Lombard

September 7, 2011 9:04 pm

Bombardier has trouble with the points

What should Bombardier be doing to win contracts in open competition?

Like charity, commitment to fair competition has to begin at home. That means certainty and clarity through the tendering process – and not unpicking decisions just because they are unpopular.

While it must be disappointing for Bombardier and its employees that Philip Hammond on Wednesday ruled out reopening the award of preferred bidder status to Siemens to build 1,200 train carriages, one of the UK’s largest-ever rolling stock orders, the transport secretary was right to say that the process will not be revisited.

So far, so straightforward. But the hearing by a cross-party committee of MPs raised two points worth further thought.

The first was Bombardier’s apparent puzzlement (and almost resentment) that finances played a part in deciding where the contract should go.

Perhaps quality was once the sole criterion when buying rolling stock – though looking around the train carriages on Britain’s railways, “excellence” is unlikely to be the first word that comes to mind. In the age of austerity, however, once a minimum quality threshold has been met, public purchasing decisions cannot be based on the idea that money is no object. It was right to take into account the difference in financing costs arising from Bombardier’s lower credit rating – estimated by Professor Karel Williams, of the University of Manchester, as £500m over the life of the contract.

The second point is what the aim of any government intervention should be. Government’s role is not to protect Bombardier from the realities of the marketplace, difficult though these are. It might well be to try to ensure that the UK keeps a design capability and expertise as a source of future jobs, through the consistent application of a policy that encourages long-term investment in sectors based on large, long-range orders.

A single high-profile contract is the wrong focus for this debate. The question should not be “How can the government give such contracts to Bombardier?” but “What should Bombardier be doing to win contracts in open competition?”

Maths with Melrose

Knuckle-whitening, indeed. Less than a week after this column’s usual incumbent suggested that turnround specialist Melrose might find its share price a tad embarrassing in its 850p per share indicative offer for Charter, the prospect of some red faces has increased.

For the equity element of the deal, the Melrose formula imposes a floor of 301.5p and a ceiling of 315p on the imputed price of each Melrose share, based on the average closing price from August 15 to September 19 at the latest. But since Colfax, the US engineering group, said at the weekend it might launch an all-cash offer for Charter, the Melrose share price has slipped from 296p to 281.5p.

With some time to go before the final deadline, the current average is just over 297p. If it were to stay there, the indicative price would be closer to the tentative 840p-a-share number that Melrose had to sweeten earlier.

Meanwhile, the Colfax interest lacks the hard certainty that normally comes with cash, since the US-listed group is smaller than its potential target: its confidence comes from having two billionaire brothers with a 42 per cent stake.

There is much for observers to enjoy in seeing two acquisitive machines at war offering (potentially) the classic choice between the immediacy of cash and the allure of future upside. If only the Charter share price – 788.5p at Wednesday’s close – behaved as though it thought either expression of interest would come good.

White goods, dark times

John Browett is a good guy in a bad place. The former Tesco executive who runs Dixons has a plan to revive the electricals group, but it is hard to think how conditions for its success could be more unfavourable. Group like-for-like sales were down 7 per cent in the quarter to late July, while the gross margin took a 100 basis point hit.

Electrical retailers face dark times. The short-term issue is consumer confidence: as Mr Browett himself has pointed out, it is unnatural to be buying a new TV while worrying about your job. The longer-term issue is the continuing shift of electrical sales to the internet. US retailer Best Buy is launching its own online marketplace to fight back against the practice of shoppers visiting its showrooms just for research. But retailers with a real estate portfolio will still have costs that internet-only rivals do not.

Beyond these problems, Dixons possesses a fragile balance sheet and high operational gearing. By the close, the share price had given up its intraday rally, and it was hard to argue with that.

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