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Outlook: Osmond blasts Six Continents, but will City pay his price?

BT stranded  

Jeremy Warner
Friday 21 February 2003 01:00 GMT
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The charge sheet reads as follows; Sir Ian Prosser, chairman of Six Continents, you have bought expensively and sold cheaply, you've invested billions in your company for very little return, you've hugely overpaid for your financing and, if all that wasn't bad enough, you've been a rotten manager as well. It would be hard to imagine a more devastating attack on one of Britain's longest serving business leaders than the one launched yesterday by Hugh Osmond on Sir Ian.

The only precedent I can think of was when Jimmy Gulliver's Argyll accompanied its bid for Distillers in late 1985 with a personalised demolition of the Distillers management so brutal in its analysis that the company never really recovered from the force of that first punch. Having been floored, it was unable to pick itself up off the canvass, and instead was left feebly looking around for a white knight to stretcher it out of the ring.

John Connell, the chairman, later told me that he couldn't believe civilised business people capable of being so rude about each other in public. A fundamentally decent man, Mr Connell was way out of his depth as chairman of such a large business, and, with his self confidence shot to pieces, he retreated into himself, leaving it to others publicly to front the scotch whisky goliath's last few miserable months as an independent company.

Sir Ian is made of rather tougher stuff and yesterday he came out fighting. But it wasn't much of a defence and, perhaps significantly, it wasn't Sir Ian who was fielding calls yesterday on how the group plans to fight off the young upstart's unwanted attentions. Capital Management and Investments (CMI) has no experience of running hotels, says Six Continents, and hold on there a moment, we've outperformed the FTSE 100 on a one, two, three, five and ten year perspective. What's more, anything Mr Osmond can do in bringing the private equity techniques of "secured real estate financing" to the hotel and pub chains, we can do just as well.

The big question, however, is why if they think securitisation appropriate they haven't already applied it. As for outperformance of the FTSE 100, it would indeed be a story if Six Continents hadn't, given the defensive, asset-rich nature of much of its business. In itself this is not a credible defence, and Sir Ian is going to have to do a whole lot better than that to beat Mr Osmond off.

Like so many once accomplished executives, Sir Ian's big mistake as head of Six Continents was to outstay his welcome. He should have moved on ages ago, perhaps on completion of the breweries disposal, but he hung on in there only to see his reputation progressively challenged and trashed. Sir Ian had to be forced into the demerger Six Continents is now expensively trying to push through, while the appointment of his finance director, Richard North, to head up the hotels was a final act of stupidity that may well cost Six Continents its independence.

If it wasn't already too late, I'd suggest as a way out the Captain Oates defence, under which Sir Ian and possibly Mr North too would wander off into the snow in an attempt to rebuild confidence and save the rest. You don't have to think about it for more than a few seconds to realise it wouldn't do any good. Self sacrifice would be only a parting admission of failure.

We haven't yet seen Mr Osmond's bid and, until we do, it would be wrong to write off Six Continents completely. What he's planning is essentially a management buy-in, which means he's got to produce powerful evidence that he'll make a better fist of things than the present lot. You might not think that difficult but, even so, shareholders will be asked to take a lot on trust.

This is not a private equity takeover that is being proposed, where shareholders take the cash and run leaving others to make of the business what they will. Philip Green and KKR with their proposed bids for Safeway have demonstrated that it remains possible to find the finance for very substantial private equity transactions, but the £6bn plus it would cost to take out Six Continents would be a tall order even for them and it is not clear Mr Osmond could lay his hands on such huge sums of cash.

Instead, Mr Osmond plans to bid through his publicly quoted cash shell, CMI, in a mixture of shares and cash. For those who don't want any paper, there will be a full cash alternative, but Mr Osmond will have to rely on most shareholders wanting to take shares so as to benefit from all the value he hopes to unlock through more switched on management and financing.

Mr Osmond says the objective is that Six Continents shareholders participate "fully" in the upside, but that's not quite true. Mr Osmond is not so altruistic that he would work solely for the beneficiaries of Six Continents' institutional shareholders. If he was, they would have been able to hire him years ago and Six Continents wouldn't be in the mess it is today, with the likes of Mr Osmond circling the dying beast.

No, Mr Osmond wants a big share of the upside for himself and the other principals. Mr Osmond won't say how this is going to be achieved. His 6 per cent stake in CMI will be diluted out of existence by the bid, so he won't get it that way. The most likely path would be through his private equity vehicle, Sun Capital Partners, which under the terms of the offer might be given a slug of the equity – gratis, as it were.

The two key questions are quite how much of the upside the principals intend to take at what point investors in Six Continents say it's too much. No one doubts Mr Osmond's midas touch, but what percentage of the spoils are shareholders willing to give up to see him perform his magic?

Mr Osmond is proposing to bring the alchemy of private equity to the publicly listed sector, which is exactly what investors have been crying out for, but it comes at a price, and the sort of money Mr Osmond plans to make out of this once in a lifetime corporate land grab will make those rows about "fat cat" excess in publicly quoted companies look like a vicar's tea party by comparison.

The battle for Six Continents is likely to prove a big testing ground for the City and the conflicting interests that make it up.

BT stranded

British Telecom has failed to live up to the early promise of its demerger 18 months ago. On the face of it, BT has been through a total transformation. A rescue rights issue was launched, the old guard was cleared out and a new chairman and chief executive brought in, the mobile interests were split from the main fixed-line business and BT has belatedly grasped the opportunity of broadband.

Unfortunately, the effect on the share price has been precisely zero. It continues to languish close to all time lows, while the newish chief executive, Ben Verwaayen, seems to have gone down in the City like a lead balloon. Already he's been forced to abandon his revenue growth targets, and as for the company's explanation of the way it accounts for its pension fund deficit, my 11-year-old daughter could have done better.

There's growing unhappiness, with one leading shareholder telling me bluntly, "we seem to have swapped one lot of plonkers for another". In truth, there's still plenty of goodwill left in the City towards Sir Christopher Bland, the chairman, but the honeymoon period was over ages ago and there is already a groundswell of questions about his leadership which he would do well to nip in the bud before it gets out of hand.

I've long believed that BT's best way forward is to split the retail business from the backbone network, which would then be run entirely as a wholesale operation – another demerger in other words. But one of the first things Mr Verwaayen did when he came in was to rule this out. Sir Christopher should be revisiting the idea, or someone else might end up doing it for him.

jeremy.warner@independent.co.uk

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