Outlook: Sir Martin's dividend amid advertising's nuclear winter

KPN/mmO; Coffee madness

During the last recession, Sir Martin Sorrell's WPP nearly went bust and the City cursed him for the destruction of shareholder value he presided over. He was lucky to escape with his job. This time around, Sir Martin has ensured that the advertising goliath he's amassed is a more conservatively financed and robust organisation all round, and although yesterday's interim results were a disappointment, particularly the admission that the group will fall short of its target of a further increase in margins this year, the good news is that despite one of the worst advertising recessions in living memory, things are still healthy enough to allow a sizeable increase in the dividend.

Not many media organisations can boast that. Granada and Carlton have cut their payouts, Pearson is paying for its dividend out of reserves and it's now so long since BSkyB paid any sort of a dividend that it must have clean forgotten what they are. Sir Martin's prediction that a significant recovery in the advertising market may have to await the Athens Olympics and the US presidential elections in 2004 – which are one and a half years' away – is as gloomy a prognosis as they come, but WPP seems better prepared than most for the nuclear winter which has set in across these industries.

In the boom years, WPP and other British companies used to complain bitterly about their inability to match US peers by paying staff in stock options. Now those restrictions look like a positive boon. WPP has far less of its capital out in staff stock options than US counterparts. As a result it doesn't have to fund them so heavily with stock buybacks, nor does the new austerity which forces companies to account for stock options as if they were a cost, impact as greatly. As a consequence, WPP seems to be achieving a better balance than Omnicom and others between the interests of staff, which will always be to the fore in a creative business such as advertising, and shareholders.

Few would have predicted that in the dark days of 1992, when Sir Martin was desperately trying to convince investors that they should back a rescue rights issue.

KPN/mmO

One by one, the big telecoms operators are coming to terms with reality and writing off the excessive prices paid in more profligate times for peripheral 3G licences. Telefonica Moviles and Sonera grasped the nettle last month with their 3G start up in Germany, and yesterday the Dutch carrier KPN did the same. KPN also put its 15 per cent stake in Hutchison 3G, which is planning to launch in the UK in late autumn as 3, up for sale. Purchasers are going to be thin on the ground, so perhaps wisely KPN has written off the value of its holding in the UK licence as well.

None of these players have yet wholly abandoned the 3G dream, in Germany or anywhere else. Moviles and Sonera say they have merely mothballed their German licence and might revisit its use at a later stage. KPN is, meanwhile, planning to continue with its German 3G buildout. Whether it stays the course remains to be seen, for the fact remains that too many licences were issued and not all of them can succeed. Britain's mmO2, the former BT Cellnet, is meanwhile both continuing with its investment plans in Germany and refusing to write off its hugely expensive purchase of a 3G licence there.

It was this purchase that finally broke the camel's back at mmO2's former parent company, British Telecom, and led directly to the humiliation of a rescue rights issue and enforced breakup. Even now, there is a consequent reluctance to admit the investment is wholly worthless. Moviles is able to gain a substantial tax break on its write down of German assets. No such tax advantage is available to mmO2, which wouldn't be allowed to offset such charges against UK earnings for tax purposes. So mmO2 is right to argue that even if it thought such a write down appropriate, it would be pointless to do so.

None the less, most analysts continue to attribute a negative value to mmO2's German operation. Many think the continued German buildout a waste of money. Maybe, but if mmO2 is the only player left standing besides existing incumbents when the music finally stops, then the game may still be worth the gamble. Sir Christopher Gent, chief executive of Vodafone, thinks the stock market is being far too gloomy about prospects for mobile telephony. Just as the market was excessively optimistic two years ago, it is now excessively pessimistic. He's right, of course, but it's going to require more of the write offs announced yesterday by KPN before the market believes him.

Coffee madness

It's hard to believe given the extortionate price charged for a double shot skinny wet latte, or even a conventional cappuccino, but the great bulk of Britain's legion of coffee bars struggles to turn a profit. So much so that Coffee Republic's Bobby Hashemi is threatening to give up the chase altogether and convert his group into a chain of bog standard sandwich bars.

It's easy to see why. The apparent success of the Seattle Coffee Shop chain, eventually sold to and converted into the concept it was copied from, Starbucks, spawned a legion of other copycat formats – Costa Coffee, Coffee Republic, Caffè Nero, Madisons and many minor versions of the same thing besides. Even Seattle never made a profit. Its founders were wise to sell out when they did while coffee bars were still thought of as the next big thing.

The trouble with selling cardboard cups full of coffee, it has turned out, is that however much you charge, you cannot sell enough of them to pay the rents and the wages. Pret A Manger and other successful sandwich bar concepts will typically outsell a coffee bar by four times for the same amount of floor space and overhead cost. In order to justify the very high rents these chains have signed up to, they need to be selling more than just coffee. Ergo Mr Hashemi's attempts to persuade Benjys, or some such other fast-growing chain of takeaway eateries, to reverse into his company and then convert to the sandwich concept.

It's not going to be easy. Coffee Republic is locked into lots of top-of-the-market rental agreements, some on stores it has since been forced to close, and it is haemorrhaging cash at an alarming rate. Converting the chain to the Benjys format may seem like a good idea, but it has all got to be paid for, and in an increasingly tough high street environment, the investment may be hard to justify. Likewise for Benjys. It may seem a good idea hugely to expand its potential for growth by reversing into Coffee Republic, but just what sort of a liability would it be saddling itself with. No wonder Benjys' chief executive, Ian Rickwood, is proving such a reluctant marriage partner. This is by no means a done deal and he's said fast to be getting cold feet.

Likewise Caffè Nero, which has built up a 10 per cent stake in Coffee Republic. It's got problems enough of its own without taking on Coffee Republic as well. The other big shareholder in Coffee Republic is Julian Richer, the high-fi entrepreneur and a friend of Mr Hashemi's. He's built up a 16.7 per cent stake. Perhaps Mr Richer knows something the rest of us don't. Alternatively he may simply be losing his touch.

jeremy.warner@independent.co.uk