C&G borrowers have all to gain by saying `No' : City & Business

ONLY the Treasury could come up with a blueprint for building societies that fails to throw a solitary ray of light on the one question everyone wants urgently answered: should borrowers enjoy some of the proceeds if their building society is floated or sold? The Building Societies Review published last week failed to address the question, let alone answer it.

You might think there would not be much doubt. Borrowers are the legal owners of the society, though their ownership rights tend to be less solid than those of investors. When the Abbey National converted from mutual status to quoted company, its borrowers were all issued with free shares, and the Halifax building society plans to issue shares to all its borrowers when it floats.

But the Cheltenham & Gloucester, along with its lawyers, Slaughter & May, believes it cannot be done. Whether it floats or - as it currently plans - sells itself to Lloyds Bank, the borrowers won't receive a penny of the proceeds. Its view is based on the judgment handed down last summer by the then Vice-Chancellor, Sir Donald Nicholls.

This is obviously a huge grey area here. Meanwhile, with no chance of any clarification in sight, C&G's 1.2 million members have to get on and vote on the Lloyds Bank proposal by 26 March. They need to ask themselves three key questions. Is there any advantage in the C&G staying mutual? Is Lloyds paying enough? And are the proceeds being fairly distributed?

Is a mutual organisation preferable to one with shareholders? In principle, yes. There are no dividends to pay, and the organisation can concentrate 100 per cent on serving its customers. In practice, no. Societies long ceased to be accountable to their members and last week's Treasury proposals won't make much difference. The Abbey National seems to have managed to keep its customers happy while serving its new masters.

Is Lloyds paying enough? J P Morgan, the investment bank advising C&G, seems to have done a pretty good job in maximising the price. By two different measures - price/earnings ratios and discount cash flow techniques - the £1.8bn price looks reasonable. More to the point, none of the other three prospective buyers originally shortlisted has subsequently indicated it would offer any more.

Are the proceeds being fairly distributed? To the 806,000 eligible investors - more than fairly. As we describe on page 13, they stand to receive up to £13,500. Depositors with anything but the most unswerving dedication to the mutual movement would be crazy to vote anything but yes.

Borrowers, however, stand to get nothing. The law is an ass, the C&G says, but it still expects its borrowers to surrender the ownership rights they have in the society in return for nothing. Borrowers are every bit as responsible as savers for building up the reserves of the society, and are also more likely than savers to be long-term members of the society. It is preposterous that they should be excluded from any payout.

The C&G argues that borrowers will eventually benefit because of more competitive rates made possible as C&G exploits the efficiency gains from taking on the Lloyds mortgage book. Even if that happens - a big if, because C&G is already hyper-efficient - borrowers would have to enjoy many years of cheaper mortgages to compensate them for the one-off payment foregone now.

They will be better off to sit tight and vote no. The C&G, confronted with defeat, might try a little harder to challenge the High Court judgment, or get the law changed.

Persil washout

SIR MICHAEL PERRY, chairman of Unilever, called it "the greatest marketing setback we've seen". Unilever shareholders might have chosen a juicier epithet to describe the disastrous launch and promotion of the Power range of detergents last year - fiasco, blunder and shambles spring readily to mind.

For Unilever, the group responsible for hundreds of consumer products from Bird's Eye fish fingers to Brut after-shave, the episode is deeply embarrassing. Last week, it announced a £57m charge to cover write-offs and other costs associated with Persil Power and other Power products across Europe.

Add in the operating losses of the product, the R&D costs, the lost sales of associated products using the same brand name, the management time taken up, and the entire episode is almost certain to cost the group well over £100m. Then there is the unquantifiable, but undeniable, damage to Unilever's standing in the City.

How could it have happened? Overweening arrogance, sloppy R&D, and nave PR, to name but three factors.

The arrogance was in refusing to believe the mounting evidence that the product could damage clothes in certain circumstances. Unilever wasn't helped by the source of the original accusation - it came in person from Unilever's arch enemy, Ed Artzt, chief executive of Procter & Gamble, a man known affectionately (and not so affectionately) as the Prince of Darkness. His request that Unilever shelve the product quite naturally had precisely the opposite effect. Unilever became entrenched in denial mode. Even 10 months after the launch, Persil Power has not been completely scrapped, despite the refusal of Sainsbury, Tesco and others to stock it.

The sloppy R&D was in not testing the product rigorously enough before launching - the company's scientists feared the opposition was developing a rival product and rushed.

The naivety was in failing at first to understand how quickly the story of Power's shortcomings would spread from country to country across Europe, and how damaging it would be to sales.

No heads have rolled at Unilever, but Sir Michael insists lessons have been learnt. Let's hope so. Shareholders would not treat a second disaster on this scale so kindly.

Pentos brought to book

TUESDAY is crunch time for Pentos. With its bankers digging in their heels, it faces either receivership or a rescue restructuring. The latter, I hope: Pentos has some value as a continuing business, but less at the knacker's yard. Even if it is rescued, however, the shares (which closed at 8p on Friday) will be diluted into oblivion. If you're unfortunate enough to hold any, sell.