Category Archives: Financial arcana

Waratah trains: why the NSW government isn’t at fault

The suggestion that the NSW government had done nothing wrong would normally seem unlikely, irrespective of context. Even more so when the context is a $2.6bn capital investment project that’s at risk of collapsing, requiring a massive government bailout, or both.

However, the funding shortfall threatening the public-private partnership (PPP) to build 78 new Waratah suburban trains for Sydney CityRail services is an exception. The NSW government did a good job in managing risks for this deal, and it’s at risk of having to stump up extra taxpayer’s cash for reasons nobody can blame it for not foreseeing.

On the plus side, even if the government does have to step in, it’s unlikely the NSW taxpayer will lose much. The biggest loser is likely to be Downer, the train’s builder, which is exactly where the blame should lie. Unfortunately for the NSW government, the deal is arcane enough that the press and the opposition can easily claim otherwise.
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Finding a new Foster home

So there’s an interesting piece on Bloomberg quoting the Sunday Times saying that Fosters Group, the Aussie wine and beer company, might sell its beer operations (branded Carlton & United Breweries, confusingly enough) to SABMiller.

This makes sense. Since I was working as a drinks industry reporter getting on for ten years ago, I’ve been saying Fosters should flog off the beer business. They’re a combination of a global premium wine company, a low-margin domestic beer business, and one mysteriously popular global beer brand – which, oddly enough, has almost entirely disappeared from their home turf. Being a global wine distributor, while providing a global beer company with a global brand, and an opportunity to distribute their other brands into Australia, was always going to be a better call.

I’d always taken a British take on ‘appropriate buyers for CUB’, on the basis that Heineken (formerly Scottish & Newcastle) owned the EU rights. Obviously, that would’ve been a good fit. But I’d forgotten the fact that the USA is the world’s largest beer market, that Foster’s is a popular import brand in the USA (“throw another shrimp on the barbie”, etc), and that Miller owned the US rights to the brand.

Meanwhile, SABMiller – which, like Kraft Foods, is part-owned and heavily cash-backed by Altria (= Phillip Morris) in a desperate attempt to stop all their shareholders’ money going to compensate lung cancer victims – has fallen way behind Anheuser-Busch Inbev in the “being a serious global brewer” stakes.

A leading position in a mature but profitable beer market (yes, oddly enough, selling beer to Australians is popular. See: selling crack in Baltimore; selling expensive houses in Mayfair) is nice from a cash-generation point of view. And for some utterly mystifying reason Foster’s is a much-loved beer brand everywhere except Australia, and as brand promotion becomes global it’s becoming important to have the rights to your most important assets, rather than having them owned by some comedy convict jokers [*].

So if the news is true, then it’s a good call on SABMiller’s part, as well as a bloody relief to Fosters Group (who’ll presumably have to rename themselves to ‘Australian Wine Company’ or a made-up name like Geadeo or something). And some kind of deal with Heineken to sort out the global rights would probably also be sensible.

And no, none of my alcoholic drinks market wisdom would have made the slightest difference to share-tippery at any point ever. If you want to make money on markets by thinking you know more than people about fundamentals, horse-racing is still a better bet. Stock analysts are still voodoo-merchants; my skills are only worthwhile if you actually want advice on what to do if you’re trying to market grog.

[*] dear the Australian Department of Immigration and Citizenship: I don’t believe that all Australian businessmen are comedy convict jokers. As the owner of an official certificate of being an Australian Businessman, I take Australian business very seriously. And mentioning Alan Bond and John Elliott at this point would be deeply unfair, and the fact that Mr Elliott used to own CUB isn’t even slightly relevant.

Why isn’t there a new Bond movie?

Yes, I know MGM (or, more accurately, the latest in a long bunch of shysters to own the rights to the MGM name and to make James Bond movies) are in serious financial trouble.

But if I was in serious financial trouble, and I owned a money tree, but I couldn’t afford to harvest the money tree due to my serious financial trouble, then I’d sell someone the rights to the next harvest of my money tree. Then, I might be able to do the following money tree harvest myself. At a worst case, the money tree’s money crop hasn’t just rotted on the branches.

So I’m genuinely perplexed about the weird machinations that mean we’re not going to get another Bond movie until forever. What incentive have MGM’s management got to not sell the rights to make a new Bond (which will make copious quantities of money, unequivocally) to someone with dollars, rather than sitting around making nothing until they go painfully bust?

I suspect it’s an accounting / US law / principal-agent problem, but would appreciate guidance from anyone who either knows, or can come up with a vaguely sensible reason for MGM’s management to do what they’re currently doing…

Technical BP question, or ‘lazy crowdsourcing’

So, on BP, let’s assume that it gets so busted by compo claims that its entire US business gets liquidated and sold to Exxon (as seems to be the current, insane narrative: “we’ll pretend BP are evil rather than the same as everyone else, so we don’t have to stop the drilling and the oil greed…”. I don’t think it’s an anti-British thing, by the way – I’m sure that if Exxon had been the unlucky chaps, they’d’ve got the whole take-one-for-the-team treatment.)

At that point, the American liabilities are ringfenced, and BP can continue to do as it does in the North Sea, Asia and Africa, bringing quantities of money that are undeniably copious, albeit less large than its shareholders pre-spill might have hoped.

At that point, British and Chinese BP shareholders are perfectly safe in their holding of the company. But what happens to American shareholders? Is there a mechanism by which the US government could appropriate US-held BP shares, and is it an ‘unprecedented, practically war’ thing or a ‘yeah, we do this’ thing if so?

