RJH writes...

The reason no one drops $2 billion into a new refinery to increase the supply of car/airplane fuel is that it is not profitable. It makes more sense to make investment in exploration and production rather than pay a fortune for a doubtful return within the environmental mine field that is refining. That is why the last US refinery was built in 1976.

Yet Sir Richard Branson (pictured below) sees a profitable way through this financial conundrum. He is pushing for talks with the UK finance minister, Gordon Brown, about constructing a new refinery. After all, as Sir Richard says, "The big oil companies are making extortionate profits out of the current oil price" and consumers are crying out for a Samaritan. Or, Gordon, two.

The idea is bound to have at its centre Other People's Money (otherwise why speak to the government). Conveniently, that is what Chancellor Brown controls - the people in this case being UK taxpayers. The Debonair Fox may have spotted a chance for Mr Brown to again taxeth away from many and giveth to another. Another like, say, the Virgin Team. And, who knows, Mr Brown may well be able to create a few more public sector jobs for the project while he's at it.

One day, eventually, the right hand and the left hand will communicate. In the meantime, be on the look out for another outbreak of Millennium Dome Syndrome.

Asked for comment on the topic, well-known power-boater, ballonist, aircraft proprietor and altruist Basil Brush (also pictured below, bearing an uncanny resemblance to Sir Richard) said:

"Boom! Boom! Marvelous idea! I'll definitely be keeping the Land Rover on the road!"

[Editor: Cynicism is a terrible thing]

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RJH writes...

At mega-investment Coats (30% of GPG's non-cash assets), there has been no decent top-line growth; and an expensive drawn-out reorganisation continues. The opportunity cost of holding GPG shares in 2005 versus a simple FTSE100 index tracker has been 3 percentage points. And, based on Coats' Chairman Dr Weiss' own outlook for his baby there is little reason to expect its parent to outperform until the end of next year. Maybe.

Released this morning, Guinness Peat Group plc's (GPG) results give pause for thought...and doubt.

GPG's acquisition of Coats (background here and here and here) has been its main point of interest. Yet Coats' result is not as rosy as the prose to the latest interims suggests.

Perhaps this scribe's expectations for Coats sales growth post-Multi Fibre Agreement (MFA) were unrealistic. Yet it is still a shock that turnover (like-for-like) is only up 2% - a deterioration from the itself ordinary 3% rise reported for the first 3 months of 2005 and less, even, than the '04 interim increase.

Further, it astonishes that Chairman Weiss ventures nothing about the impact of the abolition of the MFA, the new quasi-quotas on China or the shift of textile producers' output to India. There is not, in fact, a single sentence that helps shareholders understand the dynamics of the new MFA-free world and its impact on the company.

In the full year 2004 accounts for Coats, Dr Weiss said (scribe's highlight in red):

Prospects: 2005 will be another year of reorganisation and consolidation, the full benefits of which are expected to be reflected in 2006 and beyond. Investment in new plant and reorganisation spend in 2005 is expected to remain at a similar level to 2004. As in 2004, disposal of surplus assets should largely compensate in terms of cash flow. This spend should start to reduce from 2006. Given the nature of the textiles and clothing industry, there will inevitably be an ongoing requirement for further adjustments in capacity at specific locations but the associated cost of transfer is expected to be significantly lower than in recent years.
Today Dr Weiss says:
Outlook: The trading outlook is not without its challenges. Where possible, it is intended that the remaining restructuring of capacity will be accelerated, principally in Europe. Restructuring cost is therefore expected to continue at relatively high levels until end 2006. However disposal of surplus property will continue to provide a significant offset.
To this shareholder that indicates an admission that Coats was in more of an organisational mess than GPG anticipated; that the expected return on investment has slipped out in time; and that the board has not yet found the recipe for meaningful sales growth - or that the post-MFA environment is simply not conducive to this.

A final point. It is noticeable that Coats has increased debtors and decreased creditors at the same time. As your correspondent's writing partner commented, for a company (GPG) that prides itself on cash management that is a concern. Managing a multinational in a raft of new economies, each with their own regulations, must not be as easy as perhaps they thought.

NB: The writer held GPG shares at the time of writing

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MD writes...

It is astonishing how shamelessly arrogant, greedy and frankly dangerous movers and shakers of the investment community have become. Non-bids are all the rage now: the latest is Gerry Robinson and his bid vehicle Raphoe's non-bid for Rentokill Initial.

The core message of Mr Robinson is, essentially, "Put me in charge for £50m or so (plus a salary) and I'll give you back your own money." Ah, yes - without saying how. Answer: by borrowing and issuing new shares - for Gerry.

Eh? Mr Robinson's record doesn't bear scrutiny: he doesn't grow businesses. Witness Granada and Allied Domecq, the latter a particularly good company, sold for a song earlier this year.

It emerged at the weekend that Franklin Templeton hold 15% or so of the shares and are nursing significant losses, yet support Robinson's strategy. Strategy? What strategy? Please, tell shareholders what you'll do differently. Clearly a reporting / measurement period must be drawing nigh for Franklin who will be compelled to declare a poor performance. Hasn't anyone told them that shares can go down as well as up?

Rightly, the incumbent Rentokill Initial management have told Robinson to get on his bike. Keep the faith, guys, and demolish his bid. When, or if, it arrives. The Take Over Panel [read: a tool of the investment banks] should start the clock and tell him to put up or shut up.

Meanwhile, the FSA [read: apparently looking after our interests] must step in and stop one set of self-interested investors getting privileged inside information on the books of Rentokil (and many other companies, it may be said) at everyone else's expense.

