23 July 2014
Week in Brief: BUSINESS & THE CITY
GREEK BANKS: Greek financial affairs have suddenly been relegated from the headlines, following the rescue package agreed last week which has led to their banks reopening on Monday, and enabling the central bank to make the delinquent IMF payments to take the country back out of insolvency. There are various legislative barriers to cross yet and there are severe restrictions on cash withdrawals and transfers, but for the time being the crisis has been averted. The next test will be the left wing government’s implementation of the agreed austerity programme, which may cause further unrest among Greek citizens, especially with pension cuts likely to be pretty deep, and then likely elections in the autumn. But at least for the time being, things are settling down.
GREEK GIFTS: The resolution of the Greek debt crisis has not gone unnoticed in the tourist trade. The various travel companies and airlines who market Greek holidays report an upsurge in bookings and enquiries. Although it is not expected to be a great summer for the holiday business, and there are lots of bargains still available, it looks as though the worst is over for those many Greek businesses, especially in the islands, who so depend on the summer holiday trade. What is now becoming apparent though is that the holiday trade remained relatively unaffected by the financial crisis in Athens for a remarkable time – it was only at the end of June, when the banks were closed, that bookings fell dramatically. When it comes to the Mediterranean sun, holiday makers seem to be prepared to be very robust.
FOR SALE SIGNS: As George Osborne increases his search for expenditure savings – he now wants to cut £20bn off existing spending budgets – government departments are increasingly looking at their enormous property land banks. It is estimated the government, or rather the tax payers, own about £300bn of properties in the UK. A lot of that is in specialist properties that are needed for government services – such as schools and hospitals – and even more is in the form of government offices, but quite a lot of it is in land. It is estimated that The Ministry of Defence owns one per cent of the land area of the British Isles, much of it used for military training – such as getting on for an estimated 200,000 acres around Salisbury Plain in Wiltshire and Dorset. Whilst nobody is suggesting turning tank ranges into housing estates, there are probably a lot of little corners that might just do for housing or retail parks. And there is no particular reason why the government should own a lot of its own offices – after all, most businesses don’t. They sell them to investors on long leases. There is plenty of demand for that sort of investment at the moment, and yields are at record lows. So the major estate agents will no doubt be making for Whitehall with some enticing proposals and then off to see eager investors with possible opportunities.
ROLLS ROLLS EAST: Rolls Royce, the aircraft engine maker, has had a battering of bad news recently, including the embarrassment of new Chief Executive Warren East having to announce slashed profit forecasts in his first week in the job, last month. But yesterday he could publish some good news – the engineering firm was able to announce a US$930m deal to supply its Trent 700 engines to Airbus for new planes being constructed for leasing to Saudia, the state airline of Saudi Arabia. This is good news for Anglo Saudi relations too – recently there has been a certain coldness in the air politically, with a change of monarch and the turbulence of the nuclear standstill pact between the Americans and Iran. Rolls has announced it is halting its half-completed £1bn share buyback programme, which should mean less pressure on working capital to construct this order; all good news for the share price.
DRILLS BLUNTED: More fallout from the dramatic drop in oil prices – Halliburton, the international oilfield service provider, has announced profits 93% down in the first half of 2015. This reflects sharp falls in new oilfields being opened up, mothballing of some expensive drilling sites, and a serious attack on costs by oil companies. Halliburton is attacking its own cost base as fast as it can, but this inevitably takes time, and the business has to steer a tricky line between getting profitability back to reasonable levels and maintaining capacity for a possible quick upswing in demand for oil.
PHONE FOR JOB OPPORTUNITIES: Vodafone, Europe’s leading supplier of mobile phone services, is preparing for the next stage in its evolution: to cement its market position by faster decision making, cost control, and quicker responses to new opportunities and trends. Chief Executive Vittorio Colao has cut out a layer of European senior management. From now, the country heads will form the European management forum and report direct to Colao. Vodafone has become a very big business comparatively quickly, and is now making hefty investments which Colao wants to ensure are properly justified and fully accountable.
ANOTHER FOR-SALE BOARD: Travelodge, for long rather the poor relation of Premier Inn in the provision of a standard value (i.e. cheap) but quality product in hotel accommodation across the UK, has announced that revenues were up 18% in the first half of 2015. Revenue per room was up 15% (to £36 per room per night – which shows the target market) and the rest is from improving occupancy levels. This is a great result for the management team who have struggled with a chain which effectively went bust in 2012, having pretty much got through the recession but then failed, suffering from unsustainable debt levels. Travelodge was saved from bankruptcy by being taken over by Goldman Sachs and two investment funds, who then had to bring in the new management team and grapple with several years of underinvestment and a tired and, in some places, unsuitable estate of hotels. In the meantime, arch rival Premier Inn was able to build many new hotels and modernise their old ones, also running a very successful advertising promotion with actor and comedian Lenny Henry. Now Travelodge is back in contention. The next stage for Goldman’s and their partners is to begin their exit strategy, by either a flotation or a trade sale.
KEY MARKET INDICES: (at 22 July 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.56%(steady); 5 year 1.63%(steady).
Europe€: 1 mth -0.6% (rising); 3 mth -0.2% (rising); 5 year 0.33% (fall)
US$: 1 mth 0.21% (steady); 3 mth 0.38% (steady); 5 year 1.78% (steady)
Currency Exchanges:
£/Euro: 1.44, £ strengthening
£/$: 1.55, £ steady
Euro/$: 1.1, € slightly weaker
Gold,oz: $1104, fall
Oil, Brent Crude barrel: $56.65, small fall.
Wheat, tonne: £120.15, steady
London Stock Exchange: FTSE 100: 6,769. FTSE 350: 3,748
Briefly: The markets remain steady, trading in established bands. The exception is gold which is recovering from a sharp drop yesterday (to the lowest price for 5 years) caused by an alleged bear raid (though traders were also blaming stop-loss orders triggered at US$1,100). There is continuing light pressure on mid-term sterling interest rates accentuated by strong hints from the Bank of England that they see a movement up in base rates toward the end of the year.
