28 July 2016

Week in Brief:BUSINESS AND THE CITY

REACHING OUT:  Ofcom have finally issued their long delayed report on British Telecom’s infrastructure business, Openreach.  Openreach is the telecoms equivalent of Railtrack in that it owns the wires and fibres and transmission equipment which allows broadband connections – not just for BT, but for all other retail customer service providers.  That has becoming increasingly of concern to independent providers, who feel they get a second rate (and over-priced) service as they try to compete with BT’s broadband services.  Openreach is obliged by statute to offer equal access to all customers but there is concern among many independents that its primary focus is on its owner and main customer, BT.  Most independents would probably like to see BT broken up and Openreach become an independent company; but Ofcom had already ruled this out in a preliminary report earlier this year.

Their full report confirms that they are stopping short of calling for a breakup, but suggesting that although BT retain full ownership of Openreach, it should be become effectively an independent company within the BT group, with its own independent board of executives and all staff working for Openreach, not as part of a BT career path.  It should also be in control of its own budget and develop its own brand, clearly different to that of BT.  However BT would still appoint the non-executive directors (in consultation with Ofcom) and it is not clear how Ofcom would see the financial structure of an Openreach operating seperately fro BT.   Ofcom is now consulting the industry and soliciting views on this proposal – which seems unlikely to be popular with BT’s service competitors, or indeed own customers, who would like to see wider competition to BT to encourage price cutting and improved service.

TROUBLES IN KING’S CROSS:   No, not on the railways, but in the smart office block on York Way next to the station; King’s Place, the arts centre whose upper floors are occupied by the Guardian newspaper.  As we have mentioned here before, the Guardian is struggling to make the newspaper pay, with falling print circulation, falling advertising revenue, insufficient revenue from the growing and well regarded on-line version, and rising costs which it is belatedly tackling as it tries to achieve  the difficult balancing act of keeping the newsroom team as intact as it can.  The position of the board was that high quality writing and presentation would win through and certainly the team of journalists is much bigger (and arguably more experienced) than most quality nationals.  Unfortunately though the theory has not proved compelling on the revenue side and earlier this year the board announced 250 voluntary job cuts, a target which was oversubscribed.  As a result the workforce has been cut by 20%, but losses announced earlier this week were still appreciably higher than forecast, at £173m.  This was not just the losses of the newspaper.  There are also losses from the write down by the parent company, Guardian Media Group,  of its major investment in Ascential, a magazine and media group, much of which was floated off from GMG some years ago to raise the pot of cash which is what keeps the Guardian going.  There is still £750m in that pot, and the Ascential stake is worth over £200m even after the right down, but at the rate the Guardian is burning cash, the necessity of returning it to cash flow positive is becoming a burning issue.

The Guardian is far from the only newspaper with such problems – the Daily Mail and General Trust, owners of the Daily Mail and associated newspapers, said last week that print advertising revenues are down 10% although partially offset by 12% growth in on-line advertising – from a much lower base.  Overall that put the newspaper business revenues down about 6%.   And the Financial Times has also said that its advertising revenue is declining and starting to cause concern.

PREMIER CHANGES:   Premier Foods, that is.  The major British food brand specialist – Bisto gravy, Mr Kipling Cakes, and Ambrosia custard are perhaps its best known brands but it owns many other names that you may find in your kitchen pantry – has announced an increase in turnover for its first quarter’s trading for this financial year, though the improvement is mostly in its non-branded products,  (those made for food retailers mostly under their labels rather than as an independent brand) , which saw growth of nearly 10%.  The branded business saw much slower growth, at under 1%.  This comes as a relief to shareholders who rejected a takeover bid in March from the American food giant McCormick (its third attempt at taking over Premier) and then saw the share price plummet, as reported here earlier this year.  However, the faith in the existing management may turn out to be well placed – the deal with Japanese noodle maker Nissin (a 20% shareholder in Premier) is signed, Premier have announced plans to invest heavily in its soup and veggie brand Batchelors, which is showing good growth, and its joint venture with drinks manufacturer Knighton is also going well.  The share price has recovered on all this improved trading and a positive statement from the company’s management, even though Premier says it will not be paying dividends for a while yet, to conserve cash.

MOVING UNDER ITS OWN VEOLIA-TION:   EDF, the French energy giant, may still be struggling with the decision as to whether to proceed at Hinckley Point to build a new nuclear power station, but its much smaller French competitor, Veolia, has no doubts about the opportunities for profitable business in the UK.  Its traditional business was and remains water supply and garbage disposal, but the growth part of its enterprise is increasingly seen as green energy generation.  It is proposing to invest around £750m in green energy power sources, about a third of which will be spent on a waste powered power plant in Hertfordshire, with other initiatives to follow across the country.  The company said that it does want Mrs May to clarify her new government’s policy on green issues, which appears to have been downgraded in her new ministerial appointments, but its waste energy generation plants, although not entirely green (they produce carbon dioxide, though less than most carbon sources) do solve another problem, the disposal of the vast amount of rubbish which we produce.  Veolia has an existing plant at New Cross in south-east London which not only produces (profitably) electricity for nearly 50,000 homes, but heat and hot water for nearly houses and offices.  It burns over 400,000 tons of rubbish a year.

INVASION:  If you live in London, or indeed any other tourist hotspot, you don’t need the Shaw Sheet to tell you this – the fall in the value of the pound, and troubles in Europe, have brought floods of tourists into the UK benefitting from their euro’s and dollars going further.  That is making some places overcrowded, but is great for budget hotels and restaurants, and for fashion shops.  It’s an ill wind….

KEY MARKET INDICES:

(as at 26th July 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.53% (falling); 5 year 0.42% (falling).

Euro€: 1 mth -0.50% (falling); 3 mth -0.40% (falling); 5 year -0.27% (rising)

US$: 1 mth 0.51% (rising); 3 mth 0.66% (rising); 5 year 1.12% (rising)

Currency Exchanges:

£/Euro: 1.19, £ steady

£/$: 1.30, £ falling

Euro/$: 1.10, € steady

Gold, oz: $1,323, falling

Aluminium, tonne: $1,605, falling

Copper, tonne:  $4,919, rising

Oil, Brent Crude barrel: $43.60, falling

Wheat, tonne: £125, steady

London Stock Exchange: FTSE 100: 6,701 (rising).  FTSE Allshare: 3,639 (rising)

Briefly: Although the amount of risers and fallers makes the market look active, the movements are mostly in small ranges, and the reality is a pretty steady market.  Except for wheat – which has powered up another £25 per tonne after a 10% rise the week before.  If you are a home bread maker – buy your flour now!

 

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