…which brings the technical question: is there any divergence between movements in BP shares on the LSE, and BP shares on the NYSE? That would be an interesting indicator, if so…

On third-columnists, deliberate or otherwise

I’m a Keynesian who believes in fiscal expansion in tough times, and I’m a market-favouring leftie who believes in progressive taxation (whilst trying to minimise disincentives to work at all levels).

However, I’m embarrassed by Richard Murphy of TaxResearch.org.uk, and the way in which the press tend to print his daft views as a serious example of Keynesianism economics and left-wing thinking.

He isn’t an economist, he’s a man who knows a great deal about the specifics of UK tax accounting, and has lots of other views that aren’t really based on much sensible – and are only paid any attention to due to the spurious argument-from-authority that his tax accountant background gives him.

It’s the equivalent of someone dealing with the (serious, real) debate on pharmaceutical companies pushing too many overpriced lifestyle drugs based on cherry-picked trials that don’t reflect real clinical benefits over generics or non-pharmaceutical responses, by interviewing a loony quack like Gillian McKeith.

Those British Airways strikes

While there’s been a lot of commentary on the British Airways strikes, the analysis (whether pro-company or pro-union) tends to miss two major points.

The business model is unsustainable – but that’s the management’s fault, not the unions’

BA’s model before the global financial crisis was to charge a fortune for excellent service in Club World and First, while matching its competitors’ prices and service levels in World Traveller. Together with BA’s massive global coverage and its excellent connections between the financial boom centres of London, New York and Singapore, this business model allowed BA to attract a lot of passengers and make a lot of money.

This was lucky, as BA’s cost base is and remains far higher than that of its competitors. Not on planes, or marketing, or even management – but on staffing. At the time, the money that bankers were willing to pay to fly to Singapore in a bed whilst being served champers by reassuringly camp gentlemen was so vast that BA could get away with paying long-serving cabin staff double the national median wage.

However, this wasn’t a sustainable business model unless you believed the boom times would never end. BA should have taken advantage of the good times to stuff its current crews’ mouths with gold (pay rises, massive early retirement packages, one-off bonuses), in exchange for permission to hire new recruits under less generous contracts so that the long-term cost base was more sensible. Virgin Atlantic pays new recruits gbp15,000 ranging up to about gbp30,000 for senior crew, and anyone who’s flown on Virgin will confirm that this is enough to attract motivated people who provide excellent customer service.

Unfortunately, BA’s CEO for most of the boom – Rod Eddington – had approximately no aptitude for long-term strategic thinking, so kept with the status quo for an easy life (my assessment of his aptitude is supported by his report on UK transport policy two years ago, which managed to miss out high-speed rail completely. I’ve only just discovered via Google that he’s done much the same half-arsed job in Melbourne). Willie Walsh has a better track record, but by the time he’d taken over and settled in, the recession was already imminent. Now, BA has to cut costs for long-term survival, but doesn’t have the money to bribe its staff to accept the cuts.

The unions are in a far stronger position than most commentators realise

BA’s enterprise value – the amount that its assets plus goodwill are worth, before taking into account its financial liabilities – is something like GBP7bn. The reason its market cap is only GBP3bn is because it also has a GBP4bn pension deficit. In other words, money that BA owes to its workers and former workers accounts for more than half of the company’s total value.

This has two policy implications.

One is that Red Tory Philip Blond’s suggestion that the government should mutualise BA isn’t quite as insane as it looks – more than half the company is already owned by the workers, and if things were to get worse then the pension fund has priority over the shareholders as a creditor. A deal like the one the US government brokered for GM, leaving the workers as majority shareholders, isn’t totally implausible.

The other consequence of this ownership pattern is something which should make BA shareholders rather nervous.

If the industrial action were to turn into a major, long-term dispute that drove down passenger numbers and revenues to such a severe extent that BA had to go into administration, then the pension fund would have priority over BA’s assets (including not only its physical assets, but also its brands, goodwill, systems, etc). It’d be hard work to rebuild BA as a global brand after that kind of collapse, but it wouldn’t be impossible – particularly with worker ownership ending the company’s labour crisis overnight. The shareholders, however, would lose everything.

So while the “nobody backs down” outcome isn’t good for either side (as the workers lose salary in the short term, and in the long term their pensions end up secured on a much less valuable asset), it’s a lot more optimal for the workers than it is for the shareholders. This makes negotiations, erm, challenging.

Conclusions? None really, except that I wouldn’t want Willie Walsh’s job, and Rod Eddington shouldn’t be put in charge of the strategic direction of a whelk stall (although he’s probably competent to administer one day-to-day).

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Update: another conclusion is that if you blame the strikes on Gordon Brown’s ‘weakness’, you’re so utterly clueless that you shouldn’t even be allowed to assist Rod Eddington at his whelk stall…

Update 2: Jim notes that BA’s business model is also unsustainable in the sense that the oil’s going to run out. This is true, and worth a read (I’m not yet totally sold on Jim’s view on precisely when the oil’s going to run out, but that’s mostly based on sheer incredulity that if the oil’s really going to start running seriously short by 2015, governments and large companies haven’t done more to mitigate that. The GFC highlights that this may be over-trusting of me…).

Financeblogger playground spat

When I grow up, I wouldn’t object to being an incredibly rich, disgraced, highly influential, not-proven-guilty-of-fraud Wall Street figure and would-be press baron.

However, unlike Henry Blodget, I don’t think I’d devote a day’s worth of output to slating other financial commentators for being insufficiently productive, hard-working, etc. Worrying about the productivity of people who actually work for you is stressful enough – and besides, I’d want to leave at least eight waking hours a day outside of work to enjoy my enormous pile of ill-gotten gains.

(I am, however, also a little jealous of Felix Salmon. If any multinational news organisations want to pay me a decent-ish New York salary to tweet and blog about finance and the economy all day, then you know where to find me…)