The Northern Rock fiasco last week moved into another chapter as the Virgin consortium became a “preferred bidder” - which has remained a suitably vague qualification.
Whilst it has shortcomings, it is at the very least a proposal on the table and has at any rate probably flushed out any other potential bidders (and in all likelihood forced others out of contention). The key difference which probably made the Branson bid stand out for the politicians and the Treasury was that most sensitive of issues - jobs in the North East. Anyone who can make at least some reassuring noises on some form of security is bound to be welcomed. Add to that the chance of being able to swiftly change the brand, and I suspect many in Whitehall would be very grateful to consign the blackened name of Northern Rock to the dustbin of political embarrassments.
There were obviously bleats from certain shareholder groups and I certainly feel for innocent smaller shareholders who probably have little understanding of their obligations and risks.
I have, however, little interest in those more sophisticated hedge managers who probably invested on a short term basis and now expect a greater level of reward for their failing investments. Why the shares haven’t been suspended for some months now seems astonishing to me. For a company with a capitalisation at the beginning of last week of £361 million, I feel that their rights stand for little against our tax payers’ rights for having contributed over £24 billion. If you invest in risk capital, you take the risk.
In fact the potential rights issue at 25 pence might be quite attractive for those shareholders willing to take a five year view.
What I would like to see implemented though, is a valid point made by certain shareholders and it is that the Treasury should have a mechanism for benefitting from any recovery in the value of the assets that very likely could take place. What I don’t want to see is merely the opportunity for Sir Richard Branson to pick up assets cheaply on the back of a very large public loan.
So this is an encouraging start in my view but it needs some finessing to address the issues of a fair share in the upside value and a greater clarity of the repayment of the total sum lent (including interest).
However, there is another pressing issue - how can we ensure that there is not a repetition of this farce? It comes back to the question of the obvious failure in the “tri-partite” agreement (by the way has anyone seen a copy?) and possibly a return to the tried and tested (although by no means perfect) route of banking regulation, under the Bank of England, managed in a more discreet and professional manner. How dare we find ourselves with our most valuable, and profitable industry, not only washing our dirty laundry in public, but in fact publicising our financial hygiene issues on a global basis? The Governor of the Bank of England has called for an early review and consideration – and I think he is absolutely right.
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Interest rates are on the agenda for this week and although there has been pressure for an early cut, concerns regarding inflation may prevent the MPC from cutting base rates this side of Christmas. Inflation though has to be a key issue especially if Sterling weakens further against other currencies. Perhaps a judicious cut in January might thus be in order – but what price defending the inflationary pressures against a weakening economy – a judgement of Solomon (a.k.a. Mervyn)?
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Rio Tinto’s battle with BHP Billiton is heating up, with a forthright defence from Rio – but maybe the key will be with the growing issue of the recycling of assets back from the Middle East and China, as perfectly illustrated by last week’s Abu Dhabi Investment Authority £3.6 billion investment into Citibank.
Maybe then a strategic investment by the Chinese, who are most concerned about the combined power of the two mining companies over iron ore production, could be the deciding feature as to which way this goes and Rio fends off BHP’s unwanted attentions.
The theme of the recycling or reinvestment of surplus assets from Asia, the Middle East and Russia will, I suspect, become a key issue for 2008, and quite likely be crucial for investment confidence in a slow global economy.
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And finally….a retail outlet in Derbyshire troubled with a spate of shoplifting has recently installed a life sized cardboard cut-out of a police officer as a suitable deterrent. It has been stolen.
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management