19 May 2016
Week In Brief: BUSINESS AND THE CITY
LOST CONNECTION: After many months of negotiation, lobbying, and speculation the European Commission finally refused to allow CK Hutchison Group, the Hong Kong telecoms operator, to use its UK operation, Three, to take over O2, which is one of the largest mobile telecoms operator in Europe. Combined they would have commanded the leading market position in the UK and Europe, and the Commission thought that such concentration was not in the interests of consumers. O2 is owned by Telefonica, Spain’s largest communications business, which has been struggling under an overload of debt and was looking to a disposal of O2 as a major contribution to paying down that leverage. Although the blocking of the sale is a blow to Telefonica, it is not as disastrous as it would have been when first mooted a year ago; the Spanish company has made good progress in deleveraging itself and the rapid pick-up of the Spanish economy is helping its trading improve. Even so, it would still favour a sale, albeit at a full price, and is now mulling over what to do. One option is to float the O2 business, probably on the London Stock Exchange rather than Madrid to give a more international exposure.
Another option, which is believed to be favoured by the Chief Executive of O2, Ronan Dunne, is to attempt a leveraged buy-out by the senior management of the business. This might be with the assistance of an outside group who might be well placed to procure the layers of debt finance on best terms, but it is being said that Mr Dunne is also considering whether his team might go it alone. The figures involved are enormous – around £8.5bn – which would make it the largest leveraged buyout of all time, though this price represents quite a discount to the £10.25bn that Hutchinson was prepared to pay – for the benefits of cost savings on the merger. Mature telecoms businesses are cash generative so the debt taken on for any buy-out should be capable of being retired quite quickly; though if a price war broke out (if, for example, Hutchinson decided to aggressively grow the Three business) that might slow debt repayments up.
GLOOMY GOVERNOR: Mark Carney, the Governor of the Bank of England and not currently Boris Johnston’s favourite banker, seems pretty downbeat at the moment. After twice issuing warnings that a decision in the Brexit Referendum to leave the EC could well create an early recession as uncertainty would affect the economy, and then adding that prolonged negotiations to agree the terms of the exit and subsequent trading and economic terms would make things worse, he has now warned that household debt in the UK is too high and would make any future economic downturn “much more severe”. Immediately before the onset of the 2008 banking crisis, household debt had reached record levels, and although some has been repaid, it remains high by historic standards. This is likely to be because very low interest rates make debt much more affordable for households, even when the debt levels are surprisingly high; also the banks find personal lending a relatively easy and remunerative business so tend to be easy going when it comes to personal loans and credit card limits. It is predicted by the Office for Budget Responsibility that personal debt could reach £58bn this year – their prediction made last year was £41bn – so the Governor is waving his eyebrows to signal that this is a dangerously high level should a slowing or downturn come along. Whether eyebrow waving will be enough remains to be seen and the regulated lenders may face some imposed constraints before long.
FOOD FOR THOUGHT: (1): Premier Brands, the leading but highly geared manufacturer of many well known British food brands, perhaps most famously Mr Kipling, of the cakes fame, and Bisto (best not consumed together), has recently been the rumoured target of possible takeover interest from various parties but, openly s,o from the American food conglomerate McCormick whose leading brand is Schwartz’s Spices. This was not a great taste for Premier who allegedly discussed the position with Japanese food group Nissin, with whom it is working in Europe to improve Premier’s noodle offerings. Nissin has leapt to its new friend’s defence by buying shares and is thought now to have over 20% of Premier, with a seat on the Premier board, and thus have what may well effectively amount to a blocking stake to any unfriendly takeover stalkers. That has not gone down well with some other Premier shareholders – McCormick’s withdrawal has meant the share price has dropped by about a third, to 39p. Yesterday though the board was able to produce a strong defence of its argument that the McCormick offer should not be taken seriously and undervalued the company, by producing results which showed profit recovery continuing, especially in the last quarter of the financial year (to April 2016), and forecasts which show continuing growth in turnover and profitability.
FOOD FOR THOUGHT: (2): Round at Tyrrells, the prime end potato and vegetable crisp maker, the wellington boot is on the other foot and advancing fast. Tyrrell, founded by a Herefordshire potato farmer and still based there, was bought by private equity investor Investcorp three years ago and with their access to capital has been on the buying trail, firstly last year of an Australian upper echelon snack maker, and now of Aroma Snacks, a south German organic crisp maker. Organic is where Tyrrell thinks the growth will be and is looking for further buying opportunities around the world.
SLIDING UP: The oil price, a perpetual recent source of wonder to those many businesses and traders – and sovereign economies – affected by it, continues its recovery after its decline to below US$30 a barrel in January this year. Although that provoked comment among analysts that the price could hit US$20 it in fact marked the bottom of the long slide of the previous eighteen months. Now it looks as though the price will pass back up through the US$50 level soon, as Brent Crude hit US$49.34 earlier this week. Given stocks are still high – most storage facilities are so full that tankers are been used to store the black stuff, and usage has been lower than normal over the mild northern hemisphere winter – it is often hard to work out what is driving the increasing price. But the best guess is that what is making oil traders nervous is a combination of slowly rising usage for manufacturing and transport, combined with likely tightenings of the supply chain. Political disruption in some significant production areas (Nigeria, Venezuela, Iraq) is restricting output, and OPEC continues to try to cut supplies from its members – which is to some effect self-fulfilling when it works – revenue from rising prices takes pressure off the need to pump out more to maintain revenue. The big question is what happens if the price gets above the US$50 level – at this price the view is that offshore and shale oil production generally becomes profitable once more and OPEC’s influence on production management will lessen.
KEY MARKET INDICES: (as at 17th May 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.62% (steady); 5 year 0.89% (rising).
Euro€: 1 mth -0.28% (steady); 3 mth -0.25% (falling); 5 year -0.17% (falling)
US$: 1 mth 0.46% (steady); 3 mth 0.51% (falling); 5 year 1.20% (rising)
Currency Exchanges:
£/Euro: 1.28, £ steady
£/$: 1.45, £ steady
Euro/$: 1.13, € steady
Gold, oz: $1,274, slight fall
Aluminium, tonne: $1,525, slight fall
Copper, tonne: $4,640, falling
Oil, Brent Crude barrel: $48.65, 10% rise
Wheat, tonne: £106, steady
London Stock Exchange: FTSE 100: 6,151 (small rise). FTSE Allshare: 3,378 (slight rise)
Briefly: The market continues to show a very subdued trading pattern, short term interest rates show modest adjustments down as do most metals. Only oil continues to edge up – indeed, a jump up this week (see article above). Although the FTSE indices are steady, this conceals some nervousness about underfunded pension liabilities following the BHS failure.
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