Orange refused Swiss merger

Swiss competition regulators have refused permission for Orange, the smallest of three operators in Switzerland, to merge with Sunrise, the Danish-owned second largest operator, on the grounds that the proposal would undermine market dynamics and damage consumer interests.

The merged entity, for which proposals had been developed last November, would have had a market share of 38%, compared to the 62% held by Swisscom, the former monopoly operator. However, the view of the Swiss authorities was that the merged operator: ‘would have been in a collective dominant position which risked eliminating effective competition.’ Uppermost in the authorities’ mind was that it would be more advantageous in a two-company market for both to collude over pricing levels.

An appeal, which must be lodged within 30 days, is thought likely [registration required; limited viewing time]. In the meantime, a knock-on effect of the decision has been to delay a planned flotation of TDC [registration required; limited viewing time], the Danish parent of Sunrise, which is currently owned by a consortium of five well-known private equity groups (Blackstone Group; Permira; Kohlberg, Kravis, Roberts & Co; Providence; and Apax Partners). Part of the Swiss merger would have meant France Telecom, Orange’s parent, handing over €1.5bn in cash to TDC in return for a 75% share in the merged operation – without which, on the face of it, the private equity groups concerned have been unable to realise sufficient gains prior to their exit from the Danish market.

Clearly, the Swiss mobile communications market is different to the UK one and Switzerland is outside the EU, so it’s not particularly interesting to examine the reasons for the approval of a merger in one market compared to a decision to reject a merger creating a still-small entity in another. At the same time, however, and taking these two recent situations together, it is interesting that the rationale for merger approval or rejection in neo-liberal societies seems, on the face of it, not to be so much the desire to create, or achieve, conditions of high competition but to minimise the point at which there is a potential for pricing collusion.

It’s also an interesting reflection on the role of private equity groups, and their ability to extract high rewards from relatively quiet situations (the Swiss mobile market is 9m consumers) – as well as a comment on  the involvement of private equity groups in telecoms companies. If the €1.5bn was as crucial as that to their exit from the Danish market, and sufficient to postpone it when its arrival has been blocked, then it is likely that the efficiency gains sparking their involvement in TDC have not been sufficient to make their involvement in Denmark worthwhile. At least – not yet; which may in turn spark a note of further warning to Danish trade union colleagues.

It would have been even more interesting had Deutsche Telekom, in which Blackstone has a stake, had been involved in the Swiss market.

Well that worked, didn’t it?

A belated reaction to last Friday’s decision by Alliance Boots to close its two final salary pension schemes to future accrual.

The company insists that the decision has not been made on cost grounds, but there appear to be two rationales drawn from the company’s own reported words:

1. protect the business from the effects of pension funding volatility

2. ensure the long-term sustainability of the group’s UK retirement savings schemes (which of course encompass DC provision as well as the DB schemes being closed).

With regard to (1), Boots was the first major company to opt to switch its pension fund assets entirely into bonds rather than equities – a move it undertook around ten years ago (for some techie background, see here for article by John Ralfe, written while he was Boots’s head of corporate finance and a member of its trustee investment committee). Bonds are low growth vehicles but which don’t jeopardise capital assets, and such a move was touted at the time as a solution which would lock equities-driven asset values into the asset bases of mature schemes.

Only, it doesn’t seem to have worked. One likely reason for this is the increasing growth in longevity in retirement – which, to compensate for without recourse to the scheme sponsor, is likely to require pension funds being invested in assets that are, well, a little more exciting. Indeed, The Times reports that the Boots schemes has previously switched back at least a portion of its assets into equities and property since the date of the last assessment of the scheme’s health (March 2009). Reading between the lines of the story in The Times, I’m wondering whether, despite having been in surplus last year, the forthcoming formal valuation is likely to show a deficit in the schemes, perhaps driven by a combination of increasing longevity and the impact of the Bank of England’s quantitative easing programme in lowering bond yields (and thus inflating scheme liabilities). Certainly, the purchase of equity-based assets within the last year is likely to have been a policy which, currently, will show strong returns. If there is such a deficit, it will require a recovery plan to be put in place, entailing higher expenditure from the company. This would certainly explain the rationale of ‘protecting the business from the effects of pension funding volatility’ – a somewhat differently-faceted explanation than one based on cost alone.

