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THE INDEPENDENT: Review of 2007: A year that began with euphoria and ended with the spectre of recession

Published: 26 December 2007


2007 has turned out to be the most challenging year for the Bank of England since it was granted independence to set interest rates in 1997. Inflation rose above 3 per cent earlier in the year, forcing the Bank’s Governor, Mervyn King, to write a letter of explanation to Gordon Brown. And then came the summer of the credit crunch and the Bank’s initial reluctance to pump more liquidity into the banking system to keep the wheels moving. An air of caution has descended on investors ever since the Northern Rock crisis. As the year draws to a close, the signs are distinctly chilly. There is mounting evidence that the housing market is slowing down, with the commercial property market on the brink of collapse, while consumer sentiment is weak as households tighten their belts as successive interest rate rises finally start to bite. This month, the Bank bowed to intense pressure to cut rates for the first time in two years, down by a quarter of a point to 5.5 per cent, but many question if it is enough to prevent an economic slowdown. Some economists are predicting an outright recession.


This is the year that started with the UK crowing about how enlightened regulation had made it the world’s leading financial centre but ended with the Government guaranteeing £56bn of deposits after the first run on a UK bank since the 19th century. Northern Rock will cast a shadow over Christmas for the Government and its regulators after the former building society made Britain a laughing stock.

Northern Rock was just the most visible manifestation of the credit crunch that has wiped billions off banks’ profits and threatens to tip the world economy into recession. Previously obscure products such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs) threatened to drain the life out of the financial system after defaults on mortgages for poor people in the US alerted investors to the fact they did not understand what they had bought.

With one obvious exception, Britain’s banks have come out of the crunch relatively unscathed compared with the massive writedowns at the likes of Citigroup and UBS. But fear stalks the sector and will do so at least until full-year results at the end of February.

In the heady days of the first half, the talk was all about international consolidation as Barclays and Royal Bank of Scotland battled it out to buy ABN Amro of the Netherlands. RBS won the war, but many investors lost patience with the mega-banks as HSBC faced an assault from the activist investor Knight Vinke.

Clive Cowdery, the chairman of the insurer Resolution, will walk off with about £150m after selling the company he founded in 2004 to his arch-rival Hugh Osmond.


Investors were filling their boots as last year’s euphoria spilled into the first half of 2007. The ever-present spectre of private equity and general consolidation talk was responsible for bolstering many on the London Stock Exchange, with the FTSE 100 hitting a seven-year high of 6,754.1 points one day in June.

Few saw the clouds gathering on the horizon, but as the sub-prime crisis smashed the US and problems emerged at Northern Rock, the market went into freefall. The top tier dropped almost 14 per cent in a month to as low as 5,821.7. Consequently the rumour mill and the mergers and acquisitions market promptly closed down. Since then, it has bounced repeatedly as trading volumes waned and while the index is back over 6,000, traders are not confident that the current levels will hold.

The mining sector has led the way this year, riding a wave of rising commodity prices, bullish outlook and continued takeover speculation. Top riser of the lot was Rio Tinto, up 86 per cent according to Thomson Financial. Second was Tullow Oil, highlighting the strength of the sector as the price of oil lifted.

On the downside, the banks have suffered in the wake of Northern Rock, while the housing stocks have also been hurt by the credit crisis and fears of higher interest rates; Barratt Developments was the second worst performer behind the Rock, down more than 60 per cent in 2007.


It was certainly a busy year for J Sainsbury, which was very nearly taken private – not once but twice. The supermarket managed to fight off a £10bn attack by a consortium led by the private equity house CVC, only to almost succumb to a £10.6bn bid by a Qatari state-backed investment fund. The second deal was thwarted, not by the Sainsbury family, but the turmoil in the credit markets which led to the Qataris pulling out. No windfall for Justin King just yet.

The Tesco juggernaut continued its relentless march forward, launching itself on to the notoriously difficult US market, which has already proved too hard a nut to crack for a string of other British retailers. Sir Terry Leahy will be in the heroes or villains list this time next year, depending on its performance with its Fresh & Easy chain.

The Big Four supermarkets were under the spotlight after a number of investigations. Asda, Sainsbury’s and a number of dairy companies were fined up to £116m after admitting they had colluded to fix prices but the supermarkets appeared to be let off the hook over claims they are killing off competition and leading to the death of the high street, much to the dismay of the independents.

Clothing retailers were quick to blame the worst summer since records began for poor sales in the first half and ended the year on a note of caution with everyone waiting to see just how bad things have become amid fears about the economy.


The chairman of Alliance Boots, Stefano Pessina, pulled off a spectacular coup by taking the high-street chemist private in April in Europe’s largest ever leveraged buyout. The £11bn deal with Kohlberg Kravis Roberts came less than a year after the Italian billionaire, dubbed the silver fox, oversaw the merger of his wholesaling business Alliance UniChem and Boots.

Europe’s biggest drugs firm, GlaxoSmithKline, suffered a number of setbacks. Sales of its best-selling diabetes drug Avandia plummeted by around 50 per cent in the US after reports linking it to heart disease, while its next big hope, Cervarix, a vaccine against cervical cancer, was delayed approval in the US for up to two years. GSK is also facing competition from cheaper generic versions of its products, which leaves Andrew Witty, who will replace chief executive Jean-Pierre Garnier in May, with his hands full.


