04 February 2016
Week in Brief: BUSINESS AND THE CITY
NOT A GOOD FIT: Once it was the UK’s fashion leader among the young and tight pursed. But now Matalan, the giant fashion discount retailer, is struggling with fierce competition and a business model that seems to have lost the thread. Latest rumour is that following a weak Christmas – store sales were down 6% to £134 million but on-line sales slumped dramatically, with revenue from the on-line business nearly halving – Matalan has approached Lloyds Business Support Unit for help and protection. It is said to be trying to renegotiate the covenants on its £50 million banking facility. In spite of this Matalan was very recently predicting a positive profit performance for the last year of comfortably over £50 million. Even more oddly, the business is said to have more cash on deposit with Lloyds than it actually owes them.
The problem is apparently a bond refinancing of £492 million which it did in 2014 and which matures in two tranches in 2019 and 2020. Matalan is said to be increasingly concerned about its ability to meet the obligations under the terms of the bond issue and refinance in due course. But given refinancing is three and four years ahead, a decision to get support from Lloyds would suggest that trading must be grim and cash-flow suffering. The problem of course with making it known that you are seeking support is that trade credit tends to instantly dry up. Retail is a wonderful business if you get it right – customers often pay cash for the goods before the retailer has had to pay the supplier for them; but, equally, if the suppliers won’t give credit and the retailer can’t get what the customer wants into its stores, the customers will be gone like snowflakes in August. Matalan has over 200 stores in the UK and 16,000 employees.
BAD TAKE OFF: It is the City of London’s favourite airport, a quick train journey along the Docklands Light Railway and a twenty minute check in. Even better, less congestion at this end of town means that flights take off and land on time (though it can be exciting on a windy day). But now the owners of the airport, Global Infrastructure Partners, an American fund who are also shareholders in Gatwick and Edinburgh airports, have been offering London City for sale, at a price said to be around £2 billion. That has provoked a footstamping complaining performance from British Airways, the airports biggest user with 40% of passengers passing through the terminal, who say that the proposed price is “foolish” and will mean that airport charges will have to go up, an increase that will inevitably be passed onto passengers who already pay premium fares for the convenience of travelling this route.
British Airways has in recent years considerably increased the number of flights from London City so it has some clout there, but cynics are noting that with the Crossrail railway opening from the City to west London in early 2018, including direct trains to Heathrow, BA may be less concerned about flying out of the Docklands airport if it can instead get passengers to use its magnificent and almost new Terminal 5 at Heathrow. Analysts though suspect all this may be more of a good old fashioned ploy to keep the sale price, and thus costs, down. For one thing, much of London City’s passenger base is from Canary Wharf, for which Crossrail is nowhere near so convenient, or indeed from those living to the east or south east of London; and for another, to release slots here would mean they would be taken up by BA’s rival operators, always keen to find extra capacity in the over crowded skies of south east England.
DOUBLE TILLS ALL ROUND: In the end it all seems to have gone remarkably smoothly. When J.Sainsbury announced their interest last November in bidding for Home Retail Group, owner of the Homebase and Argos retail chains, there was much puzzlement, not to say sneering, among the retail analysts and others who follow the sector. Why would a supermarket operator, struggling with its own patch of troubles, want to get into other troubled retail areas? In particular, why would Sainsbury want to buy back Homebase, a business it managed to slough off years ago with a sigh of relief? But since then all has been revealed and the Homebase problem solved via its acquisition by Australian chain Wesfarmers, a timely and opportunistic bid, apparently. That leaves Sainsbury with its real target, Argos, a catalogue based mass market retailer which still works through a large chain of high street premises.
Sainsbury thinks it can cut costs by folding Argos into Sainsbury stores in many locations, combining their delivery and warehouse operations, and creating a much improved on-line presence. That business will in fact be bigger than Amazon, so is potentially a very powerful presence indeed, though it will have to run fast to catch up with Amazon’s delivery and marketing strengths. Sainsbury has had to pay a higher price than it hoped – effectively 161p in cash equivalent – it is a cash and share offer – but not so far off the 140p it offered originally. But the market likes the deal now, can see the potential in the merged business, and marked Sainsbury shares up in appreciation.
BANKING BOTHER: For more years than it likes to think about, National Australia Bank has been trying to get rid of its two UK regional banks, Clydesdale and Yorkshire banks. Both banks fought off NAB’s attempts to centralise their management controls and then suffered heavily in the 2008 crash, especially with exposure to property lending. After years repairing their balance sheets and systems, NAB finally decided to exit its investment via a flotation of the merged banks, now known as the Clydesdale and Yorkshire Banking Group. It was hoping to get away a sale that put a valuation of £2.5 billion on the new bank, but when the proposed opening price of 180p for an initial IPO of 25% of the capital was announced on Monday night this week it was based on a value for the business of just £1.6 billion, reflecting the newness of the independent operation and the market’s lack of appetite in a sector where so much banking paper is available. But even then things did not go well; the sale was delayed for twenty four hours after one of the rating agencies announced it was not happy with elements of the bank’s funding structure. Finally the float got away on Wednesday morning with the price rising to 183p in early trading, some comfort for NAB which still owns 75%.
COST OF FORM FILLING: £87 million, says the Inland Revenue. That’s the cost, not of filling in your self-assessment form, but of not filling it in, for the deadline of 31st January. One in thirteen tax payers missed the deadline – nine months after the end of the tax year. 870,000 taxpayers will thus be handing the Revenue a payment of £100 each, even if the Revenue turns out to owe them a refund for tax overpaid. That’s more than half the amount of the deal agreed with Google to settle their tax dispute with the Revenue last week. Let’s hope they will be paying that on time and not landing themselves with the £100 fine.
KEY MARKET INDICES: (at 2nd February 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (unchanged); 5 year 1.04% (falling).
Euro€: 1 mth -0.26% (steady); 3 mth-0.11% (falling); 5 year -0.05% (falling)
US$: 1 mth 0.60% (slight rise); 3 mth 0.70% (steady); 5 year 1.28% (falling)
Currency Exchanges:
£/Euro: 1.320, £ rising
£/$: 1.44, £ rising
Euro/$: 1.09, steady
Gold, oz: $1,117, slight rise
Aluminium, tonne: $1,519, slight rise
Copper, tonne: $4,533, slight rise
Oil, Brent Crude barrel: $32.15, rising with fluctuations
Wheat, tonne: £106, fall
London Stock Exchange: FTSE 100: 6,060 (rising). FTSE Allshare: 3,325 (slight rise)
Briefly: A positive week on the markets; in spite of much economic doom and gloom in the media; LSE indices rose, as did most commodity prices, and oil continued a slightly stumbling upward curve. And interest rates at the longer end of the curve eased further – the test now in sterling is whether the five year rate will drop below 1% – the euro 5 year went negative this week, so it is all possible.
