Crunch coming on house prices

Anthony Hilton12 April 2012

AT last the Bank of England seems to be worried about the house prices boom. Deputy Governor David Clementi caused a surprise a few weeks back when he seemed to imply that it was not a serious problem because things were nowhere near as overstretched today as they were before the 1990s collapse.

But today in front of the Treasury Select Committee he took a tougher line, casting himself as the prophet of doom. 'It bears repeating,' he said. 'The level of house price inflation, the growth of house prices is unsustainable and the longer it goes on, the sharper is likely to be the eventual adjustment.' In other words the greater today's gain, the greater tomorrow's pain.

His boss Sir Edward George, perhaps with an eye to the inevitable headlines, sought to cool fears of a bust to follow the boom. Unfortunately, this is not in his gift. It is a bit like the dollar - every central banker wants it to fall but slowly and gently, because the alternative is too awful to contemplate. But in financial markets gentle adjustments are as rare as hen's teeth. The reality is that when people see that prices slide, they rush to sell. Their desire to lock in their profit guarantees that a bust will follow the boom.

Something to Yell about

YELL, the directories business sold in the fire sale of assets by BT a few months ago, confirmed today that it is coming back to the stock market. The indicative float price is between 270p and 345p a share, which puts a mid-point value on the equity of just over £2bn.

The float is a chunky one for the market in its current mood, given that it is planned to raise rather more than £1bn from new investors so that they will hold 51% of the equity. Of this, £750m will be new money with the balance of £300m going to venture capitalists Apax and Hicks Muse, which financed the original purchase from BT and are unloading some shares.

The debt in the business, currently £2.5bn, drops to £1.2bn. The new money raised will pay off a chunk and an additional slice owned by the venture capitalists will be converted into equity before the float. Overall, therefore, the venture capitalists will maintain their equity commitment - which suggests they think the business still has a long way to go and the offer price is a lot better value than shares of comparative companies in the market place. Venture capitalist sales are not always good value but this market will not pay over the odds.

For a business that has been around as long as Yellow Pages, it is a remarkably strong growth story with unusually good management. The executives have found a new passion since they got out from under BT, which means the business is squeezing out more revenues and maintaining margins in Britain despite a tougher regulatory regime.

The potential is even better in the US, although an apparently mature market, because it is controlled largely by the incumbent telephone companies. These are seen as dinosaurs struggling to fight off a much more aggressive, light and nimble independent sector which has begun to develop rapidly since a court ruling a few years ago that forced the incumbents to hand over the clean phone lists the competitors needed to get into the markets.

Alhough British companies normally make a pig's ear of operations in America, in this case the competiton seems to be as desultory as BT was at exploiting the potential of the business.

So if you believe the Americans will remain a sufficiently soft touch for Yell to continue to do rather well there - and to expand fast without overreaching itself - you have a powerful reason to buy the shares. They certainly look a more attractive bet than some of the stuff floated recently.

PR message

A QUESTION in Parliament yesterday focused on the apparently unhealthy move of the hitherto unknown Andrew Hood from his post as a special adviser to Defence Secretary Geoff Hoon across town to the financial public relations consultancy Brunswick.

The perceived problem behind the question was an issue that had been raised by BBC radio's Today programme. Special advisers are really just PR people who put a more favourable gloss on what their minister does than departmental Press offices manned by impartial civil servants are willing to do. Nevertheless, when an adviser goes from such an appointment inside a ministry to an external appointment with a PR firm, ought not there be a decent cooling-off period?

Not in this case for two reasons. First, though Brunswick has Rolls-Royce as a client it is not a political lobbying firm in the accepted sense, so Hood's internal knowledge of the MoD will be no use to it. Second, Hood is not being employed as an external PR consultant, but as an internally focused office manager.

What is clear, however, is that Brunswick failed to get this message across to the media. Perhaps the firm needs to retain a PR consultant.

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