Outlook: Baan overboard as Haythornthwaite struggles with salvage

Grocery attractions; Free trade impasse

Rick Haythornthwaite reckoned he had thrown in the proverbial kitchen sink when he first took over at Invensys and announced the obligatory rationalisation programme. Eighteen months and one profit warning later he is back again with the Marigolds on and this time the pile of dirty dishes is even higher.

Invensys is pulling the plug not just on the final dividend and its chairman Lord Marshall, but also on businesses which account for 60 per cent of group turnover, including the ill-fated Dutch acquisition Baan. Please don't call it a break-up. Invensys prefers instead to think of it as a "strategic refocusing" down to one core business of helping firms manage their production lines.

Confused? So too are the analysts paid to follow the affairs of this ever shrinking former conglomerate. Two months ago they were told that 80 per cent of the business was performing to plan and that Baan was not for sale because it was part of the "core" business.

It all seems a far cry from the grandiose vision Invensys laid before the investment community when it was formed from the £9bn merger in 1999 of BTR and Siebe, two businesses which had once grown exponentially through a combination of aggressive acquisitions and equally creative accounting. Most mergers destroy shareholder value and Invensys has proved the truth of that in spades. The BTR/Siebe get together came too late to apply the techniques of merger accounting to the picture being presented in the shop window, and the combined whole is now worth less than £500m. Debt stands at £1.6bn of debt even after raising £4bn through disposals.

What seems to have caused this latest burst of refocusing is less the state of the markets Invensys is operating in and more the fact that its bankers have finally lost patience and told Mr Haythornthwaite to get the debt down and fast. The growing hole in the pension fund has not helped matters.

Invensys plans to sell off businesses with combined revenues of £2.9bn. How much the fire sale will raise is another matter. Baan, which was bought for £470m just three years ago, is a basket case, and prospects for some of the other businesses that have suddenly become "non-core" such as climate controls aren't much better either.

Mr Haythornthwaite surely cannot have imagined what he was letting himself in for when all bright and bushy tailed he agreed to take charge of the Invensys salvage. His share options long ago sunk below the water line. It's not his fault that the hulk is falling apart as he attempts to tow it off the rocks, and ever the optimist, he continues to believe there is still a viable property in there somewhere.

But it looks increasingly likely that the core will be gobbled up by the bankers once the roughage has been sold off. A fitting end, perhaps, to what was always a futile marriage. And for Mr Haythornthwaite, a blessing in disguise. The sooner he puts Invensys behind him and moves on to running a proper company again, the better.

Grocery attractions

I may have to eat my words when I get into the office this morning, but I don't believe Philip Green is ever going to make a bid for Safeway. His declared interest in the company looks more like an ego boosting publicity stunt by the day and I'd be amazed if anything of substance comes out of it. With each week that passes, his relative advantage against the alternative trade bidders in being the only interested party not being investigated by the Competition Commission ebbs away.

Major shareholders in Safeway wouldn't in any case be prepared to accept a low ball offer from Mr Green, even after yesterday's trading update, which shows that things are starting to deteriorate sharply because of the uncertainty that overhangs the company's future. Failing the monopoly price Asda might be prepared to pay if the Competition Commission gives the go-ahead, investors would rather settle instead for Wm Morrison than Mr Green, an alternative that would at least give them an ongoing stake in Safeway.

Hugh Osmond's failure to secure Six Continents shows that big institutional investors have had their fill of private equity style transactions. If there is upside to be had, then they want it for themselves, and if even Somerfield, the dysfunctional also ran of the groceries trade, can attract a bid at a reasonable level, then Safeway has to be worth a lot more too.

The Somerfield bid is a curiosity if ever there was one as well as being a living reminder (well almost anyway) of the fact that private equity takeovers don't always generate squillions for their backers. Somerfield is the remnants of the old Gateway supermarkets group, bought, disastrously, by financial bidders in the late 1980s. Weighed low by the debt taken on to finance the transaction, the company eventually had to sell its best outlets to Asda. It was the making of Asda and the undoing of Gateway, which was eventually refloated as the sickly Somerfield. Convenience shopping for the cash rich time poor urbanite is meant to be the new big thing in groceries. Every dog has its day, and maybe this is Somerfield's.

Free trade impasse

"If goods do not pass frontiers, armies will", said Cordell Hull, the former US Secretary of State widely regarded as the father of modern multinational free trade. It's a chilling thought which is perhaps as relevant today as it was when it was first offered during the outbreak of protectionism that led to the Great Depression and ultimately to the Second World War.

Nobody is saying that we are today in a similarly apocalyptic downward spiral in international trade and diplomatic relations, but the dangers are there for all to see, as Peter Sutherland, a former director general of the World Trade Organisation and the present chairman of BP, warned his audience in a lecture last night to the Worshipful Company of World Traders in the City.

The GATT and now the WTO have largely succeeded in eliminating commercial ambition as a cause of war, Mr Sutherland observed. But the multilateral trade agreements and enforcement mechanisms around which so much of the world's present economic prosperity is built are a delicate flower, and right now it's being buffeted from all directions.

Mr Sutherland's message was that it is essential to the credibility of the WTO that the Doha process is moved forward over the next six months, and for that to happen requires movement in Europe on agricultural reform. The developing countries won't budge on further liberalising their markets until they see real progress on dismantling the subsidies and protections still afforded to agriculture in Europe and beyond.

Why is it so important to make progress? The world economy is in recession with international trade at its lowest ebb in years. It desperately needs the medium term boost that a further opening up of markets would provide. But the bigger reason is a less tangible one. International relations right now are at their most fragile since the end of the cold war, with the recriminations over 11 September and the war in Iraq still echoing around the world.

There is a real danger of the deep divisions that have opened up over Iraq contaminating the multilateral trading system. For instance the US could quite legally use the WTO to pursue economic sanctions against France for its position over Iraq and visa versa. Alternatively, the US could just ride rough shod over the WTO altogether, as it did with the United Nations, a response that could lead ultimately to a total breakdown in the free trade agenda. "If the WTO represents international order through consent, achieved by consensus among sovereign governments, then the stakes are very high. We have to make it work", Mr Sutherland says. Quite so.

jeremy.warner@independent.co.uk