This is also a timely reminder in the context of Ofcom’s Pensions Review that schemes need to invest in a range of investment vehicles appropriate to their membership profile, not to concentrate in one or other type of vehicle. A mix of assets is likely to remain the most sensible investment strategy. Again, of course, it also amounts to a plea for a long-term perspective on pension fund investments- one to which, however, the private equity owners of Alliance Boots may not necessarily be sympathetic.

As regards the second explanation, the Times’s revelation that 70% of Boots employees are not members of any schemes (the DC schemes have around 5,500 members, compared to around 15,000 in the closing DB ones, out of a total UK workforce of around 75,000), in conjunction with its own reference earlier in the article to the 2012 reforms, tells its own story. Given these extremely low participation rates, auto enrolment will indeed present its own challenges as regards the total sums invested in providing employee pensions, even on the basis of use of the National Employment Savings Trust scheme, still less on the presumption of the continuation of Alliance Boots’s scheme which is likely to operate on the basis of a higher employer contribution rate than that which will fund NEST, at least in the first instance.

If the issue is one of the effects of the quantitative easing programme in inflating scheme liabilities, then today’s call by the NAPF for the issue of more long-dated and index-linked gilts is timely as regards the continued survival of other DB schemes. It’s a call that the NAPF has made before, and it remains a supportable one.

Finally, it also remains true that the best protectors of members’ interests in pension schemes continue to be a cadre of well-trained, independent and vocal member-nominated trustees firmly backed by trade union organisation. Schemes with such an independent presence on the trustee boards are likely not only to be well-run but also more accountable in terms of the decisions they make. That’s a lesson which all too often is only learned when it’s too late.

National Express receives private equity bid

CVC, a private equity group, has confirmed, according to The Guardian amongst other sources, that it is the bidder for National Express. The share price of the transport group has been rising all week owing to speculation as to the identity of what has been up to now a mystery bidder.

CVC is reported to be working in conjunction with the Cosmen family, which is National Express’s biggest shareholder at 19%, on an all-cash bid for National Express, following just hours after First Group, another transport operator, confirmed it would not be bidding further.

Corporate takeover activities are not usually the interest of this blog – but it is a rather slow news day for one thing and, more importantly for another, my interest here was piqued since National Express, which runs the East Coast railway franchise to which I give rather too much of my disposable cash, chose earlier this month to hand the franchise back to the government on the basis, essentially, that it had overpaid for it in the first place and could not afford the profitability payments the government was demanding (and refusing to re-negotiate). National Express is still handling the franchise, with the return of it to the government expected at the end of the year.

It appears that Lord Adonis, Transport Secretary, has a role to play here as the government must sanction any bids for any of the franchises, taking into account not least the new owner’s ‘plans to honour franchise obligations,’ including any proposals in respect of its long-term future. So, this is likely to involve the government in sanctioning (or not) the private equity takeover of the east coast main line franchise (even if only for six months). Now, presuming a CVC takeover of National Express does indeed result from its ‘indicative proposal’, this is interesting.

1. It means that a private equity firm will gain a role, at least temporarily, in running a part of the UK’s railways. Aside of the reaction of the rail unions (there is not yet anything on the RMT website about that), there is a debate to be had about whether a private equity firm should be involved in running a public service (although in reality that’s largely a pass that’s been sold long ago).

2. The plans of the new owners for the franchise are evidently not yet known. It may be that they will carry on with it, having either identified contract savings that National Express has not – and here see the aside in point 1 – or else on the grounds that they think they will be able to persuade Lord Adonis to carry out the re-negotiations that he has so far failed to do. It is likely that CVC is able to pay for top quality legal advice so, if this is the case, it is to be hoped that the contracts are good ones. If so, there is some amusement to be had in a private equity firm having to return cash to the government on the basis of the existing contracts.

