Whole new ball game for investment bankers

DUTCH telecoms group KPN this week launched a e5bn (£3.1bn) share offering, one of the largest ever seen in Europe. The deal was run by eight banks. Eighteen months ago, the City would have expected a transaction of this size and prominence to have been run by Goldman Sachs, Merrill Lynch or Morgan Stanley with perhaps a Dutch bank in the background for the sake of protocol.

But the three bulge-bracket houses were nowhere to be seen. The syndicate was led by ABN Amro and Deutsche and the other underwriters were Bank of America, CSFB, JP Morgan, ING, Rabobank and Schroder Salomon Smith Barney. The choice highlights what some are calling a seismic shift. Commercial banks are increasingly flexing their muscles.

Alongside KPN's hefty demand for equity came a request for e2.75bn of debt, willingly supplied by the same eight banks that underwrote the share offering. In the past, commercial banks would have been happy simply to provide the comparatively unprofitable loan and leave the high-profile, high-earning securities deal to the investment bank professionals. The demise of the Glass-Steagall Act, which prevented US commercial banks from owning investment banks, has changed that.

Equally significant is the increasing confidence of European firms with investment banking subsidiaries. Since Glass-Steagall was abandoned, Citibank has bought Salomons and Schroders and Chase has bought JP Morgan. Over the same period, the likes of Deutsche and UBS have become much punchier.

These firms routinely tell corporate clients they will only lend them money if they can have a slice of their securities or advisory-business as well. The banks know they can do this because pure investment houses do not have the assets to provide large companies with large loans.

In the past two years a lot of companies have received a lot of bad advice from investment banks. Many feel extremely sore. They do not want to be burned twice and are minded to use banks more for their technical and financial expertise than their ideas on strategy. If this attitude persists, it will increase the pressure on Goldmans, Merrills and Morgan Stanley.

End of an era

FROM the moment Marks & Spencer announced its intention to buy Brooks Brothers, back in February 1988, there was criticism of the deal. M&S was accused of overpaying and over-ambition. Today, those critics still working in the City can say: 'We told you so.'

Brooks Brothers has never lived up to its owner's expectations and plans to exploit the famous name have never borne fruit. At the time of the purchase, the retailer was described as being sleepily-run. M&S was going to revitalise the brand, expand the chain and use it as a platform for growth in the US. None of this happened. Brooks made less money last year than it did in the last year under former owner Campeau Corporation.

This failure is graphically illustrated by the terms that M&S has been forced to accept from Retail Brand Alliance. Brooks is being sold for precisely the value of its assets. There is no goodwill premium at all, a situation virtually unheard of in brand-name deals. The price is evidence of management's determination to focus on the core business. For this, shareholders should be grateful.

Recent figures have shown that M&S is beginning to show signs of recovery, internal morale is much improved and there is optimism about Christmas trading. The Brooks sale is a sorry end to an era during which M&S thought it could conquer the world. Now it is fighting to reconquer the soul of the British shopper.

Sad Somerfield

IF Somerfield did not exist, you probably wouldn't want to invent it. Sainsbury's and Safeway have just reported strong increases in underlying sales, Tesco is aggressively maintaining its position as market leader, Morrisons is booming and Asda continues to attract the shopping public. But Somerfield is struggling. Its most recent data showed the chain's core sales fell, while growth at the Kwik Save subsidiary declined.

Chairman John von Spreckelsen remains outwardly sanguine. When he joined 18 months ago, he predicted a turnaround in the group's performance within two years. Now he talks of a five-year recovery plan. Meanwhile the shares are hovering around 85p, against a high of 481p in 1998.

Somerfield and Kwik Save together have 1,400 stores nationwide, making it Britain's largest supermarkets group by number of stores. Tesco has just 400. Last year, Tesco sales at £21bn were five times bigger than Somerfield's. The leading chain made a £1bn profit. Somerfield turned in a £13m loss.

Kwik Save is a discount operator and has an obvious market niche. Somerfield has neither the upmarket allure of Waitrose nor the middle-market value-for-money appeal of Tesco and Sainsbury's. As they say in the trade, it has no unique selling proposition.

Von Spreckelsen has a challenge on his hands whether his timescale is two or five years.