24 March 2016
Week in Brief: BUSINESS AND THE CITY
RETAIL HOME WIN: In another unexpected turn of events in a takeover battle that has been full of them, J Sainsbury emerged victorious to win ownership of Home Retail Group, owner of Argos, the catalogue and high street retailer. The City had reacted coolly to Sainsbury’s original bid because at that point Home Retail also owned Homebase, the struggling DIY retailer, but that problem was solved by a sale to Australian group Wesfarmers. But then a competing bidder emerged for the Argos business – Steinhoff, a South African conglomerate, who offered a higher price. Last Friday, with two hours to go before both bidders had to go around again, Steinhoff dropped out – and announced a proposed acquisition of Darty, the electricals retailer. Game set and match to Sainsbury which had not raised its bid, though the rising Sainsbury share price makes the paper element of its offer more valuable to Home Retail shareholders. They should be pleased – their exit price is around 75% higher than before the initial Sainsbury approach. Sainsbury are also pleased – the deal is a very good fit for them as it will allow many Argos stores to be closed , their businesses being transferred to nearby Sainsbury supermarkets, thus bringing more footfall and, hopefully, profits, to the existing real estate. Sainsbury also hopes that both businesses will benefit from cross selling and cross marketing. Most of the Argos leases are short so this is all likely to happen quite quickly. Good news for everybody in fact – except some Argos workers who will lose their jobs (no estimates provided yet), and high street landlords who will see this as another blow to struggling high street shopping.
CASH GUARDIAN: Alone amongst national newspapers, The Guardian has kept almost its full editorial and journalistic staff, operating from new offices in Kings Cross. But alas, this has not been reflected in the newspaper readership where print sales continue to decline, now down to about 180,000 copies a day, from about 400,000 copies in its heyday. The newspaper has tried diversification into various related activities, including film, but without much financial success. It has also kept its on-line version free, that has now one of the largest daily electronic readerships.. But, perhaps not surprisingly, losses of Guardian Media Group, the holding company, continue to increase. The Group has a large cash pile available to it, £838m at the end of March 2014, some from the philanthropy of the Scott Trust set up in 1936 which still controls the newspaper, but more from the sale in 2014 of the immensely profitably Auto Trader automotive sales magazine. The idea of the sale of Auto Trader was to allow further investment into the Guardian brand with profitable activities complementary to the newspaper, but so far that has not happened. Latest accounts show that the cash pile diminished £100m in the year to March 2015, £80m of which was attributed to operating losses within the group (the balance to new investments).
The group has now announced that it will cut 250 jobs in the forthcoming year, at least 100 of them from editorial jobs in London, as many as it can through voluntary redundancy. The newspaper will also introduce charges for some elements of its currently free on-line services in an attempt to generate additional revenue – no word yet as to what will become pay to read, but competitors now charge for all access. This is not likely to be the last round of cuts – Kath Viner, the editor of the Guardian, says she needs to cut operating costs by at least a third in the next three years to get to around long term break even, if the business is to survive and to stop erosion of its cash reserves.
HIGHLY RATED: Following the LIBOR rigging scandals of recent years, where traders were able to adjust the LIBOR rate setting process in their favour, ICE Benchmark Administration (“IBA”), a subsidiary but independently run adjunct of ICE (who own the New York Stock Exchange) was made an independent setter of rates, remote from influence by individual banks or traders. IBA has now announced that within the next year or so it will migrate entirely to a computer based system which will take in bank supplied transaction data and then produce the appropriate rates. This, says ICE, will make future rigging “impossible”…
IN TRAINING: The government has said that it will soon bring forward legislation to increase competition on the UK’s main long distance railway routes. This, it hopes, will improve standards of service and bring down prices on the most heavily used routes. One of the objectives of railway privatisation in the 1990’s was of course to introduce a market into rail services, but the franchise system has tended to mean that the Department of Transport typically selects the most financially short-term rewarding offer rather than the best for passengers, or for longer term profitability and investment. Now, having looked at the freight system, an open access based structure, the DoT intends to bring passenger services closer to that model.
HIGHER HEDGING: Berkeley Group, the house and apartment builder that owns the Berkeley Homes, St George, and St Edward brands, and whose main activities are in London and south east England, has said that this years results should be at the top end of expectations and that in the next three years it expects to make £2bn of pre-tax profit. The Group, which is in the FTSE 100, has been under prolonged attack from speculators running bear raids on the shares on the back of gloomy views of sales prices and volumes in top end London markets. The Berkeley share price has risen about 8% in the last few days.
OVERGROUND ALL OVER: Transport for London’s moves to take total control of the London Overground, the above surface railway network that operates services around central London and various branches, moves on. Arriva UK Trains, a division of Arriva, the Sunderland based train and bus operator ultimately owned by Deutsche Bahn, the German national railway operator, has won the seven year contract to be sole operator of the Overground system. It is now expected to work with TfL on increasing frequency of services and further modernisation.
ROOMS AT THE TOP: Having decided to keep its headquarters and domicile in the UK, HSBC Group is now setting out on the next stage of its management of change at the top – the search for a new chief executive and chairman – two separate jobs that is, in strict compliance with modern codes for public companies. It is hoping to avoid the difficulties of the last change at the top, in 2010, which ended in a major boardroom row. Chief executive Stuart Gulliver says he is likely to serve another two to three years. His replacement is likely to be an internal candidate with good knowledge of the bank and its far flung operations. The current chairman, Douglas Flint, says he is looking to go soon so the new chairman can oversee that appointment. His replacement is likely to be, in a major change of tradition, an external candidate; first name in the frame is Henri de Castries, soon to quit chief executive of AXA, the French insurer and financial services group.
KEY MARKET INDICES:
(as at 22nd March 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.65% (falling); 5 year 0.91% (falling).
Euro€: 1 mth -0.27% (rising); 3 mth -0.24% (rising); 5 year -0.11% (rising)
US$: 1 mth 0.66% (falling); 3 mth 0.73% (steady); 5 year 1.27% (falling)
Currency and other Exchanges:
£/Euro: 1.28, £ steady
£/$: 1.43, £ steady
Euro/$: 1.12, € steady
Gold, oz: $1,253 steady
Aluminium, tonne: $1,485, falling
Copper, tonne: $5,079, rising
Oil, Brent Crude barrel: $40.35, rising
Wheat, tonne: £101, steady
London Stock Exchange: FTSE 100: 6,185 (slight rise). FTSE Allshare: 3,397 (slight rise)
Briefly: Another quiet week in volatility terms, no dramatic movement in markets, though copper and oil continue to edge upwards – the latter is now over US$40 a barrel. Euro interest rates have edged slightly up, not significant but certainly a turn of direction. The excitements over the UK budget had little effect on the FTSE indices.
