Lombard

July 16, 2012 1:25 pm

Shell out of Cove contest

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Voser dodges winner’s curse

It’s easy to pay too much in a public auction. You do not even have to be tipsy on Champagne and bidding for Wayne Rooney’s old boots at a charity dinner to overdo it. Peter Voser, the understated boss of Shell, is right to walk away from the billion-plus bidding tussle for Cove Energy, an African-focused explorer. The winner’s curse – returns deficient in proportion to the overpayment – may now be visited on PTT of Thailand, if there turns out to be one.

Shell had bid at 220p per share, valuing Cove, the brainchild of hydrocarbons geologist John Craven, at £1.1bn. PTT came in at 240p, after more gas was discovered in the Rovuma field off Mozambique where Cove has an 8.5 per cent stake. The City had been holding out for around 265p. That equated to $3.18 per barrel of oil equivalent of contingent reserves, around double the relevant average.

The sweetener for Shell was the right for Cove, as a stakeholder in the Rovuma, to make an offer for shares that other investors decided to sell. As an offshore expert, Shell has the expertise to bring the field into full production, with its payback proportionate to its stake. But it may be able to establish a foothold more cheaply by buying part of Anadarko’s 36.5 per cent shareholding, or stakes of around 10 per cent each held by Indian investors Bharat Petroleum and Videocon.

Raising its bid would hardly have overstretched Shell. But a company does not get returns on capital employed of 16 per cent (with a little help from the oil price) unless it shops shrewdly for assets. An auction overseen by the Takeover Panel has meanwhile been forestalled. That is a serious loss to showbiz. But it lessens the chances of either bidder suffering the corporate equivalent of waking up hung over, with the UK’s most expensive second-hand sports shoes on the bedside table.

Power behind the thro

ne

Have at ye! National Grid is so furious with Ofgem’s price control plans that it will retaliate with a ... webinar. If that sounds limp, it reflects the reality that regulators have the whip hand over heavily regulated businesses.

Ofgem wants National Grid to put up £22bn to upgrade the UK’s electricity and gas distribution network by 2021. The spat is over the return that Ofgem will permit the company to earn from higher charges met indirectly by consumers. The Grid pitched for a cost of equity of 7.5 per cent. Ofgem has come back with an offer of 7 per cent on electricity transmission, 6.8 per cent on gas transmission and 6.7 per cent on gas distribution.

This was below the expectations of City analysts. Ofgem was expected to be more generous, partly because it agreed a 7 per cent cost of equity for an upgrade of Caledonian power pipes with Scottish and Southern. It still may. A new bidding system was meant to reduce haggling. But the relatively sanguine response of National Grid’s shares to Monday’s bad news suggests a compromise is still likely.

The energy company is firmly under Ofgem’s thumb – it can hardly rip up the power cables and decamp abroad. But investors are more mobile. It is a point that government and its agencies need to understand if they expect the private sector to finance a larger share of infrastructure spending.

Higher, faster, cheekier

Advertising slots around commercial TV coverage of the Olympics are in little demand. Viewers, after all, will be able to watch the same content without commercials on the Beeb. But this can only be a modest setback for the juggernaut that is Olympics advertising. The most pervasive – and irritating – comes from McDonald’s, whose UK ads have previously been nicely judged. How, precisely, does a fat man eating a Creme Egg McFlurry contribute to the Olympics, compared, say, to Mo Farah? We do not all make the games

A certain sneaking admiration must therefore be reserved for businesses that use sporting links – and the Union Jack – for promotional purposes without needing to auction the spare kidneys of the workforce on eBay to pay for an Olympics sponsorship package. Aviva and British Gas trumpet their longstanding support for the UK athletics and swimming teams in current campaigns. More tenuously, Gola’s underground posters show models assuming Olympian poses while wearing its clobber.

An Olympic contract would be a positive hindrance to such elliptical free-riding, since retribution would surely follow. Lombard is therefore proud to be the City column of undefined sporting activity in London this summer. Our symbol? Five loosely conjoined fruit Polos, naturally.

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