Outlook: Dixons shock shows just how fragile the economy really is

Money for old rope; Tube Lines

Sir Stanley Kalms seems to have got out in the nick of time by retiring as chairman of Dixons at the last annual general meeting. Trading conditions have deteriorated sharply since then, and although nil growth in like-for-like sales in the core UK retail operation over the Christmas period is not exactly disastrous, it's easy to see why the stock market was so spooked by yesterday's trading update.

Margins are falling, sales of extended warranties, which still account for some 40 per cent of Dixons' profits are falling, and product sales aren't growing. There's no chance in these markets of putting up prices to compensate for the loss of income from warranties, and although Dixons still has a market share streets ahead of its nearest rival in electricals, the supermarkets, Argos and others are taking advantage of the continuing glut in production to offer a quite crippling level of competition in electronic games and other market niches Dixons once counted as its own.

It would be an exaggeration to compare Dixons' position with that of Boots, which finds its once unassailable position on the high street under siege on all fronts from the big supermarket groups. It is not as bad as that for Dixons yet, and Dixons has in any case always succeeded by offering the lowest possible prices. But there are similarities – a faintly out of date, down at heal format, growing competition from those with potentially much greater buying power, and the steady erosion of a once highly profitable sideline, in Boots' case prescription drugs and in Dixons' the extended warranty.

A much chastened John Clare, Dixons' chief executive, candidly admits that for the time being the group is being forced to abandon its overseas ambitions to concentrate all its efforts on getting the proposition right in the UK market. There may be much to do.

To some extent, Dixons is being hit by a generalised deterioration in consumer confidence. Mr Clare makes the point that the comparisons were boosted by the one-off effect of lower mortgage rates, which increased the amount of money people had in their pockets to spend. Rates haven't changed for more than a year now, so the effect of falling mortgage payments is running out of steam. People are also beginning to worry about the economy, house prices, employment, and the higher level of national insurance, which kicks in this April.

All of which makes Mr Clare exceptionally cautious about the outlook. Analysts are being too optimistic on prospects for profits, he says. Whether Dixons is typical remains to be seen. Figures from the British Retail Consortium for roughly the same period suggest like-for-like sales growth across the sector of 1.7 per cent. That's obviously better than Dixons, but none the less points to a big slowdown in spending growth. The Bank of England won't be cutting interest rates at the close of the Monetary Policy Committee meeting today, but I'm sticking to my view that the next move is much more likely to be down than up.

Money for old rope

Few chief executives think they get value for money when dealing with investment bankers, but they tolerate the often exorbitant fees none the less, if only because there seems no other way of getting the deal done. Right now, there are very few deals going on at all. The M&A scene has become much like the London housing market. The buyers look forward to a time six months hence when they think prices will be a lot lower than they are now, while the sellers look back six months for their valuation yardsticks to when prices were higher. The gap between what companies are prepared to sell at and what they are prepared to buy at grows larger by the month. Ergo, a hiatus in deal making.

Those investment banks lucky enough still to be in a job, sit around twiddling their thumbs, or dreaming up ever more outrageous fee earning ideas to try to interest their clients. So when there is a deal, or a refinancing, you would expect the commission to have dropped correspondingly. It does in other markets where there is chronic overcapacity, but it doesn't seem to work that way in investment banking. Instead, the effective fee seems to get even larger, as if to compensate for the lack of work elsewhere.

The process is particularly pernicious in any refinancing, where the chief executive often feels the bankers hold him by the short and curlies and he must therefore pay whatever they demand. Take last year's rescue rights issue by Ericsson. The rights were pitched at a 75 per cent discount to the ruling stock market price, so in theory the company could have got away without paying anything other than legal fees for its money.

Instead, a massive 4 per cent underwriting fee was charged by the responsible investment bank, Morgan Stanley. Underwriting is in essence no more than a form of put option, but no put option has ever succeeded in costing as much as the Ericsson rights issue. Ericsson is by no means a unique case. It is now common practice among investment bankers to persuade clients of the need for underwriting, even when the shares are being issued at a deep discount. The more financially stretched the client, the bigger the commission. That's to compensate for the extra "risk", of course, but where's the risk in a deeply discounted equity issue?

In another case, the chief executive of a major plc was told by his bankers that they could ensure he maintained his comparatively favourable credit rating, but only if a costly restructuring were entered into where businesses were sold to related private equity houses with the bankers' own corporate financiers to advise on the disposals. I cannot give you the names involved, because I promised not to. In any case, the suggestion was so riddled with potential for conflict of interest that it hardly bears thinking about.

So don't believe that the fee earning iniquities of the boom died with the bubble. The bankers have merely dreamt up new ways of fleecing the client. Across the broad sweep of professional advice, the major players operate what is in effect a cartel. They all charge the same, and in most cases, the rules of engagement requires that one of their number is routinely put on the pay roll for any transaction of size. Chief executives are finding it increasingly necessary to seek independent advice. If that sounds like even more money for the investment bankers and their backriders, it may be money well spent if it saves the shareholders from constantly having their pockets felt.

Tube Lines

You couldn't make it up. Tube Lines, the private sector consortium chosen for the task of upgrading the Jubilee, Northern and Piccadilly Lines, opted for Southwark tube station for the press conference to celebrate its success in finally signing the contract. The event did not bode well.

Any chance of hearing what was said above the rumbling of the escalators was snuffed out by a faulty public address system. Only 10 chairs were provided for the 50 or more journalists who turned up. Passing commuters could only look on in amazement at what must have seemed like a piece of badly choreographed street theatre. The charitable thing to do would have been to leave a shilling in the hat, only it was too cold to search one's pockets for change.

Not that Tube Lines will need it. Those able to make him out over the din would have heard the chief executive, Terry Morgan, say that return on equity over the first seven and a half years will be £80m higher than anyone had hitherto thought. Ken Livingstone, the London mayor, has not done the public a service with his constant delaying tactics for modernisation of the Tube, but he has successfully demonstrated that the chosen public private partnership route is not good value for money.

On the other hand, it should at least mean that the necessary upgrades get done, which would in all likelihood not have happened had the Tube been forced to take its chances alongside all the other priorities in public spending.

jeremy.warner@independent.co.uk