Tuesday, 9 December 2008

Who's next for nationalisation?

Regular readers will be aware of my views on the banks – after the sub-prime mortgages, CDOs and toxic loans, then the rusty car loans, we will have the rancid corporate loans. My view remains that most major banks in this country will wind up being fully nationalised – but what of major businesses?

I don’t believe in Government bailing out major companies. For instance I believe it is a major mistake by the US government to bail out any of their car manufacturers – they have become large organisations that are out-of-touch with their consumers and pursuing business strategies that were always destined to fail – credit crunch or no. As in nature, the rule of “survival of the fittest” is the best rule for businesses as well - artificially keeping weak businesses alive will, in the longer term, cause more problems than are solved by supporting them short-term.

But the UK Government seems destined to nationalise several major business over the next few months, many unintentionally. I believe that many highly leveraged organisations will shortly be defaulting on their loans to banks that will by then be partly- (or I believe fully) nationalised. Government will have difficult political decisions to make – let the companies fail, with the consequent loss of jobs amongst the electorate – or bail them out. In some situations the banks will have no choice but to take on ownership to try to recover some of their losses, but in a nationalised banking environment where politicians will undoubtedly make many of the decisions, I suspect more will pass into public ownership than would normally.

On Monday, Jon Mouton wrote an
article in the FT about the £20bn of debt in the pub industry that he believes is currently “unsustainable”. One can but agree with his assessment that “the capital structures for a lot of pub companies have become desperately inappropriate in a falling market,” and that “the highly leveraged business model pioneered by the likes of Punch Taverns and Enterprise Inns was looking increasingly untenable”. Will the pub industry – so close to many of Labour’s supports – follow the automotive industry in seeking government funding?

What about other sectors? The retail sector is always one of the first to feel the effects of a recession – Woolworths and MFI had flawed business strategies and were early casualties – but even businesses with strong business strategies but deeply in debt may not survive. For example, Boots reputedly has c £8bn in debt – will it survive any downturn? – if not, there is little doubt that it would have to continue trading – but in whose ownership?

Yes - there will be several “vulture” debt funds in the Private Equity sector, but I don’t think their pockets will be deep enough for all the distressed debt that will be around next year. No – my money’s on several “nationalisations” during 2009....

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