This week’s media picks worth a read

We found these articles worth reading, you might too depending on your interests.

FT: Criticism of energy groups overshadows good news in [wind] sector

The changing view of the “big six” energy companies is symbolized by a recent Mirror front page headline that showed Centrica CEO, Sam Laidlaw as the “blackout blackmailer”. Commons energy select committee chairman, Tim Yeo, cannot remember energy being such a high-profile issue in his 30 years as MP. The CMA referral and the Tories proposed block on onshore wind farms have exacerbated fear in the sector. But Siemens’ Yorkshire wind turbine factory and the investment push by Dong, Statoil, Statkraft and Vattenfall show that “the big six are not the only game in town.”

FT:Labour vows to spread wealth away from London

In a little-noticed speech Ed Miliband confirmed Labour’s move away from the old regional development agencies as a means of generating growth in the English regions. Instead, the new local enterprise partnerships (LEPs) would be retained and the focus would be on cities, city-regions and partnerships of councils.

The Guardian:Government contractors begin to realise public trust is an end in itself
Jim Bligh, head of public services at the CBI, writes that the private sector is starting to recognise that building public trust is a worthy end in itself. The risks of not being transparent – of hiding behind bureaucracy or commercial confidentiality – far outweigh the risks of the alternative. Transparency ultimately shines a light on good performance and bad performance alike, which means that it can greatly improve the competitive dynamic. The losers will be companies and public bodies which simply aren’t performing well enough.

The New Yorker: Heartbleed: an example of ungovernability

You may not yet have heard of Heartbleed, the latest cyber-threat, but you are probably already a victim of it. The New Yorker reports on why one respected cryptography expert describes the threat of Heartbleed as 11 on a scale of one to ten. Was it on the Government’s cyber-crime radar? And even if it was, what can one Government do to tackle what is a global threat?

The Independent: Over here for the beer

A bevy of brewers is increasingly flocking to London from overseas. Discover why the English beer regulations make the capital the place to be for German and US brewers thirsty for innovation

The Independent: Erdogan: from model strongman to tinpot dictator

The Turkish premier’s decline into authoritarianism has dangerous geopolitical consequences.

Select Committees bare their teeth

Two Select Committees are in the news for very different reasons. Both have important lessons for business.

The Culture, Media and Sport Select Committee has published a controversial report condemning News International for the News of the World‘s alleged widespread phone-tapping of public figures. There are potentially major reputation – and possibly legal – implications for Rupert Murdoch‘s UK newsgroup.

Yesterday, too, Bank of England Governor, Sir Mervyn King appeared for the 17th time before the Treasury Select Committee and its forensic Chairman, John McFall MP. It was also King’s 19th Parliamentary questioning on the economic crisis in 29 months. Like Bob Beamon’s long-jump record, this was set in extraordinary circumstances and is unlikely to be surpassed for a very long time. King admitted that his time before the Treasury Committee “hadn’t been fun and, if I’m honest, it hasn’t been easy”. But what King did acknowledge is the high quality of the Committee’s reports and that they have contributed to the reform of the UK financial sector.

Parliamentary Select Committees rarely attract much attention beyond the Westminster village. Although they have existed for centuries, the modern system of departmental Select Committees was only established in 1979, as an innovation under Margaret Thatcher. Today, there are 19 of them. In the last full session they produced nearly 250 reports, but only about 25 of them were debated in Parliament. These reports are hardly ever read by anyone outside the Westminster bubble. And apart from the Mervyn King Show the work of the committees rarely makes it onto television screens – unless you watch the Parliamentary Channel at two in the morning.

Despite this, the Select Committees should not be ignored by businesses and campaigning organisations that seek to influence policy. Select Committees can present a valuable means to, at the very least, publicise views, criticisms or policy proposals. With a well-argued case, which wins over the committees, organisations can sometimes even exert some influence on Government policy.

But Select Committees are also be bear traps. I have helped prepare people for grillings from McFall and other Committees, so I know how King felt each time he was up before his inquisitor. It can be even worse for representatives of commercial organisations, whose company reputations (and their own jobs) can be on the line. News International is one high-profile, politicised example. But damage can also be done in much lower-profile committees: witness the discomfort that Tesco suffered at the hands of the Human Rights Committee last year, when pressed about its refusal to meet a trade union seeking recognition in its US subsidiary. Select Committees should not be underestimated.

And, potentially, with a minority Government in a hung Parliament or with a weak majority, who knows? Select Committees could be more influential than ever before.

Government for sale

Watch out: the Government is on the scrounge. Ministers are looking for about £500 billion to invest in the UK’s infrastructure over the next ten years in areas like energy, water, transport and communications.

Given the constraints on public finances, the Government is looking to the private sector to fund this investment. The increased capital requirements on banks largely rule them out. This means that pension funds and insurance companies are seen as the more likely candidates to be approached with the ministerial begging bowl.

In his Pre-Budget Report last year, the Chancellor, Alistair Darling, established Infrastructure UK to identify and attract new sources of private sector investment in infrastructure. It will develop a strategy and list of investment priorities for the next five to 50 years to be announced in Budget 2010.  And now that various ministers have “gaffed” by stating the obvious that the general election will be on 6 May, this will definitely be Alistair Darling’s Budget and not George Osborne’s.

Infrastructure UK will be a heavyweight body. It will be chaired by former Rio Tinto chairman, Paul Skinner. But crucially it will be the focal point for the Government’s infrastructure strategy and advice. It will swallow up the Treasury’s PPP policy team and Infrastructure Finance Unit and those functions of Partnerships UK that support the delivery of major projects and programmes.

