Outlook: Six Continents at sea as Osmond finally goes for it

Pension deficits; Pearson/FT

Hugh Osmond's bid for Six Continents has not got off to the most auspicious of starts. An effective rap on the knuckles from the Takeover Panel for failing to provide an equivalent all-cash alternative, an inaccurate presentation and an explanation of the incentive package that was so confused it was close to gobbledegook – this is not the stuff of successful takeovers.

Other criticisms that can be levelled at Mr Osmond is that he's left his intervention very late with shareholders due to vote on the rival demerger proposal next week, he's plainly not yet found the partner he needs to manage and/or buy the hotels, and he's not giving as much immediate cash back as had been hoped.

That said, the bid has finally been tabled, despite those who dismissed Mr Osmond's interest as just bluster, and it is a credible one with a reasonable chance of success. Mr Osmond promises £700m more in immediate cash back than the rival Six Continents demerger proposal, but his real contribution to the party would be in applying the techniques of private equity to maximise value – securitisation of cash flow, sale and leaseback of the the property assets and a more vigorous approach to capital allocation.

To go with the private equity style management buy-in, there's naturally also a private equity style incentive package, the gold plated nature of which will stick in the craw for some Six Continents shareholders as egregious and greedy. As I understand it, the package works like this. All sums paid in shares, there's an immediate £22m fee to Mr Osmond's Sun Capital Partners on successful completion of the deal for all the time and effort so far expended. Two other linked fees of £38m and £47m apiece are triggered once the cash back totals £2.6bn and the equivalent Six Continents share price hits 692p.

Together, these fees amount to £107m, which the Osmond camp reasonably points out is less than the cost of the demerger, excluding additional advisory fees to investment bankers, lawyers and others. Anything above 692p a share, and the return to Mr Osmond and his partners become turbo charged – 20 per cent of any further upside. Packages of this order are common place in private equity and hedge fund management, but they have never before been tried in the publicly quoted sector. Most big City institutions are these days also investors in private equity, and some of them in hedge funds too, so they will be familiar with jackpot remuneration of this sort.

Whether they are prepared to tolerate them in publicly quoted companies is an interesting question, and I guess Mr Osmond's bid will provide the answer. Private equity and publicly quoted equity are regarded by most big investors as two distinct asset classes, the one quite high risk, the other less so.

After the stock market meltdown of the past three years, it's hard to agree with that analysis, but for better or worse, that's how some of them think, and they'll look at the terms of this deal and figure that Mr Osmond is getting a big chunk of the upside with virtually no downside risk. The dissection of Six Continents assets Mr Osmond is proposing is not rocket science, but if it were as risk free and easy as sometimes portrayed, then you would have thought even a management as lacking in imagination as the present lot might have tried it.

Mr Osmond's bid has prompted a deliciously two-sided debate in the City. To Mr Osmond and his supporters, it's a way for shareholders in publicly quoted companies finally to rid themselves of underperforming managements and obtain the returns of private equity. Most publicly quoted companies, he observes, are protected because private equity will not go hostile without due diligence.

If he's successful, a whole host of others will get similar bids, Mr Osmond predicts. But does the City really want to set such a precedent? Soon all FTSE 100 companies would demand the same incentives as Mr Osmond, making the present debate over excessive boardroom pay look like mild-mannered dinner party banter by comparison.

Normally I'd be signing off now with the statement "this one is set to run and run", or some such other platitude, but the imminent demerger EGM makes an early, sudden death outcome more than possible. Six Continents insists next week's EGM will not be adjourned. If it wins, then the demerger happens and Mr Osmond's bid is dead in the water.

On the other hand, Mr Osmond needs only 25 per cent of the shares voted to defeat the demerger. It is important that he is given at least that level of support. The demerger can be resurrected at any stage, but if Mr Osmond is defeated at the first hurdle, bids like this one won't happen again for a generation. The subtleties of the argument for and against his case need to be properly aired.

Pension deficits

Once seen as a hidden asset for corporate raiders to plunder, final-salary pension schemes have become like a millstone for many of the companies that operate them. The £551m pension "black hole" revealed by GKN yesterday looks grim. But it is nowhere near as bad as the £2.2bn deficit at BAE, where the workforce is threatening to go on strike if forced to help plug the gap, or the £1.2bn shortfall which Rolls-Royce is expected to announce today – a figure which is roughly the same as the company's entire stock market value.

To put GKN's deficit into perspective, it is less than half its market capitalisation, nor is the company threatening to close its final salary scheme, either for new members or existing ones. Furthermore, the top-up payment which GKN will have to make this year to compensate for the falling value of the fund's assets is not going to break the bank. The cost can be covered several times over from operating cash flow and, by comparison with its counterparts, GKN has a far healthier balance sheet.

There's little that links the pensions misfortune of these three companies other than one rather striking fact – they are all paying the price for having taken pension contribution holidays when times were good and the funds were in healthy surplus. Companies can scarcely complain that their profits now are being artificially lowered by the obligation to take a snapshot view of their pension liabilities into the future when they were inflating them during the boom by virtue of paying nothing.

Perversely, the rules allowed employers to take contribution holidays at precisely the time when they could best afford to have kept on paying them. Now the same thing is happening in reverse. Companies are being forced to pay more when they can least afford to. The burden of pension fund regulation ought to have been turned on its head, so that when the going was good there is an incentive or a requirement to save for when times were lean.

It's too late for that now. There are still loads of defined-benefit pension schemes around, but they have become incapable of procreation. Soon they will be a rarity and within a decade an endangered species. It has taken a three-year long bear market to make companies realise not so much that they cannot afford them any longer, but that they amount to an open ended liability that's becoming increasingly hard to honour.

Pearson/FT

Marjorie Scardino, chief executive of Pearson, once said it would be over her dead body that the Financial Times would be sold, and as she keeps pointing out, she's still very much alive. Persistent rumours of the FT's sale owe more to wishful thinking by would be buyers than anything else.

Ms Scardino would be mad to sell now at the bottom of the cycle with the FT losing money unless the Pearson balance sheet desperately needed it, which it doesn't. None the less, the FT has turned out to be a seriously cyclical product, which she will have to address somehow or other.

There's an Asian and a beefed up UK edition coming, but investors might wonder whether further investment is really the answer. Experience with The Economist has shown it can work. Repeating the trick with the FT may not be so easy.

jeremy.warner@independent.co.uk