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The Observer: Treasury cashes in on the UK's financial jiggery-pokery

Frank Kane
Sunday January 29, 2006
The front-page headline in the Financial Times last week was good news indeed. 'UK tops inward investment league,' it declared, going on to explain that Britain had attracted more cash than any other country in 2005. Hawk-eyed foreign investors had spotted the opportunities of the keenly competitive and efficient UK economy, and poured their money in – some $219bn of it. America, at $106bn, and China, with a meagre $60bn inward investment, were also-rans.
A great triumph for Gordon Brown's economic master-plan then, and so it was trumpeted. Des Browne, the Treasury Chief Secretary, said: 'Once again, we have shown that – even in the most difficult of years – the British economy remains resilient and competitive.' It was the highest figure recorded for a European country, and all the more impressive because the figures came from the United Nations Conference on Trade and Development – about as impartial and global as you could get.
But just read Unctad's small print: 'However, the increase was largely accounted for by the merger of Shell Transport and Trading with Royal Dutch Petroleum for some $100bn.' The rest of the increase was due to the high level of mergers and acquisitions business in Britain and the rest of the developed world, which totalled $2.9 trillion.
So rather than demonstrating Britain's resilience and competitiveness, the Unctad figures actually show how good we've all got at financial engineering, in particular a huge accounting item from a bit of Anglo-Dutch jiggery-pokery.
In fact, as the FT reported later in the piece, the level of total investment in the economy last year as a share of national income was the lowest on record.
What we are actually getting very good at is selling off the family silver in ever-increasing quantities, and smoke-and-mirrors financial accounting. I wonder if Browne is proud of that.
Parker shows how it should be done at P&O
If Browne, or Brown for that matter, wants to know about real inward investment, and value creation, he should study what has happened at P&O over recent weeks. This is most decidedly not a case of the family silver going abroad – most of the assets and employees are overseas anyway, and the company has long been a global player, beneath an ever-thinning veneer of British imperial tradition. It seems entirely appropriate in the 21st century that P&O's worldwide assets should be in the ownership of one of the great trading international centres, like Dubai or Singapore.
And if you are going to sell premium assets, you must demand a premium price, and there is no better man for the job than Sir John Parker. He has orchestrated the auction currently under way between DP World of Dubai and PSA of Singapore (owned by trading conglomerate Temasek) with all the finesse of a maestro. Last Thursday, when Dubai came back to top a recommended £3.5bn bid by Singapore, with a quickly recommended £3.9bn cash offer of its own, it was as good an example of value-creation as you could find.
Parker has successfully exploited the rarity value in P&O – there are no other international ports groups available. He admits that the current price, at 38 times earnings, is 'out of normal valuation territory'. It is a persuasive offer, but not just for shareholders – it becomes compelling when P&O pensioners are taken into account. Dubai has undertaken to put £125m into the estimated £200m pensions deficit now and make up the rest over five years. (Compare this with the meagre, but government-sponsored pensions element of the scandalous Qinetiq flotation.) The question Parker must now ponder is: can he do even better? Can he persuade the Singaporeans to come back with a higher offer, lifting the value of P&O well over the £4bn mark.
The PSA executives who flew home for the Chinese New Year – apparently without even knowing of the new Dubai bid – must decide exactly what price they are willing to put on P&O. They face bigger regulatory hurdles than DP World, but have said they will do whatever is required to get P&O. Backed by Hong Kong's Hutchison group, they have pockets just as deep as Dubai's. On the other hand, they may not want to be tied up in red tape for six months by Brussels.
I think in the end the unique nature of P&O's business will tempt them back. There is another twist to come in this tale, I believe, but it will only be for the good of P&O shareholders, employees and pensioners.
Is Sir Victor the black horse's white knight?
Sir Victor Blank has never been a man to decline a challenge. He had plenty of those in his time at Trinity Mirror, and for the most part rose to meet them. He will be less in the media spotlight at Lloyds TSB, but as chairman of one of Britain's most venerable financial institutions, he will be under even closer scrutiny from his real peers – the small but powerful circle of bankers who run the financial services industry and much of UK plc.
He will want to get his feet under the desk, of course, but he must already know intuitively that Lloyds cannot go on as it is. From being at the top in the 1990s, when it avoided the expensive mistakes on non-core banking suffered by its rivals, it has languished for years.
Its focus on UK banking – which looked so sensible back then – now makes it look like a laggard, too timorous to be entrepreneurial in a rapidly globalising business world.
The options are limited: Lloyds must either persuade the government to abandon its veto on British domestic banking consolidation, and then lead the next round of that process; or it must negotiate a successful exit for shareholders via a takeover by one of the big international groups that want to expand in Europe. Put bluntly, it must either merge with Barclays, or be bought by the likes of Bank of America or Standard Chartered.
Your move, Sir Victor.

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