Ministers have already approached the pensions industry. But rather than expect to have their tummies tickled as they are asked to stump up for the Government, funds and insurance companies need to be clear about what they need in return. For instance, how will risk be shared, particularly during early construction phases? What can Ministers do to raise credit ratings that are often graded at BBB? And will insurers enter into negotiations only to find themselves hammered by new Solvency II rules from the European Commission that restrict their freedom to invest in large-scale infrastructure projects?

Ministers are also looking to sell £16 billion of Government assets by 2013-14, possibly by establishing new companies in which the public as well as pension funds would be offered shares. These disposals will be handled by the Shareholder Executive, which was set up by the Government in 2003 to carry out its role as shareholder. The Executive manages a portfolio of 29 businesses with a collective turnover of about £21 billion. These include esoteric parts of the public sector such as the QEII Conference Centre (currently staging the Iraq war inquiry), the Covent Garden Market Authority and the UK Hydrographic Office.

Early candidates for disposal include the Tote (again), the high-speed rail line to the Channel Tunnel, student loans and the Dartford crossing.

Any investor thinking about taking these off the Government’s hands will need to consider more than just the financial aspects. There are some potentially tricky stakeholder and industrial relations issues which new owners will need to address, particularly if the Government tries again to sell a stake in the Post Office or when it comes round to disposing of Northern Rock.

Investors will need to think through their messages and what they offer for customers/users, politicians, public sector unions and regulators. Failure to do so could lead to costly reputational damage. They may end up paying a lot more than they bargained for.

Mournville

At first glance, it may seem that Cadbury and BAA have little in common. One is a long-established and much-loved chocolate manufacturer with a philanthropic heritage and the other is an airports company held in low regard by local residents, passengers, journalists and politicians. Bear with me, as they have more in common than you might think.

Both have recently gone through high-profile takeover battles with foreign bidders. BAA conceded to Gruppo Ferrovial in 2006, when the world’s biggest (British) airports company passed into Spanish hands. BAA’s board secured a very good deal for its shareholders and Ferrovial had to stump up a considerable premium to BAA’s regulated asset value, which has caused it headaches ever since.

Similarly, Cadbury’s board has tossed in the towel and conceded to US food giant Kraft. But the Cadbury board has recommended acceptance of a share price of £8.40 – a significant discount to its long-term share price, according to analysts and commentators. This is quite enough to turn a quick buck for the speculative US hedge funds who nipped in recently and mopped up a quarter of its shares. And UK pension funds and long-term investors will make a return, but not as much as they could have done had the company been valued closer to the £10 a share that analysts say it is worth. Its a bit of a steal for Kraft.

So far, so different. But here come the parallels – and the warning to Cadbury and its putative owner.

Both BAA’s new owners and Kraft had to borrow heavily to fund their bids. Ferrovial’s first act as owners was to load that debt onto their new acquisitions. Anyone who has the misfortune to support Manchester United understands that this saddles the company with high interest payments which have to be funded from somewhere, and if it isn’t from higher revenues, then it’s going to be from lower costs or by offloading some of the assets (or, more happily for the rest of us, by upsetting the natural order of things and keeping Man U off the top of the Premiership table).

Even before the UK’s competition authorities declared BAA’s London airports monopoly to be against the public interest and required break-up, economics had already forced BAA’s new owner to sell the recently-acquired Budapest Airport, flog its duty free business and to begin selling off its US interests. Gatwick was also sold in December 2009 in a process begun many months before the Competition Commission bared its teeth and made its sale compulsory. These sales were needed in a large part to finance the repayments of the £12 billion of debt with which Ferrovial has saddled BAA, which until this point had been cash rich and debt light.

Cadbury can expect the same medicine from a Kraft acquisition. Kraft is reportedly borrowing £7 billion to help finance the £11.5 billion deal, and this debt will be loaded onto Cadbury, not onto Kraft. So unless Kraft’s marketing genius can produce astonishing sales figures, there will be rationalisation, cost cutting and asset sales.

And Kraft has more leeway to cut and rationalise than Ferrovial did with BAA. Cadbury’s chocolate can be made anywhere that the recipe and ingredients can be shipped, so its manufacturing can be moved abroad, while BAA’s passengers flying to London can’t be diverted to Central Europe or to the parent company’s home market. Employees at Cadbury are in a much less secure position than BAA’s employees were after takeover, since for the most part, BAA’s jobs were not exportable.

And the impacts go beyond the financial. Before its takeover, BAA was consistently the most admired (privatised) transport company in Britain, having worked assiduously at tackling the environmental and social impacts of its operations. Of course a minority of local residents bore the brunt of the impact of the flying habits of the rest of us, and were naturally unenthusiastic about their concrete neighbour, but BAA was generally regarded as being at the forefront of sustainable development and social engagement, was largely liked by its national stakeholders and envied by its competitors abroad. Not any more. Since Ferrovial took the helm BAA has become the aviation equivalent of Railtrack – derided, disliked and dismissed – though to be fair, this can’t all be laid at the door of the new owners: the security chaos that swiftly followed the takeover was not of their making.

And what does this mean for Cadbury? Loss of independence, of Britishness, will mean a loss of natural empathy and support among decision-makers and customers (I’ve not knowingly bought a Rowntree’s product since it was taken over by Nestle in 1988). The loss of jobs through inevitable rationalisation and cost-cutting means union (and public) hostility and reputational damage. And the sale of, discontinuing or messing around with brands will further damage customer loyalty. All are problems for the new owner.

The global market economy means that takeovers like Cadbury and BAA will continue to happen, and major national companies will lose their independence to aggressive foreign buyers. But caveat emptor – there will be consequences for the buyer as well as the bought. It won’t necessarily be a Picnic and there may be thorns among the Roses.