Rock Rescue Cannot Ignore Investors

THE Bank of England, the Treasury and the Financial Services Authority are about to stumble into another disaster.

In their rush to try to drum up an auction for Northern Rock, they appear to have underestimated one of the biggest obstacles to a rescue – the mortgage bank’s long-suffering shareholders.

The Treasury is desperate to find a solution to get back the £23 billion it is now owed by Northern Rock. But the shareholders are equally keen to see their holdings protected as well.

I suspect that investors accounting for at least 20% of the company are only a few phone calls away from assembling a powerful action group to protect their interests.

They will have just as influential a voice in deciding the fate of the bank as the Treasury and they will want to examine all aspects of any rescue. This will include the terms of any discounted rights issue.

And as our front-page story says, if they are arguing that a sale should be abandoned until markets return to more normal conditions, they should be listened to.

There is a good chance that when the terms of this weekend’s offers emerge the majority of bidders will be working on proposals that price a rescue well under the current share price of 132p, which values the company at £690m.

The shareholders will argue it is absurd to evaluate any offers for a company against the financial backdrop that we have at present. They argue that if a sale is abandoned, the best option is to manage the company out of its difficulties, rather than put it into administration.

We still don’t know what their equity is worth, but I bet they think it is worth more than anyone is prepared to offer, and that in itself is grounds for a very public spat that will drag this sale process into ever deeper chaos.

Taxi moment

A WALL STREET economist I met a few years ago had devised a simple index of his own to calculate the health of the New York economy.

He would stand on a busy Manhattan street and count the number of taxis showing their for hire lights. Too many lights meant a recession was on the way.

We had a taxi moment last week, but it went largely unnoticed. Starbucks said the number of transactions at its stores in America had fallen by 1%, and that it had scaled back plans for store openings. “It is apparent our customers are feeling the impact of the economic slowdown,” said chief executive Jim Donald.

Starbucks’s faltering US sales – and its share price, as shown by the graph – gives a good idea of what is happening with the US economy as a whole. And where America leads, we follow.

The comments made by Stephen Green, chairman of HSBC, to this paper last week should be taken very seriously. He has a perspective of the world economy that is matched by few.

Green said: “I don’t want to sound apocalyptic about this, the real answer is we don’t know, but we are sufficiently concerned and wary of the potential development of the next few months to want to sound a warning note.”

Every banker, chairman and chief executive I spoke to last week echoed those same sentiments, and there is a danger it will become self-fulfilling. They also endorse Green’s other comment that “if you take out the banking sector, you have equities at record highs and this seems to be a curious phenomenon when you are looking at a world economy that is at some risk of slowing down”.

But out of the financial markets’ lending freeze, one new trend is emerging. Equity is the new king, that is to say that big corporates are starting to use their shares to finance deals, rather than cash. We are seeing it with BHP Billiton, but there are more to come.

In the boom days a nil-premium merger was jumped on by private equity. That is no longer the case and this is encouraging a number of companies to look more favourably on share-based deals.

Moore not merrier

PHILIP MOORE woke up last Wednesday in the expectation of having lunch with me and discussing the strategic review Friends Provident is undertaking. But by midday he was out of a job.

Moore, who had previously been finance director at the insurance group, had been hand-picked to take the chief executive role by his predecessor Keith Satchell. But his reign was short-lived.

Soon after taking over he had to retract some aggressive growth targets the firm had set out, and his investors became increasingly disillusioned after the aborted merger deal with Resolution. Moore’s departure serves to underline that narrow divide between success and failure in corporate life.

Whether he was the right man or not, he simply took charge at the wrong time.

Bet on Wallace

DON’T be surprised if Brian Wallace, the finance director at betting giant Ladbrokes, takes over from Chris Bell as chief executive. Wallace did not turn down the opportunity to become chief executive at rival firm William Hill just to remain in his current position.

Wallace has a good working relationship with his chairman, Sir Ian Robinson, and has long harboured ambitons to take the top seat.

For his part, Bell has steered the group out of its demerger from Hilton and onto the stock market. His friends say he may step down within six months.

john.waples@sunday-times.co.uk

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