In a parallel political universe, Ofwats pricing framework for the English and Welsh water companies for the next five years would have been redundant before it was announced on Monday. Incoming Labour ministers would instead be inspecting their soon-to-be nationalised assets.
None of that will now happen, so the key issue in a still-privatised world is different. Will any of the companies that have bleated behind the scenes about a politicised regulatory process dare to allege unreasonable harshness on the part of Ofwat? Will any appeal to the Competition and Markets Authority (CMA)?
Well have to wait eight weeks the permitted period for an appeal to find out, but the likely suspects would be well advised to swallow their medicine.
First, Ofwats review is pitched as the toughest ever, but so it had to be. Shareholders since privatisation in 1989 have enjoyed a dividend bonanza so this was always going to be a moment to lean in the opposite direction. Thats not evidence of politicisation; its just a recognition that regulation has been too lax. Ofwats new demands will strike most bill-payers as reasonable: lower returns on capital; a reduction in bills by 50 on average, ignoring inflation, over the next five years; and a 16% cut in leaks.
Second, Ofwat has given some ground between its draft and final calculations. Companies, in aggregate, will be allowed about 1.5bn of extra expenditure to meet performance targets. The concession is not huge in the context of a 51bn spending programme, but its a softening.
Third, the new regime will only look tough to the laggards, judged by efficiency. Note how the share price of Severn Trent, one of three companies that got top-of-the-class fast track status during Ofwats review, is within pennies of its all-time high. Its shareholders see little to frighten them.
Fourth, an appeal to the CMA is not a one-way bet. The competition regulator is allowed to conclude that Ofwat should have been harder. That thought ought to concentrate minds in the boardrooms of the four companies Anglian, Northumbrian, Thames and Yorkshire that are thought most likely to appeal. Its time for them to accept that, in a privatised but regulated system, owners have to take a hit sometimes.
Its hard to keep up with transport firm FirstGroups view of its best strategy. Back in May, the future emphasis for the group was going to be First Student and First Transit, its two North American bus contractors, since they had the greatest potential to generate sustainable value and growth over time.
Now both operations may be sold. Whats prompted the U-turn? One can point to the arrival of David Martin as chairman in August but, since he seemed to endorse the May vision only last month, the latest development looks to be a lobbying triumph for activist investor Coast Capital, aided these days by fellow investor Robert Tchenguiz. The duo demanded a sale of all US assets, not just the Greyhound coaching business, a few weeks ago; now they may get it.
A UK-only future would be a mighty come-down for FirstGroup, which can currently call itself one of the worlds largest transport companies with 100,000 employees. Indeed, even within the UK, the future of the bus division is unclear, as FirstGroup is exploring what form of separation is possible while meeting pension obligations.
If the buses were also to exit along with the US assets, all that would be left would be the UK rail business, from which FirstGroup seemed to be contemplating an orderly retreat only a year ago. Then it won the West Coast Partnership franchise and all is now apparently right with rail.
One can view this strategic soul-searching as an exercise in rationalisation, the polite term for a break-up. Its hard, though, to escape the feeling that theres a simpler alternative to uncertain deal-making: just run the businesses better.
Mike Ashley has been banging on about his elevation strategy for years and now he has something to show for it: a share price that elevated by 31% in a day. Context is everything, however. The improvement to 472p merely took the shares back to where they stood at the start of 2016, which is roughly when Ashley adopted his other obsession diversification.
House of Fraser, the main product of that ambition, clearly isnt getting worse, which was why the shares jumped on Monday. But the eventual returns from the HoF deal remain a mystery. Ashley runs a tighter ship than the old management (no surprise there) but the long-term investment demands in the department store business are anyones guess.
Excerpt from:
Water companies would be best advised to swallow their medicine - The Guardian
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