20 October 2016
Week in Brief: BUSINESS AND THE CITY
TROUBLE AT T’SHOP: As if food retail were not difficult enough, ASDA has a new problem in the aisles – or, really, a long running old one. This difficulty is on the cost side rather than the usual difficulty of trying to entice the customers in and get them spending. Begun in 2002, a slow but persistent class action by employees of the supermarket chain, run from head office in Leeds, but owned by American food retail giant Walmart, finally reached the UK courts and was given consent to proceed to a full hearing. The action is brought by a group of female ASDA employees mostly working in supermarkets around the country, who say that male employees in distribution centres can earn up to £3 an hour more than they do. ASDA has been defending the action throughout, saying that the jobs are different and not comparable, and that they have to recognise different job functions and also regional differences in costs. An employment tribunal, though, has said there is sufficient merit in the case by the protesting employees for the case should be heard, which is likely to happen next year. About 7,000 employees are thought to be affected and if the case is decided against ASDA the cost is thought to be around £100m in back payments – and the increased wage costs going forward.
GIVING LIBERTIES: Last year at this time the British steel industry looked pretty much doomed, with many plants closed or mothballed, and high profile shutdowns in Redcar and Cardiff. Steel makers blamed world over-capacity with China in particular keeping its steel plants open by continuing to sell on world markets at less than production cost, but also high social and energy costs in the UK making the economics of production, even for specialist steel, too difficult. Since then, there has been a change of sentiment, with the rescue of Scunthorpe (said to be profitable at the operating level), the current complex attempts to keep Cardiff open, the reopening of Dazell in west Scotland, and now, most surprisingly, the planned reopening of Sheerness Steel, closed as long ago as 2012. Sheerness Steel produced specialist rolled steel (girders, rails, etc) and is located on the island of Sheerness in the Thames estuary, which has rail, road and water connections. The plant there was bought by the industrial conglomerate Liberty House who intended to recover much of the relatively modern rolling mill equipment and move it to other plant in Wales and elsewhere. Liberty say that they see “emerging opportunities in the market” and that it makes much better economic sense to keep the plant where it is, and restart production. Initially this should create about 60 jobs, with more to come if output and sales build as hoped. The mill can produce about 750,000 tonnes a year, and is adjacent to a port facility well placed for exports to Europe; the decline in the value of sterling just adds to the attractiveness of the offer.
ALL BETS ON: It has been a long time coming, but the final details of the complex merger of two high street bookmakers, Ladbrokes and Coral, have been agreed. The complications arose because of the insistence of the Competition and Mergers Authority (“CMA”) that the new entity should dispose of shops where on a localised basis it had a quasi-monopoly. In the end it was agreed that this might apply to 359 shops, which were then put on the market for sale to an established operator; the buyer is to be a joint venture of Betfred and Stan James, two smaller though substantial UK chains. Total proceeds are a disappointing £55.5m – the new business was hoping for at least £100m. There apparently were higher offers, but the Ladbrokes/Coral want to get on with the £2.1bn merger, and wanted the speed and certainty of the joint offer, even if it means a bit of a haircut on the sale price. Interestingly, Stan James will take 37 shops for £500,000 – the bulk of the proceeds of sale of £55m will come from Betfred. Once this is signed off formally by the CMA then the merger can be concluded and the new entity relisted on the LSE. Ladbrokes Coral will then be the UK’s biggest bookmaker – but maybe not for long – William Hill are looking at a merger with Amaya, the Canadian betting giant. And Betfred itself is the result of a merger of the old Betfred with Paddy Power. All change in the betting industry.
IF IT DOESN’T SELL…BUY SOME MORE: BP, the British domiciled energy company, known as British Petroleum to a previous generation of investors, was early into the renewable energy sector, a previous chief executive, John Browne, seeing that the energy world was changing and the world’s major oil companies would have to change with it. BP invested into solar energy, especially in the USA where sun is a more reliable event that in most of Europe, and also into wind energy in the USA, ending up owning 14 large wind farms. In terms of turnover the contribution from green energy production was de minimis (0.4%) but it underwrote BP’s commitment to a greener world – and demonstrated to investors (and carbon depletion protesters) that the group was hot in its forward planning. But the disaster in the Gulf of Mexico when the Deepwater Horizon oil rig blew up and poured a large amount of oil onto Gulf coasts meant that BP, faced with enormous costs and litigation, had to look for all the economies it could get, and the solar interests were sold off. The company would have sold the wind farms too, but could not find a buyer for them. Now, with USA government support for wind generation costs to be cut from the end of this year, may seem an odd time for BP to announce it intends to expand the business, except for two factors – firstly, it will get subsidies at the old rate if it can get the money committed by the end of this year, and secondly, the existing business has quietly moved into profitability and is finally cash generative, so it makes sense to bulk up. Not only that, the technology is improving fast, so generation costs should start to fall. BP may yet be onto a viable alternative source of both energy and profits.
GOING DOWN (AGAIN): As if you needed reminding, the British tax payer, through its reluctant investment in Royal Bank of Scotland Group, still owns 73% of the bank; the government would dearly love to sell it, but dearly does not come into it. As the bank staggers through problems and litigation on a vast scale, the share price continues to weaken and now the Office for Budget Responsibility is once again valuing the stake for prudent bookkeeping purposes. At the moment the book value is £21bn; but at the current share price the value would be a shade under £15bn (supposing any broker could place a stake of three quarters of the share capital without pushing the price down further). In a way the book value is just that: a book entry; no loss need be taken unless the shares are actually sold. But the Chancellor is not going to get much help with restoring the public finances from that source for wee while yet.
KEY MARKET INDICES:
(as at 18 October 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (rising); 5 year 0.62% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.20% (rising)
US$: 1 mth 0.53% (steady); 3 mth 0.88% (slight rise); 5 year 1.26% (rising)
Currency Exchanges:
£/Euro: 1.11, £ falling
£/$: 1.23, £ falling
Euro/$: 1.1, € steady
Gold,oz: $1,261, falling
Aluminium, tonne: $1,684, rising
Copper, tonne: $4,672, falling
Oil, Brent Crude barrel: $51.98, rising
Wheat, tonne: £132, rising
LondonStock Exchange: FTSE 100: 7.074 (rising). FTSE Allshare: 3,849 (falling)
Briefly: The big movement continues to be medium term sterling rates – now nearly doubled in a fortnight as markets grapple with inflation forecasts for the next three years. This has not yet reflected in exchange rates but surely soon will. Oil too continues its rally through the $50 a barrel level.
If you enjoyed this article please share it using the buttons above.
Please click here if you would like a weekly email on publication of the ShawSheet
