One thing puzzles me about the Serious Fraud Office’s pursuit of BAE Systems,
our biggest defence contractor. If investigators have established a solid
case against the company, then why not simply press charges?
Instead, after a lengthy investigation into allegations of bribery in Europe
and Africa, we had last week’s announcement that the agency “will prepare
its papers to be submitted to the attorney general when the SFO considers it
is ready to proceed”. All I take from that is that the SFO isn’t ready just
yet — so why make such a song and dance?
The answer, of course, is that the SFO is positioning itself for another round
of negotiations with BAE on a settlement. Neither side in their heart of
hearts wants the case to come to court — it would be a lengthy, messy
affair, the SFO could not afford to be defeated for fear of losing all
credibility, and BAE’s reputation would be trashed, no matter what the
outcome.
The obvious solution is a plea bargain, where BAE accepts it has done wrong
and pays a fine. The board, led by chairman Dick Olver, can finally say it
has severed its links with the past, and the SFO can claim a victory.
The devil is in the detail. If the fine is too big — £300m was the amount
suggested to, and rejected by, the company last week — the directors will
lay themselves open to the accusation of misusing shareholder funds.
And the form of words in the plea bargain has to be just right: BAE cannot
plead guilty to bribery but perhaps it could admit to a failure to monitor
its agents and advisers? There is an additional hurdle, too — the settlement
has to please not only the SFO and BAE, but a judge, as it needs to be
approved by a court. A tricky agreement to negotiate but given the stakes on
both sides, one that I suspect will get done.
Banking bottleneck
THE uncomfortable truth about the economy is that a large part of it is now
controlled by the banks. Everywhere you look, the banks — and indirectly the
government through its stakes in Royal Bank of Scotland and Lloyds Banking
Group — own huge swathes of UK industry. Most of the companies are those
that were taken over in the past five years during the credit boom.
From chemical companies to pubs, hotels to manufacturing, the banks are now
left as the custodians of these firms after their former owners have seen
their equity wiped out.
In many cases the debt is now worth less than the amount paid for the company.
It is a crisis that will take years to work its way through the system. In
the meantime, it is creating a bottleneck that will slow down economic
recovery. Instead of selling the assets and companies, the banks are
choosing to swap debt into equity in the hope that the business can be
revived. Why? Because they are not in a position to take a writedown on the
value of their loans.
The banks control billions in commercial property but are refusing to sell for
the reason outlined above. The same is true in the leisure industry and in
private equity. As we report on page one with the article on Gala Coral,
there are hundreds of household names being kept alive simply at the behest
of the banks.
Supermarket sweep
SUBTLE changes have been taking place at Wm Morrison. Paul Manduca, the food
retailer’s senior independent director, has stepped down as chairman of the
audit committee and now heads the remuneration committee. The former fund
manager has the experience needed to tackle one of the group’s priorities —
to lock in Marc Bolland, its chief executive, to a long-term incentive plan.
Bolland, who joined from Heineken, has revived the group since he joined three
years ago. He has done the basics but has to maintain growth — and it will
be Manduca’s job to set the targets and match that challenge with the right
reward. It will require support from Morrison’s big investors, who will know
Bolland is a contender to step into Sir Stuart Rose’s shoes at Marks &
Spencer.
Water feature
SOME would rather watch paint dry than read about the water industry’s
five-year pricing review. That would be a mistake. This review, which is
nearing a conclusion next month, will hit the sector hard if it is not
diluted.
The regulator wants companies to raise capital expenditure and cut prices. It
doesn’t need a degree in advanced economics to work out the implications of
that.
It will undermine investor confidence in the sector and potentially lead to a
wave of rights issues or refinancings. And, for those that are quoted, it
will raise serious questions over their future dividend policy.
Ofwat, the regulator, is now talking to the heads of the big water firms.
Since the draft proposal was raised, share prices have weakened. That should
worry Ofwat. The financial make-up of these companies is not that flexible.
Many have geared their balance sheets to cope with funding a capital
expenditure programme, paying dividends and growing profits. If that model
is altered, it will have consequences — particularly for those companies
that were taken private in deals funded by borrowings. Their debt has
already been downgraded by Moody’s and they will require a financial
injection.
The regulator wants the price of water to fall 0.2% each year. The industry —
not surprisingly — wants to see prices rise. There will always be a
discrepancy but this one is too big to ignore.
That does not mean the sector is without criticism. Leakages are still a
disgrace and droughts highlight the network’s inefficiencies. But in the
round, it is a success and that is partly due to good regulation that has
checked price rises with investment.
Since privatisation the sector has seen the benefits of £80 billion of capital
expenditure to upgrade the system without any cost incurred by the taxpayer.
Compare that with America, which needs $150 billion (£94 billion) spent and
relies on local taxes. The regulator should not ignore the signal that the
debt markets are sending.
Unwanted suitor
THE takeover rumours surrounding Legal & General, the insurer — in
particular the interest of Clive Cowdery’s Resolution consolidation vehicle
— don’t stand up to much scrutiny. We all know why Resolution wants L&G
but there is no reason why L&G would want Resolution.
Any approach would have to be hostile. Even with Cowdery’s record it would be
hard to raise about £7 billion and L&G investors would not want
Resolution’s paper. The rumours have pushed up L&G’s share price
but the market is also waking up to the group’s attractions. Its chief
executive, Tim Breedon, has repositioned L&G to generate cash — setting
a target of £450m a year — not consume it. It has moved out of areas that
eat up capital.
Cowdery is liked by his investors, he has made money for them and that is why
they put up £600m to finance his first deal. Unfortunately, that involved
buying Friends Provident, a company that every rival had looked at and
nobody wanted. That is Cowdery’s problem. With Friends like that he is not
such an attractive proposition.
john.waples@sunday-times.co.uk
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