3. If they choose instead to carry on with the return of the franchise – then, who made that decision? This is, clearly, the more likely scenario than CVC choosing to carry on with the franchise. The return of the franchise may well have precipitated the bid – but, given that partners of CVC are already the biggest shareholders in the company, it is perfectly possible that the return of the franchise was essentially a (private) condition of the bid being made. It is also likely that CVC has already had a good look at all the contracts (bearing in mind that Adonis also wants National Express to return its other franchises too, rather than cherry pick between the franchises it owns). Both look more than a little dubious. (Did someone say insider trading?)

If this is indeed the case, and the franchise has been returned as a part of the condition of the bid being made, how can Lord Adonis now sanction the CVC bid given the need in such circumstances to examine the new owner’s long-term plans for the franchise and especially given that the new owners clearly had no intention of abiding by the obligations of the franchise?

Proving that may, of course, be somewhat difficult…

Speculation over future of T-Mobile

The Sunday papers have been speculating over the future of T-Mobile; this time, it is Orange that is suggested as having made a bid – rejected – for T-Mobile at some indeterminate point over the last few months. No attribution of sources was given to the speculation.

The speculation is given added weight – or perhaps it is the reason why it has appeared this weekend – since it coincides with the arrival at the company of Richard Moat, a new chief executive for T-Mobile. Moat is a former head of Orange in Romania and the City expects him to launch a re-structuring programme to restore the company’s fortunes. Private equity bidders also represent a spectre at the feast not least in the image of Blackstone Partners, which has a sizable stake in T-Mobile’s parent, Deutsche Telekom, which recently wrote the value of the UK business down to £3.3bn.

The Observer reports that Deutsche Telekom, which has previously sought to maintain a corporate line independent of the influence of Blackstone, is to give Moat a ‘medium-term’ opportunity to turn things around.

The position of T-Mobile (and Orange) employees in all this appears nowhere to be seen. Connect stands by its members in T-Mobile in refuting speculation about the future of their company which ignores their prospects and their contributions.

BT full-year results

BT’s preliminary full-year results announcement this morning identified some pretty poor headline figures. The company was itself damning in its assessment, referring to the ‘unacceptable’ performance in Global Services not once, but twice. And the share price was down too, giving it a market capitalisation of just £7.3bn.

And yet, and yet… This is not a company in such bad underlying shape: total turnover, in the midst of a recession (telecoms revenues have always been something of a bellwether for the state of the economy), revenues in the full year rose by 3%; even in the last quarter (January-March) they rose by 1% (although it should be noted that the company is expecting a pretty sizeable decline here, in the order of 4-5% in 2009-10). Outside Global Services, earnings rose by 4%, driven by cost reductions of 9% – towards which figure Connect members have striven very hard, paying either with their jobs or else with harder and harder workloads arising from those left having to cover for colleagues who have left the company. Even including GS in the figures, operating profit before the charges made in respect of contract reviews totalled £2.7bn on turnover of £21.4bn – a margin of some 12.4%. Attention is heavily focused on this being lower than in 2007-08 (when the equivalent margin was 14.6%) – but this detracts from a consideration that this level of profitability, and the level of margin it represents, is still a very healthy figure even if below the company’s long-term target.

And, ultimately, the company was able to take the hit from its £1.3bn impairment charges in contract and financial reviews in Global Services (plus a further £280m in restructuring charges) in one go – and still end up making only a small loss.

Not a great set of results, for sure – but neither is it a company facing imminent demise, as Robert Peston, BBC Business Editor, also agrees. The company’s established businesses are generating cash and signing up new customers. Nevertheless, its plunging share price (down 60% in the last year) does make it look very cheap and, in these circumstances, perhaps it is particularly good news for BT and its workforce that the economic climate has put private equity companies – at least temporarily – into hiding.