11 August 2016
Week in Brief:BUSINESS AND THE CITY
NOT TO THE POINT: The troubled saga of the new Hinckley Point power station – or at least, the lack of construction thereof – continues. As readers will recollect, EDF, the French mainly state owned company who had entered into complex arrangements with the British Government to build the new generation nuclear power station, finally resolved a couple of weeks ago to proceed with the contract proposed. But within hours the Government announced that it was delaying its decision as to commitment, to further study cost benefit considerations. It was also suggested from well informed circles that an additional factor is that the new Prime Minister is not as well-disposed as her predecessor regime towards the Chinese involvement in the scheme – mainly the provision of investment finance. Mrs May was said to have serious concerns about the Chinese gaining knowledge of nuclear technology and more especially, substantial influence over Britain’s power supplies.
Now, in a further complication, the French trade unions represented within EDF – with seats on the company board – have said that the board was not fully informed when it took the decision to proceed. It alleges that the chairman, Jean-Bernard Levy, and possibly other board members were aware at the time that the UK government would immediately impose a further pause. This though, was not communicated to the board. If so, the board decision is null and void, say the unions. The unions are very opposed to the transaction, which they fear could bankrupt EDF, whose finances are frail. EDF deny the allegations but the unions have now applied to the French courts to get an injunction overturning the board decision.
GOOD ODDS PAY OFF: Ladbrokes, the high street and on-line betting company listed on the LSE, announced its first half year results last week (to end June 2016). Last year the company reported a £51m loss, but there were much happier faces in the finance department this time, with a profit of £25m to report, and turnover up 12% (to £662m). This is due, Ladbrokes says, to more marketing, better on-line presence, and strong results from the company’s successful expansion in Australia. The share price rose 4%. This is also helpful to Ladbrokes in its complex proposed merger with another UK betting chain, Coral, which if it closes, will produce by far the largest gambling business in the UK with an estimated book value of over £3bn. The industry regulator is insisting that, as part of the merger, the combined business sells off about 400 pre-identified shops (from the combined total of 4,000) to maintain competition in areas where the merger might create a monopoly. Agreeing which shops, and to whom they should be sold, is taking some time, so the deal is not likely to close until the late autumn. When it does the combined group should be able to realise savings of around £65m, Ladbrokes have said, with some back office job losses – and some jobs transferred to whoever buys those 400 shops.
Just one bit of gloom on the horizon – the announcement this week by Rank Group and 888 that they are intending to make a bid for William Hill. That would make a rival super-group to the proposed Ladbrokes one, slightly smaller with potential revenues of around £2.7bn, but with particular strengths in on-line gaming and a better international diversity. It is not clear if William Hill will agree to be swallowed, but consolidation of the industry is clearly proceeding fast.
IF AT FIRST YOU DON’T SUCCEED…: …try to establish a monopoly. Time was when OPEC, which represents some oil producers, was effectively a monopoly, and the oil shock of 1973/4 showed the world – and proved to OPEC – that it really could move the market to its advantage. But now OPEC only represents about a third of oil producers, mainly Middle Eastern, and Nigeria, and, although its members do tend to enjoy lower production costs than the average, it means that attempts to get the oil price much over US$50 a barrel simply bring the higher cost producers (offshore, shale) into the market. After a period when oil prices looked as though they could sink as low as $20, the price has rallied and has for some months been fluctuating in the low $40’s. Many of the high cost producers are still pumping and selling; having sunk their capital costs the cash benefit of selling overplays the theoretical average of a break even. But producing oil from the sea in particular needs continuing investment, and many of those producers – and some of the shale producers – will soon need to spend to keep the oil coming. At these price levels they are not going to. OPEC members have now agreed to meet in Algeria at the end of September to discuss the “stabilisation” of the oil market – by which they mean trying again to push the price up. With increased social budgets – and extra spending on security and defence – many member states need to generate more state income and would like to see the price back around $100. But it seems unlikelythat is going to happen – there are just too many sources of supply and demand is pretty static as renewable energy starts to provide a greater proportion of our energy needs. The announcement of the meeting though has had some effect – the oil price rose $2 almost immediately.
KICK-OFF: To mark the beginning of the football season, a topical football business story. West Bromwich Albion, a leading Midlands club has been bought by Mr Guochuan Lai, a leading Chinese investor and business man. Given Mr Cameron’s and Mr Osborne’s past efforts to build business opportunities with China it might be though that this was result of a high-level introduction, but apparently Mr Lai is a long term fan of British football and likes the long history of WBA. He made his money through horticulture and landscape gardening, but has a number of investments in sports teams and businesses. He bought his stake – 88% of the shares – from chairman Jeremy Peace, who will step down from the job shortly. Mr Lai is thought to have paid over £150m for his stake and to be able to see immediate opportunities in sales and marketing to WBA’s very loyal fan base.
LESS MAY MEAN MORE: The first half of 2016 has been seen as tricky by many of those engaged in UK property. 2015 saw exceptional performances in many areas, especially in rental growth, with resultant increases in activity and turnover. This year has been much quieter, culminating in a very quiet period over the referendum period and after – reflected in the first half results of Savills, the commercial and upmarket residential estate agents, who saw first half profits (to June ) down 3%. However, Savills said it saw some prospects for a recovery in the second half, especially the last quarter, with overseas investors returning to the commercial business and brighter prospects for the residential side, except maybe in central London.
KEY MARKET INDICES:
(asat 9th August 2016; comments refer to changes on the week; $ is US$)
UK£ Base rate:0.25%, unchanged: 3 month 0.43%(falling);5 year 0.31%(falling).
Euro€: 1 mth -0.35% (steady); 3 mth-0.28% (steady); 5 year-0.35% (falling)
US$: 1 mth0.77% (rising); 3 mth0.77% (rising); 5 year 1.16% (rising)
£/Euro: 1.17,£ steady
Euro/$: 1.10, € falling
Gold,oz: $1,334,slight fall
Aluminium, tonne: $1,644,steady
Copper, tonne: $4,795, falling
Oil, Brent Crude barrel: $43.95,rising
Wheat, tonne: £127,steady
LondonStock Exchange: FTSE 100: 6,809 (modest fall). FTSE Allshare: 3,701 (rising)
Briefly: A little more action on the markets this week. The big news was the Bank of England reducing Base Rate, the first change since 2009 – down to 0.25%, more a signal than any real intended effect on financing costs, but with an inevitable knock-on on LIBOR rates. Dollar rates are going the other way though. Oil overcame recent weakness to move up to nearly $44, and the LSE indices recovered from weakness to hit new recent heights.
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