UNFORTUNATELY for Lord Browne, his final two years at BP — assuming he stays that long — look set to be haunted by a classic species of story: you know that thing you never heard of, well, it’s not happening.
During the wrangle over Lord Browne’s retirement this summer, it emerged that the BP chief executive had explored the idea of one last mega-deal, namely a merger with Royal Dutch Shell. It was never clear whether it was a possibility that Lord Browne diligently explored or simply mulled for the duration of one cigar. Either way, his chairman, Peter Sutherland, was said to have quashed it.
BP is bedevilled by political problems, inside the company and out. But the Shell issue is a diversion. Lord Browne is being wilfully misconstrued in the light of the deal that never was.
Referring to the prospects for industry consolidation, Lord Browne, who runs a business worth £120 billion, said: “Looking at it from 50,000 feet, you’d have to say there’s an awful lot of players dealing with very small pieces of an industry.” This is true — and it has nothing to do with Shell.
BP and Shell look increasingly defined by their differences, rather than how they could complement each other. Shell, which reports its third-quarter results this morning, is investing ever more in the kind of unconventional energy assets such as oilsands in Canada and elephantine engineering projects such as Sakhalin-2 that BP has been shunning. Lord Browne is making a point of spurning the oilsands opportunity, demonstrating BP’s more cautious view of oil prices. (Independent analysts calculate that extracting crude from oilsands is viable only if the price of oil stays above about $35 a barrel. By steering clear of the oilsands, BP is styling itself as the prudent major.)
It is true that a falling oil price could create pressure for consolidation, but the opportunity for BP and Shell will come from snapping up over-ambitious explorers and producers who are banking on long-term prices over $45 to $50 a barrel.
And it is true that BP and Shell are “players dealing with very small pieces” of the industry: the real energy giants are, as they have been for years, the national oil companies (the NOCs), owned and controlled by national governments. Saudi Aramco, for example, has roughly ten times the reserves of Shell and BP combined.
Neither BP nor Shell — nor both combined — will do as much as the NOCs to determine the future of world energy.
Deal or no deal
THE private equity industry looks on course for another record year. A glut of cash, swollen, by debt, has left private equity firms with plenty to play with. But, for all the successes, might 2006 also be remembered for the failures?
KPMG research shows that the value of deals completed in this year’s third quarter was £7.9 billion, up from £5.2 billion in the same quarter of last year. But, in recent weeks, defeat has as often as not been snatched from the jaws of victory.
Yesterday, Northgate Information Solutions, which provides software to police forces and local government, said that the bid talks it revealed only three weeks ago had ended. The private equity bidders had, apparently, balked at the price.
It is an increasingly familiar story. Kevin Lomax was forced to walk away from Misys after the private equity team with which he was working concluded it could not pay above the market price. Morgan Crucible, the engineering group, this week said that talks with an unnamed suitor had been terminated. Pricing, again, was thought to be the sticking point.
There seem to be two misalignments here. One, the seller’s bloated expectation, the other, the buyer’s limited appetite for risk. Curiously often, the prey are pricing themselves out of deals; the predators look too cautious to strike.
Tunnel vision
EUROTUNNEL has been in financial trouble for so much of its 13-year life that some of its unwanted debt has inevitably fallen into the hands of lenders that no solvent borrower would have anything to do with. This complicates negotiations that the now mainly French group is conducting against the latest deadline. Under the French version of Chapter 11, it must strike a restructuring deal by the end of the month. Insolvency would trigger the tunnel operating licence reverting to the UK and French governments.
Talks may go to the brink but, to the surprise of some sceptics, Eurotunnel boss Jacques Gounon could bring it off. Many holders of bonds and Tier 3 debt, which are most affected, back variations of the plan he came up with in May, which would leave shareholders with an eighth of the equity and cut debt to £2.9 billion.
Having got so far, shareholders should resist if vulture funds exploit the deadline to win themselves special terms that make a fast turn on the depressed prices they paid. No-one who financed this project has made a bean out of it, so why should parasitic traders? The Court does not have to pull the plug if a few block the refinancing.
- The King is dead. Kurt Cobain has surpassed Elvis Presley, becoming the top-earning celebrity beyond the grave. The Nirvana singer killed himself 12 years ago and made $50 million last year, according to Forbes. That put him ahead of the man perennially at the top of the hereafter rich list, Elvis. (Albert Einstein made $20 million, chiefly in the computer games business.) Cobain has moved up the charts thanks to his widow, Courtney Love, who sold 25 per cent of the song catalogue last year. Boy, she is living.
