Outlook: 'Lucky' Philip gets Green light to swoop on Safeway

Nats refinancing

Lucky seems to be Philip Green's middle name. Not even he would have predicted the decision which emerged yesterday from the Department of Trade and Industry on the five-way tug of war for Safeway. Given that the DTI is meant to be in the business of protecting the "public interest", it was hard to defend, if easy enough to understand how it came about.

By allowing a clear run to Mr Green's Trackdean Investments but referring all four trade buyers to the Competition Commission, including Wm Morrison, where the overlap was marginal and easily addressed through relatively minor disposals, Patricia Hewitt, Secretary of State for Trade and Industry, has given Mr Green a possibly crucial campaign advantage.

For the next five months, Mr Green has the field to himself. While the Competition Commission pores over the detail of local market definitions, drive times, the relative costs of an average shopping basket, buying power and all the other issues affecting the trade bidders, Mr Green can pop the prize in his trolley and be off through the checkout before the others have even got so far as the booze counter. Asda and the others will ask shareholders to hold on for the possibility of an eventual higher offer, but provided Mr Green bids enough, shareholders won't be prepared to take that risk. Mr Green will argue that his bird in the hand is worth more than the two in the bush.

I cannot for the life of me see how giving Mr Green such an advantage over the others might help the British consumer, which is meant to be the whole point of these reference decisions. I've got nothing against Mr Green, who whatever you think of his uncouth language and prejudices seems to be an accomplished retailer and financier, but one thing seems certain; his acquisition of Safeway wouldn't further competition in the supermarket sector one jot and might quite considerably damage it.

Any bid by Mr Green would be a highly leveraged transaction. Safeway would be run for cash, at least until the £3bn of debt necessary to buy the equity had been paid off. No doubt Mr Green and his backers would end up making lots of money out of what would in essence be an asset stripping endeavour, but it's hard to see how a company already struggling to stay with the pack among the big supermarket groups could do anything other than sink even further under such a regime.

Mr Green admits that in any case the game plan would be progressively to pack the shelves with Bhs knickers and What Everyone Wants pap. Within a few years, Safeway would be out of the big league grocery market altogether. Condemned to suffer slow death by a thousand cuts, the others would quickly gobble up Safeway's remaining market share, either by buying its stores piecemeal or by simply out-trading them. Four would fast become three.

No wonder Tesco shares were up so sharply yesterday. For Tesco, a successful Green bid represents the best possible outcome other than taking over the company itself, which wouldn't be allowed in a month of Sundays given Tesco's already commanding position in the market. As Safeway slowly abdicated its position in the groceries trade, Tesco would be the major beneficiary. All hope of a fourth force emerging out of a combination of Wm Morrison and Safeway would vanish.

Yesterday's decision was a poor one, which demonstrates once again just how out of step the Government's purist approach to competition policy has become with the concerns, demands and wishes of ordinary people. To be fair on Ms Hewitt, it was wasn't entirely her fault. The Government has agreed to abide by the independent recommendations of the Office of Fair Trading, which in its advice to the Secretary of State seems to have thrown its hands up in the air and said the whole thing was far too difficult and complex to decide here and now, so let's just play it off into the long grass of the Competition Commission.

As it happens, the Commission investigated the supermarkets sector in exhaustive detail less than three years ago. Its report was quite specific in its definition of local monopoly, which is why the supermarket chains were able to be so precise in their estimates of how many stores they would need to dispose of to remedy the adverse impact on competition.

The OFT's handling of the matter was hardly helped by the fact that the director-general, John Vickers, was declared offside because in another life he'd taken work from the industry. It therefore fell to his deputy, Penny Boyes, to deal with the battery of highly paid lawyers sent to deal with the matter and she seems to have buckled under the pressure.

As I understand it, she might have conditionally cleared Wm Morrison, but was told in no uncertain terms by Wal-Mart that she would have to offer the same conditional deal to Asda and by implication all the other trade buyers if she did. As it happens, she could still have referred the big chains on "national" competition concerns and conditionally cleared Wm Morrison on the local issues, but if this occurred to the OFT at all, it was plainly too confused and scared by the end to try it.

As a result it seems to have unintentionally ended up with the worst possible of all outcomes. Mr Green may not bid, or more to the point, he may not bid enough to make Safeway shareholders go with him in preference to hanging on for the possibility of a higher offer from the trade buyers at a later stage. But it never pays to underestimate Mr Green and I fear that the effect of yesterday's decision will be to close off what all along has been the housewife's choice, a combination of Safeway and Wm Morrison, for ever. So much for pursuit of the public interest.

Nats refinancing

Of all New Labour's experiments with privatisation, air traffic control has proved the most ill-starred. The organisation was bought for a ridiculously extravagant price by the wrong bidder in the shape of a warring collection of airlines. Within a few short months, Sir Richard Branson and his fellow members in the Airline Group, were knocked sideways by the devastating impact of 11 September, an eventuality no one could have foreseen but a shock to the airline market which the financing should have been robust enough to weather.

What is less well appreciated is that National Air Traffic Services was also privatised using a wholly inappropriate structure involving project finance debt. This is fine for financing, say, a toll road where the risks are low, the revenues are predictable, and the ongoing capital expenditure is modest. Applied to a service such as air traffic control where both the capital expenditure and the risk is huge, as 11 September demonstrated so graphically, it has been a recipe for disaster.

NATS found itself under the thumb of its banks, with declining income on the one hand and the requirement on the other to pay off the providers of the project finance within a 20-year timeframe. The upshot has been a freeze on investment and a deterioration in service.

It was Salomons which, for reasons best known to itself, dreamt up this unusual financing structure and it is Warburgs, or UBS as we must now call it, which has cleaned up the mess. NATS still has its difficulties – not least the unacceptable level of flight delays it is responsible for and the low morale among its staff.

But at least the new and much more conventional debt and equity financing put in place yesterday in tandem with a new three-year price control places the organisation on a firmer footing, better able to finance its £1bn programme of investment in new radars and the like. Despite the refinancing, NATS is still going to be in trouble if there's a long and bloody war, but then so will everyone else.

jeremy.warner@independent.co.uk