Outlook: Diageo's jinxed burger sale takes another turn for the worse

Garnier's pay; Rail financing

Diageo's failure to sell Burger King says as much about the dire state of the private equity market as it does the near pariah status of burgers post the discovery of BSE in the food chain.

After more than a year of trying, Diageo triumphantly announced last July that it had found a buyer in the shape of a private equity consortium led by Texas Pacific. At $2.26bn (£1.43bn), the price scarcely seemed a good one. The exit multiple was little more than half the level at which McDonald's was trading at in the stock market. But burgers can't be choosers, and Diageo was happy to take what it could get.

Texas has been trying to renege on its side of the bargain ever since. The Burger King sale looks jinxed. A string of profits warnings from McDonald's has added to the growing gloom in the fast food market. Anyone would think the condition terminal. In Japan the situation is so bad that McDonald's is converting hundreds of outlets to a localised version of the Prêt à Manger format, the British sandwich bar chain it bought into last year. If McDonald's is dying on its feet, then the prognosis for Burger King, a poor number two to the market leader, must be even worse.

The dreadful state of the burger market is one thing. The other is the refusal of debt markets to fund any buyout of size. Buyout specialists are finding it hard, verging on the impossible, to find the necessary debt funding for larger transactions, particularly if the deal is thought remotely risky. Typically, lenders will only engage if buyout specialists inject a much higher degree of equity than they have been used to, which can often undermine the economics of the transaction. This is what appears to have happened with the Texas bid for Burger King. Diageo thought it had a deal, but then the lenders got cold feet.

Diageo has been through so many corporate transformations over the past 20 years that few can remember how it came to own Burger King at all, still less what the effective buying price was. Diageo is so desperate to get rid of the chain, so that it can concentrate on the eight core drinks brands it wants to shrink down to, that it might seem willing to sell at almost any price. But is it really prepared to accept as little as $1.5bn, the maximum Texas says it can now offer?

Paul Walsh, Diageo's chief executive, faces a tough choice. Either he sells for a price which even in today's markets looks a steal, or he gambles on being able to maintain the Burger King franchise long enough for the financial markets to recover. The latter strategy is a big management challenge. Mr Walsh was all set to sell Burger King and he hasn't a clue what to do if he's forced to keep it. Failure to sell will also disrupt previously announced plans for returning capital to shareholders. None the less, there are some prices which are just too humiliating to accept

Garnier's pay

Does GlaxoSmithKline talk to its shareholders at all? Yes, of course we do, says GSK. In fact we are talking to them right now. Presumably that would be about what the chief executive Jean-Pierre Garnier is doing to improve the company's increasingly poor drug discovery record, or to counter the perception that GSK is about to go ex-growth altogether? Well, no, as it happens it is about his pay, which, poor dear, is sinking worryingly behind his peers at Pfizer and Eli Lily. There's nothing like getting your priorities right. Never mind that to the outside world the GSK supertanker seems to be heading for the rocks, ensuring that executive pay remains "internationally competitive" is the order of the day.

Most investors would consider Mr Garnier already well paid enough for a company that has lost 40 per cent of its value since the Glaxo Wellcome/SmithKline Beecham merger. Alright, so the market as a whole has fallen by something similar in the same period, but this was meant to be a value-enhancing merger, and if there is one industry that should continue to grow strongly, even through the worst of business downturns, it is health care and pharmaceuticals. No such luck.

Mr Garnier received total pay and bonuses last year of £3.5m. His pension has been topped up so as to give him £966,000 a year when he retires, and there are countless share options to fall back on as well. Apparently it is not enough. Mr Garnier must have more, otherwise.... Otherwise what? Mr Garnier already runs one of the world's biggest pharma companies and he isn't going anywhere, unless fired. All the evidence is that high levels of executive pay make very little difference to corporate performance, rather the reverse in fact. Often it is indicative of an accident waiting to happen.

I shouldn't be too hard on Mr Garnier. He doesn't decide his own pay – that's for the chairman, Sir Christopher Hogg, and the remuneration committee to establish – and for the time there's no appetite in the City for his head on a platter. Just managing such a vast organisation is tough enough. To keep corporate earnings rising strongly at a time when patents and prices are under such relentless attack is proving a huge challenge that would tax the most inspired of pharmaceutical industry bosses. Even so, a more or less constant flow of negative publicity and analysis has begun to surround GSK. This may be one of those rare cases of smoke without fire, but it seems unlikely.

Rightly or wrongly, the merger is already regarded as a failure. Worryingly, the company has begun to charge the cost of settling out of court on patent cases as an operating expense, a policy which seems destined only to encourage even more litigation. The company's earnings guidance has been completely clobbered by the early onset of generic competition to its best selling antibiotic, Augmentin, while news of product innovation is now so thin on the ground that the group has cancelled its annual R&D day, when analysts are traditionally briefed on what's in the pipeline.

Mr Garnier is becoming so remote and uncommunicative that you wonder whether he really exists at all. Or has he become one of those cardboard cut-out leaders of communist politburo legend? For the record, Mr Garnier insists he doesn't want to build false hope by announcing compounds that may not make it through the development phase. Others fear the real explanation that there just hasn't got anything to announce. Whatever the answer, this is not the time to be broaching the subject of pay rises all round, even if the intention is that of "aligning executive reward with the creation of enhanced shareholder value". Executive pay always seems to rise, regardless of what happens to shareholder value.

What are these companies doing wasting everyone's time talking to shareholders about acceptable levels of executive pay? Have they lost all sense of reality and common decency? If Mr Garnier performs, then he should be well rewarded. If he fails then he should be given the shove. The rest is all so much self-interested nonsense.

Rail financing

Is that the sound of chickens coming home to roost outside Alistair Darling's window? The City always said the Government would pay a price for pulling the rug on Railtrack, and now Standard & Poor's has come up with a figure for the Transport Secretary to chew on. His colleague the Chancellor may have succeeded in persuading the Office of National Statistics to keep Network Rail's debts off the public finances. But that also makes it more difficult for ministers to give cast-iron guarantees they will stand behind the company in all circumstances. That in turn means Network Rail may struggle to achieve the single A credit rating that Railtrack enjoyed. That increases the cost of financing the debt. S&P reckons it could be as much as an extra £2.5bn. That's enough to build a good few hospitals and schools. Cluck, cluck.

jeremy.warner@independent.co.uk