The long-awaited smoking ban finally arrived in England in July, the final nail in the coffin for the traditional working men’s pub. As a response, the industry invested heavily in outdoor terraces and new menus, making the pub a more family-friendly place. Bingo clubs experienced the worst fallout, as around half of players smoke – twice the national average – while nightclubs are having to pump rose-scented air freshener through their venues to disguise the awful stench of sweat and stale beer that used to be masked by cigarettes.

As volumes declined in the West the major tobacco companies continued to consolidate. Imperial Tobacco gobbled up the Franco-Spanish company Altadis, considered the last major prize in the industry, not least because of its Cuban cigars division.

In the final months of the year, it has been the battle for Scottish & Newcastle that has been grabbing the headlines as one of the UK’s last major independent brewers fights off an attack from Carlsberg and Heineken.


After a fairly turbulent time in 2006, the telecoms sector had something of a resurgence. Vodafone pulled off a coup with its hard-fought acquisition of India’s Hutchison Essar from under the noses of a raft of local players. The acquisition hammered home the growth prospects for mobile companies in emerging markets and complemented Vodafone’s efforts to kick-start mobile broadband growth in more mature markets. The cost-cutting move of the year came when T-Mobile and 3 agreed to pool their 3G network assets in the UK, a move that could save the two companies £2bn in the long term.

Yet the year will be mostly remembered for Apple’s iPhone hitting the shelves. O2 bagged an exclusive deal in the UK and the hype around the new device has already been immense.

There has also been a changing of the guard at the top of the mobile industry’s biggest companies, with Orange bringing in ex-Virgin Mobile founder Tom Alexander as part of an overhaul and O2 bidding goodbye to Peter Erskine, its respected chief executive. Meanwhile, BT lost Andy Green, head of its Global Services division, to Logica, while Sir Christopher Bland ended his tenure as chairman to a standing ovation from analysts.


It was something of a depressing year in the media sector as the more traditional companies continued to pour investment into online businesses to tap into internet advertising growth. A number of companies, including Emap, Trinity Mirror, SMG and Chrysalis, effectively put the “For Sale” sign over key assets, with results often disappointing, while EMI sold out to the private equity supremo Guy Hands, despite rejecting a more valuable and logical deal with Warner Music only months earlier. Meanwhile, Reuters completed a tie-up with Thomson.

However, the big story was the three-way stand-off between Sky, Virgin Media and ITV. Sky had stymied Virgin Media’s plan to snap up ITV late in 2006 and things only got worse for the cable company after a £25m relaunch failed to have the desired effect. With Virgin now backing away from the pay-TV fight to focus on broadband, Sky turned its attention to a litany of regulatory investigations into its businesses, with ITV calling on the regulator to force the pay-TV giant to sell its stake in the company. Yet James Murdoch hardly blinked and has since been installed as head of News International, encompassing all of Rupert Murdoch’s UK newspaper assets, as he edges ever closer to his father’s throne.


With the internet finally living up to its promise, 2007 looked set to be the year the technology sector bounced back from the dark days earlier this decade. With Google and YouTube combining forces and Facebook exploding into life in the UK, a slew of software IPOs were set up to cash in on the new technology boom. Yet the credit crunch quashed those hopes and apart from the online video search engine Blinkx and datacentre business Telecity, most technology floats were pulled as the market shied away from any investment that looked risky.

Yet it could have been worse. Torex Retail’s spectacular implosion, caused by a sudden profit warning that triggered police raids on company offices and the homes of executives and wild allegations of nefarious behaviour in the papers, left a sour taste in the mouths of technology investors.

Metals and mining

2007 will probably be seen as the year in which the tectonic plates of the global mining industry first started to shift. Rio Tinto pulled of the industry’s largest ever deal, paying $43bn for the aluminium giant Alcan. It didn’t take long for BHP Billiton, already the largest miner in the world, to react by springing a $140bn takeover bid on Rio, still only in the early stages of digesting its catch. Rio wants nothing to do with BHP, it says, and it is unclear how the situation will shake out. But BHP’s ballsy move has inspired the other industry heavyweights. Xstrata said it has held talks with various parties, with Anglo American and the Brazilian giant Vale the most likely partners.

What is certain is that a booming China has analysts feverishly updating and increasing their price targets for commodities like iron ore, copper, nickel and coal that are already trading near record highs. Mining companies have never had more money. Yet neither has the industry’s infrastructure, from the holes in the ground to the railways and freighters used to transport the stuff, been under such strain. It’s a recipe for consolidation which could lead to a fundamental altering of the industry landscape.


The oil price will close the year flirting with record highs after reaching $99.29 per barrel last month, nearly double the level at which it began the year – most analysts think that oil at $100 per barrel is now a fait accompli. Royal Dutch Shell and BP, Europe’s two biggest oil companies, have predictably done quite well out of it, booking a cool $40bn in profits between them through the first nine months of the year. Yet neither has done nearly as well as they would have liked. Despite the skyrocketing cost of the black stuff, BP’s profits are actually down massively due to pipeline leaks in Alaska and reduced refining margins and capacity. The company was also forced to pay $303m to US authorities for alleged manipulation of the US propane gas market. It was also wobbled by the ignominious departure of its once-feted chief executive Lord Browne after he was found to have lied about a relationship to the High Court. His replacement, Tony Hayward, is sharpening his cleaver, threatening a top-to-bottom pruning of the company, but the cuts haven’t started yet. Shell, meanwhile, continues to suffer from reduced production in Nigeria, recently cutting staff in the strife-ridden country to adjust to what is expected to be a long period before its operations return to full strength, if at all. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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