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Investment Professionals

Tuesday, September 13, 2005 | 0 comments »

MD writes...

It has long been the case that most successful investment professionals have either been lucky, at no risk to themselves with other people's money, or in possession of information the rest of us don't have. A very select few have the skill, the investment nous (as well as the understanding that cash is ultimately king) and the luck of Messrs Munger and Buffet of Berkshire Hathaway.

So no surprises then to find that some of the biggest losers in the PartyGaming fiasco (apart from the Dresdner Kleinwort Wasserstein reputation) are the investment professionals. M&G's words, not mine; and they've surely lost a packet of your and my money.

Sadly, PartyGaming still seem a fair bet (geddit?) to join the FTSE 100 this month. Tracker funds will be obliged to join this nonsense; and this scribe foresees plenty of miss-selling cases in the future.

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RJH writes...

Commonplace are media articles covering emerging market virility, particularly that of the regional grouping once known as the Asian Tigers. From the inevitability of Chinese global superpower domination within 20 years to compulsory instruction in chopstick wielding in a soon to be established re-education camp near you, emerging market publicists have outdone themselves.

But consider this table:

GDP & Related country data (right click and Open in New Window)

1). Sinophobia surely is misplaced. China's absolute GDP is middling in the global scheme of things; and, frankly, the frequently cited Purchasing Power Parity of GDP flatters to deceive. PPP is helpful as a guide to long term exchange rates; it gives a clue (and not much more) to living standards; but as an indicator of global economic power it is misleading.

2). Unless one has specialist or expert knowledge, the UN Development Programme's Human Development Index is a helpful risk proxy for the chance of individual investments in emerging markets going pear-shaped due to, say, political upheaval in one form or another. The average emerging nation ranking in the table of 96 out of 177 is barely a start to the pursuit of happiness, a bumpy road.

3). A scan of the GDP/capita data (either version) reveals emerging market nations (Korea excepted) as cheap labour producer-economies highly dependent on consumer behaviour in more diversified and rich economies. Investing in them is most accurately a bet on OECD-type consumers continuing to buy there in heroic amounts - for it is certain their own consumption is bulimic.

4). With many emerging economies locked in an unenviable internecine production battle without the safety net of meaningful domestic consumption, can 644 million wealthy consumers really lift 2,890 million poor emerging market producers (or even 1,288 million) out of poverty in this century?

5). Emerging markets' aggregate GDP is probably not as large as you thought.

6). Diversified developed markets may not be low-cost producers, but they have the widest and most stable spectrum of investment possibilities.

7). Investors might usefully find a place for Korea in their portfolio - it is surely the pick of the emerging market crop for investments in growing, non-tradable consumer companies.

NB: [Editor: Many emerging markets, particularly China and much of southeast Asia, are energy inefficient. $70/barrel crude oil makes their undiversified economies that much more vulnerable to crisis/downturn.]

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Made in France

Friday, September 02, 2005 | 0 comments »

MD writes...

Three cheers to the French for clearly stating what many (outside the City, that is) believe: it is important to build champions and protect the national interest.

François Loos the Industry Minister (HMG take note – Industry Minister) articulated this earlier in the week by pointing out that business should be "shielded" from foreign take-over bids [Editor: though how "strategic" yogurt making is - see postscript below - might be, ah, questioned]. Even better, this hit the press when one of Britain's few remaining world leaders (BPP) was on the unwanted receiving end of a bid from French Champion Saint-Gobain. Couldn't have planned it better.

Vive la France!

PS: When, last month, Groupe Suez (French in case you hadn't guessed) announced it was taking over the 49% minority of Belgium's Eltrabel (the profitable and cash generative part of the business) a Belgian wag retorted that electricity was rather more strategic than Danone (the French food group recently "protected" from PepsiCo).

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MD writes...

To no great surprise Cadbury Schweppes announced today (1 September 2005) that they were selling - oops, sorry slip of the tongue - seeing if anyone was interested in buying their European beverages arm. The question I ask myself is, "why"? Say it louder chaps - "WHY?" By their own figures the business represents 10% of group revenue and 11% of group profits at an operating level (and enjoys better margins than the rest of the business). Well done chaps! Showing all the signs of a fee-driven City deal here.

Justifying the deal the company spouted wonderful double speak:

"The overriding goal is to deliver superior shareholder returns."

Fell at the first hurdle then, and:

"This is supported by two commercial goals which are to profitably and significantly increase global confectionery share and profitably secure and grow regional beverages' share."
And fell again at the second. Where is the "securing of regional beverages' share" in this deal?

Overall, Group operating margins were 14.4% at the half year 2005. The sale of a business with margins of 18% hinders Cadbury's efforts to improve on this. Nor will the deal do anything to maintain their position as the world number 3 carbonated soft drinks group: £650m of revenue does not grow on trees.

Bizarrely, up until last year Cadbury Schweppes were intent on growing this business. In 2001 they part-acquired Orangina; and in 2004 they acquired the balance of the business. So why the change of heart? Is the answer related to return on assets? Well, the business matched the group in 2004 (11.4% vs. 11.5%) so no.

In conclusion, a very bad deal which gives up strong margins and market share in key markets; and which loses all the upside of the new opportunities in the UK and elsewhere for Orangina (now they can market it in the UK).

But doubtless the future has been superbly conceived in some advising merchant bankers medium term plans: sell the worldwide beverages thus setting-up the rump up for sale to Nestle, Hershey or some such group.

PS: Note to City Editors - none of the above was hard to find or produce from Company supplied information. Please, get your acts together and start doing analysis and decent commentary rather than believing all the financial PR guff.

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