Two deals that signal the end of the bull market are in sight

The production of Debussy’s Pelleas and Melisande that has just opened at Glyndebourne is set in a gloomy, fin de siecle salon, whose floor is a bed of chrysanthemums under perspex. The opera has a pervading sense of doom, the yellow and red blooms being a symbol of short life and impending death.

There is something of the odour of chrysanthemums in some quarters of British industry at the moment. There are fears that the top of the market is at last in sight, and a new pessimism pervades the air, a psychology exacerbated by our own fin de siecle, the approaching new millennium.

Symptoms of this malaise have been particularly apparent in two stories about the banking and drinks industries that have developed over the past week. Both are fitfully cast as great triumphs of ingenuity and vision, but both really reveal, like the opera, the futility of plans gone wrong and the unavoidable fates of those led by forces beyond their control.

The banking story is the proposed merger of the Bank of Ireland and Alliance and Leicester, the former UK building society. The intention is for this to be portrayed as a clever consolidation that will apply economies of scale to the combined entity, which will become the eighth largest bank in the UK and the largest in Ireland.

But it comes just days after the announcement from Barclays that it is shedding some 6,000 back-room staff. Against this background, the Bank of Ireland/Alliance and Leicester deal can be seen as less of a consolidation than a rationalisation, driven by the threat of continental competition than the opportunity of competitiveness.

In the past half-year, a flurry of continental European activity has occurred, with the merger of Spain’s Banco Santander with Banco Central Hispano and, to the north, Paribas and Societe Generale linking to ward off the advances of Banque Nationale de Paris.

All the UK has had to offer by way of banking consolidation has been last year’s acquisition of the Birmingham Midshires by the Halifax. It is four years since anything significant has happened in UK banking consolidation – the merger of Lloyds Bank with TSB Group.

Recent developments in the retail banking industry on the continent and the sudden radical surgery at Barclays, point to the conclusion that the Alliance and Leicester initiative fits the old cliche of being too little, too late.

One of the many problems with British banking is that it is too concentrated to accommodate much significant consolidation. The big four clearers in the UK dominate retail banking to such an extent that any consolidation between them would likely not be tolerated by regulators. It’s left to the likes of the Alliance and Leicester to fiddle with consolidation at the margins.

It follows that the principal opportunity in the UK financial services market is for foreign entrants. Admittedly, they don’t have to be foreign – the efforts of Prudential with its Egg banking brand demonstrate that the market is now sufficiently sophisticated to accommodate vibrant new domestic entrants.

But the Barclays announcement and the Alliance and Leicester deal still have something of the stench of death about them. I think it’s the old, lumbering, top-heavy British retail banking industry that’s dying, which may be no bad thing. However, the fact that the pervading atmosphere is of something ending, rather than of a new era dawning, is not.

Much the same applies to Allied Domecq’s efforts to shed its pub and off-licence interests to Whitbread. This is not so much to do with Allied concentrating on its core activities and delivering value to its shareholders, as an acknowledgement of its failure to develop a meaningful growth strategy since the Eighties when it was known as Allied-Lyons.

If evidence were needed that Allied is not in the driving seat on this one, it can be found in Whitbread’s aggressive stance over the terms of the deal. Last week it threatened to walk away unless Allied fell into line. You don’t behave like that unless you believe that the vendor is a forced seller.

The UK licensed trade has never really recovered from the ham-fisted attempts to introduce competition into the industry in the Eighties. As in the banking sector, the industrial run-down marked by Allied’s exit from pubs and off-licences represents more of an opening for foreign entrants to the UK market than a growth opportunity for domestic players.

This view is reinforced by the arrival of Warren Buffett on the share register: he has taken a 2.2 per cent stake. My guess is that Buffett expects a bid for the spirits rump of Allied. His position is one of arbitrage not of investment. Whichever way you cut it, Allied’s current manoeuvres are about a game being over, rather than one beginning.

It may be that I’m unduly influenced by a visit to the opera, but it does strike me that both the UK drinks and banking industries are in a sad state. And it’s difficult to know what to do for them – other than send a bunch of chrysanths.


    Leave a comment