Business View: France Telecom and British Energy speak the same language of failure

BAE must kick this unhealthy habit

Do you remember privatisation? It was that trend during the 1980s and 1990s to sell off the state's family silver to avaricious investors for a song.

Or so they thought.

Because if you follow the history of privatised stocks, you find that in general they have underperformed the market. This would indicate either that the state is more canny than the market (what a terrible shock that would be for Milton Friedman) or that the managers of state assets are not very good at running them in the interests of shareholders.

The current problems at France Telecom and British Energy would indicate the latter. Both received great dowries from the state: FT got its infrastructure at a knock-down price and BE was sold off for less than the cost of building Sizewell B. Both acquired aggressively. Both took on lots of debt (in BE's case, it also gave some £440m of the money it raised back to investors). And both are now bust and needing the state to bail them out.

FT's problems look soluble. It could sell Orange (difficult, and not at the price it paid, but do-able) and it can raise cash from the market (so long as the French taxpayer is willing to stump up sa part). Ultimately it will be a bad story, but one with a happy ending.

For BE, no such luck. I cannot see the British Government coming up with a workable refinancing by the deadline of 27 September. Or indeed in the forseeable. Reform of electricity trading will take months. And sorting out the nuclear waste liabilities even longer.

Gordon Brown, for it is his decision, will either have to bite the bullet and renationalise, or face the prospect of BE following the other great privatisation of the Major administration, Railtrack, into insolvent administration.

R&SA is all trust up

Trust is a precious commodity. In the insurance market it is maybe more valuable than capital, because without trust you cannot raise capital and without capital you are most certainly up a gum tree.

That is the hard lesson that Bob Mendelsohn learnt this week. There is a view that the biggest sin of the American former boss of Royal & SunAlliance was bad timing. He was a bullish man in a bear market, and he could not see that when things start going wrong, opportunities disappear like sand through your hands.

R&SA is now going through its books with a fine-tooth comb to give the market an accurate picture of its liabilities. But hold on, aren't insurers in the business of knowing this already? It seems that the market does not trust R&SA's existing figures so it needs to do the work all over again.

Then it will have to raise more cash and get a new chief executive. In that order, I suspect. Because I don't think R&SA can hire a new boss without a credible future and it does not have a credible future without extra capital.

Meanwhile, Legal & General and Zurich Financial have mopped up a fair bit of the available cash and there is a queue of others behind them. I wonder if this queue includes Aviva.

Its boss, Richard Harvey, said last week that it had enough money for its current plans. But as the market seems to have faith in Aviva, maybe it could try an opportunistic fundraising to expand at the expense of those for whom trust is as rare a commodity as humility.

BAE must kick this unhealthy habit

BAE Systems is like a smoker in its addiction to exceptional items. As I pointed out back in February, BAE's non-recurring nightmare means that investors have not had an unencumbered set of profits to digest since the middle of the last decade.

And this week's set of uninspiring figures from BAE added to the exceptional mountain with £39m of losses, most of which were due to the closure of its commercial aerospace business (although £1m refers back to the purchase of Marconi's defence operations four years ago).

Exceptional losses since 1999 now total £1.1bn – or nearly a sixth of the current market value of the company.

I wonder if BAE will ever be able to lose its penchant for exceptionals or, like a 20-a-day man, it needs some sort of radical therapy to give up the filthy habit. Maybe this week's re-rating is the sort of jolt that will make BAE clean up its act.

j.nisse@independent.co.uk