shows symptoms of overload. Following the rise in unemployment to nearly 10 per cent, the government has now downgraded its projection for growth this year to only 1.5 per cent. Not only has Germany substantially overshot the Maastricht budget deficit/GDP ratio of 3 per cent, it is set to crash through the debt/GDP ratio of 60 per cent.

The unexpected economic slowdown that started last year is the main cause. That in turn was helped on its way by the appreciation of the mark to record levels against the dollar last spring. But what added salt to the wound was a big jump in wages, with a two-year inflation-busting deal in the key engineering sector. This is clearly proving too much for many companies, given the strong real appreciation of the mark in the 1990s.

Some relief has come from the Bundesbank, with three half-point cuts in the discount rate last year. Yesterday's further easing in the repo rate sent a strong signal that December's discount rate reduction to 3 per cent may not be the last. A further reduction to 2.5 per cent - something that has only occurred once before - now seems odds-on.

As Theo Waigel, the German finance minister, conceded at the Group of Seven meeting in Paris last weekend, the rigidity of European labour markets is itself a cause of slow growth. Ambitious plans agreed by the government and both sides of industry to halve unemployment by the end of the century are an advance in the right direction for they include more flexible working hours, the use of temporary jobs and the expansion of part-time jobs. Collective bargaining between employers' organisations and unions will remain the cornerstone of the German labour market, however.

Those in favour of the German system say that wage co-ordination and direction help to keep down unemployment. The argument is that if the Bundesbank raises interest rates, Germany doesn't have to go through the pain of recession to bring down wages; negotiators will instead take pre- emptive action. By contrast, the sorry post-war experience of the UK is that in an unco-ordinated set-up, workers have to feel the burn before they're willing to ease up on demands for higher wages.

But just because something has worked in the past doesn't mean to say it will always work. Kenneth Clarke has taken the offensive on the great jobs debate, arguing that the flexible labour market is proving more effective in cutting unemployment than the rigid systems in Continental Europe. In the run-up to the Group of Seven jobs summit in Lille this spring, the spotlight is bound to swing onto the jobs crisis on the Continent. The Germans were always going to stick by their system - it has served them well. Yet while the German model has proved its worth in the past, it looks a less attractive guide to the future.