Outlook: Someone may get the Abbey habit, but not the Irish

Water relief; Bowker bonds

Abbey National is down on its luck. The share price has halved in the past 12 months, it is bereft of a chief executive after the disastrous foray into wholesale banking and its brand has been tarnished where once it was a household name in the traditional mortgage market. It is, therefore, vulnerable to anyone who comes along offering a decent price.

But even Abbey shareholders are not going to be bribed with their own money into selling out to Bank of Ireland. The headline value of the bid is £10.6bn. But since the Irish first showed their hand a month ago, the premium on offer has dwindled from 24 per cent to 5 per cent at last night's closing prices.

Even then, it only represents a premium at all because a large chunk of the £1.9bn cash element added to BoI's paper will be funded from Abbey's own capital.

The Irish are nothing if not bold, however, and have produced some eye-watering estimates of the savings they will wring out of the merged bank, all with a Good Housekeeping seal of approval from PricewaterhouseCoopers.

The headline figure is £400m, made up of our old friends cost synergies and revenue enhancements. Shutting down Abbey's swish new headquarters and running the business and the IT systems from Dublin will only save so much. The big savings would be made in the UK retail market, the only real area of overlap, where Bank of Ireland's Bristol & West competes with the existing Abbey branch network. To achieve the £240m of cost benefits envisaged would probably mean torching Bristol & West.

As for the revenue benefits, these are rather harder to pin down, PricewaterhouseCoopers notwithstanding, but seem to rely on selling an awful lot of Irish life policies in the UK market.

Supposing the merger benefits can be achieved, it comes down to who has the better management. Even here, the choice is scarcely straightforward as Abbey does not presently have a chief executive while Bank of Ireland's chief executive, Mike Soden, is an unknown quantity. He may turn out to be another Fred Goodwin but, then again, he may not.

BoI is not short of ambition. But it is short of stature and getting smaller all the time as the Abbey shares price rises and the chairman Lord Burns refuses to let the Irish in to talk turkey.

As things stand BoI is destined to fail. But it may well have whetted the appetites of some of the bigger beasts in the banking jungle. When Lloyds TSB bid £13 a share some 18 months ago, Ian Harley, Abbey's then chief executive turned them down and the Competition Commission did the rest. This time around, with Abbey looking more feeble and HBOS emerging as a genuine fifth force among the high street banks, things could easily turn out differently.

Water relief

Water companies are so used to being put through the regulatory wringer, that yesterday's announcement from Philip Fletcher must have been a pleasant shock. His predecessor at Ofwat, Sir Ian Byatt, did not believe in regulation through consultation, preferring instead to squeeze the industry until the pips squeaked.

At the last price review, Sir Ian squeezed prices so hard that he strangled the life out of Hyder altogether and made investors elsewhere take a serious bath. Since then, Thames has been refused permission to gobble up some of the smaller fish in the sector and has sold out to the Germans while Southern Water has gone to the French. As for Anglian Water, it has washed away the shareholders and replaced them largely with bondholders. The remaining quoted water companies stagger on, trading at about the value of their regulated assets with little or no premium to reflect their unregulated businesses.

In Mr Fletcher, however, the industry evidently finds itself with a completely different kettle of fish. He believes in swimming with the tide and has already told the industry that even though the next price review will not take effect until 2005, it can rest assured that prices will not go down. If anything, they will start to go up such is the tidal wave of environmental directives heading its way from Brussels.

Meanwhile he has launched a three-month consultation exercise so that everyone can have their say about exactly how Ofwat should approach the forthcoming price controls.

As an added gesture to remove "regulatory uncertainty", he is modifying the notice periods of all companies so that henceforth they will be allowed 25 years to get out the water instead of the existing 10. After the plunge pool mentality that characterised the Byatt era, this must seem to the water companies like a long, hot soak in soothing oils.

It does not stop there. If everything goes according to plan, then long-term the regulator only intends to bother the industry once every 10 years with new price limits, instead of every five. In an industry where underground assets can last hundreds of years and investment is financed with 30-year bonds, it makes sense to take the long view.

After the battering the water industry has taken in the past five years, it was perhaps due a little respite. The power industry, currently enduring its own form of water torture at the hands of Callum McCarthy, can only look on in envy. Then again, Mr McCarthy has not got much longer to serve.

Bowker bonds

Coming soon to a railway station near you: the Bowker Bond. The chairman of the Strategic Rail Authority has rowed back a long way from the weekend speculation that he is about to issue £30bn of bonds to help re-invigorate the rail network. But the concept of raising additional private capital to fund new rail projects financed through the passenger revenues generated is clearly now on the agenda.

Strangely enough the idea of bond financing was poo-poohed when it came to both London Underground, where it was Mayor Ken's favoured financing method, and National Air Traffic Services, where a botched public private partnership took the place of bonds.

But the overground railways seem to be a case apart. The Channel Tunnel Rail Link was only salvaged after John Prescott agreed to guarantee the bonds issued by the developers.

The question is who will stand behind the Bowker bonds. Alistair Darling, the Secretary of State for Transport was careful to distance himself yesterday from guaranteeing bonds issued by private companies to redevelop the railway, mumbling the usual stuff about striking the right balance between risk and reward. But unless the Government is prepared to put its money where its mouth is the private investment will not be forthcoming, especially with Railtrack still fresh in investors' minds.

If Mr Darling is worried about adding to the Government's borrowings, he can always use the same smoke and mirrors kit that Mr Prescott used to keep the Chunnel Link off the public finances.

m.harrison@independent.co.uk