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Outlook: Kingfisher continues to keep City gravy train well oiled

Duffield/Jupiter; Amey's profit desert

Tuesday 09 July 2002 00:00 BST
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Kingfisher seems finally to have got its Castorama buyout away, but as ever the only certain winners are the advisers. For shareholders, the gains are far less certain.

The title of the 1940s book Where are the Customer's Yachts? or A Good Hard Look at Wall Street is based on a question that came up when JP Morgan was showing a client the marina of the New York Yacht Club. The fact that all the yachts were owned by investment bankers, rather than their customers, tells you all you need to know about Wall Street and the City. It's as true today as it ever was. As it happens, Sir Geoff Mulcahy, chief executive of Kingfisher, is a keen sailor and owns two yachts, but you can be pretty sure he's not nearly as wealthy as many of those advising him, and as for his shareholders, where all the money went never ceases to amaze.

Kingfisher was understandably coy about the total costs of the deal yesterday, but what it was prepared to admit to was that the underwriting for its £2bn rights issue alone would eat up a record breaking £40m. For shares issued at a 50 per cent discount to the ruling stock market price, this seems rich. Alright, so markets are a lot more volatile than they used to be, but for such a bet to go wrong would require the equivalent of four or five World Trade Centre shocks rolled into one.

In the old days, underwriters earned their money for the risk of taking the shares on narrow discounts of anything between 10 and 15 per cent. The main justification for the current vogue of deeply discounted rights was that such issues would not need to be underwritten and would therefore be cost free. Don't laugh.

We haven't yet been told what Goldman Sachs got for its corporate advisory work, or what Castorama's advisers got for kicking up dust, the cost of which will now be met by Kingfisher. But we do know that the complexities of the French legal system required the purchase price to be verified by an investment bank "of the first order". For being that bank Rothschild et Cie received £5m, or £250,000 per day worked. For all this, Kingfisher gets expected annual cost savings of £30m to £45m rising eventually to £55m, and management control over its underperforming French offshoot. And if it doesn't work out as planned? Don't worry. The investment bankers will still be there, only too willing to take their fee in the subsequent break-up.

Duffield/Jupiter

Achtung, Spitfire! At first sight, John Duffield's attempt to buy back his old company, Jupiter Asset Management, from Commerzbank for a fraction of the price he sold it for looks like characteristic mischievousness, more designed to embarrass the beleaguered German bank than actually succeed. Mr Duffield's hatred of Commerzbank is matched only by its determination to have nothing more to do with a man it regards as a bounder, a cad and a menace. The two of them fell out appallingly over the change of control, they are still in litigation with each other, and Mr Duffield has famously described the Commerzbank top brass as a bunch of Nazis.

Unfortunately for Commerzbank, the price of fund management has fallen so low since it first put Jupiter up for sale that the company may be within Mr Duffield's financial reach, even though his latest venture, New Star, is less than two years old. Mr Duffield says he's deadly serious in his offer to pay £50m more than any credible rival, and assuming he can get Jupiter for something south of £350m, he may even have the financial backing to do it. Commerzbank's immediate response is that it would rather sell to the devil himself than to Mr Duffield, but even in Germany fiduciary duty has to count for something and insulted though Commerzbank's top brass might be by Mr Duffield's petulance, they may none the less be forced to consider his offer if it's the best on the table.

For Mr Duffield, it's a great opportunity both to wreak a terrible vengeance on his old enemy and transform his new company. He knows the business, he knows the people, and he knows the clients. It's worth more to him than anyone else, not least because he desperately needs a big acquisition to make New Star shine. New Star has been successful so far in attracting business. But its investment performance is rather less stunning and it is a long way from having the critical mass to support its star-studded cost base. Funds under management amount to just £2bn, against Jupiter's £11bn. If he could get Jupiter on the cheap, Mr Duffield and all those clinging to his coat tails would be home free. That's Mr Duffield, his staff and shareholders, of course. Investors in the Jupiter and New Star funds gain nothing from the pyrotechnics.

In making his late entrance, Mr Duffield is up against his old protégé, Edward Bonham Carter, who is said to have his own management buyout proposal on the table. Alternatively, Commerzbank may end up taking the company off the market altogether. Commerzbank has been unable to interest anyone at the sort of price it first had in mind – £500m – and just one look at the stock market tells you why. The more equity values shrink, the less the company makes in fees.

Aberdeen Asset Management has admittedly got some special problems all of its own right now, but if a company with £35bn under management can be valued by the stock market at just £330m, what price Jupiter? Commerzbank didn't as seriously overpay for Jupiter as say Merrill Lynch did with Mercury Asset Management, but its effective buyin price was expensive none the less. Having bought close to the top, is it really so desperate that it needs to sell at the bottom, or indeed so desperate that it has to sell to a man who publicly refers to its senior executives as Nazis? We'll see.

Amey's profit desert

Amey has a £5bn order book and a slice of the £13bn London Underground sell-off. It also doesn't have two pennies to rub together. Amey is one of those contract-rich but cash-poor companies that perversely loses money the more successful it is in bidding for work.

In the good old days of accounting obfuscation Amey could flatter profits by capitalising its bid costs and taking profits on contracts in the early years even though this is when the risks are highest. In the post-Enron, post- WorldCom era of financial rectitude, Amey is being forced to be both more conservative and more transparent.

The shares have been on the slide ever since the chief executive, Brian Staples, donned the hairshirt in March and promised that Amey would henceforth write off bid costs as it went along and smooth the recognition of profits over a longer period. The new accounting treatment turned what would have been a £56m profit last year into an £18m loss.

The price took a further battering yesterday after Amey warned that delays in signing off on the Tube deal have hit profits in the first half of the year. The London Underground deal is a prime example of the problem Amey faces. The sums involved are humungous, but so are the bid costs (those blasted advisers again) and so far Amey has had lots of expenses but not a penny of income. The plan now is to lose less money by bidding for fewer contracts. Even then it is anyone's guess when Amey starts to make proper profits and generate real cash.

jeremy.warner@independent.co.uk

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