10 November 2016
Week in Brief:BUSINESS AND THE CITY
LATE SURGE: Royal Bank of Scotland, having despaired of ever selling its Williams and Glyn’s sub-business, announced a couple of weeks ago that it finally had a serious bidder in Clydesdale and Yorkshire Bank, the newly independent regional bank formerly owned by National Australian Bank. But the deal has not looked that easy; C&Y will have to raise new equity to pay for the purchase and also has doubts about whether its operating systems can cope with the integration of the W&G unit. But now RBS has good news; Santander, which has twice tried to buy the business, the first time in 2012, but on both occassios was unable to agree terms – mainly on price, has returned with another offer. The talk is that this offer is still way under the £1.3bn equity value that RBS has Williams and Glyn’s at in its books – and that does not include the rumoured £2bn which RBS has poured into creating the separate unit.
The whole deal is being driven by the special conditions imposed on RBS by the EC competition regulators after the rescue of RBS during the 2008 recession. RBS hoped to get between half and two thirds of the book value of the unit, but it looks as though the Santander price will be under that, although a plus is that Santander could fund the purchase from its internal resources. RBS has to complete the deal by close of this year to avoid a hefty EC fine, though, if it can show a deal near closing the fine might be mitigated. With two bidders, it is looking hopeful that RBS will soon be able to cross the problem off its little list of matters to be dealt with .
LATE RETREAT: It is not just RBS that is downsizing; Marks and Spencer, the quintessential British retailer, has also announced that it too will be cutting the scale of its business. New CEO Steve Rowe took on the hot seat from Mark Bolland in April and has completed a major review of the whole business; his conclusion is that M&S would be better smaller. The main cuts will be the overseas operations; Marks have long had ambitions to build a worldwide retail empire. An attempt to do this in the 1970’s ended with full scale retreat back to the British base, but Mr Bolland began again, with the flagship being a Paris operation on the Champs Elysee. But this attempt to become global has also not worked – losing £43m last year – and Mr Rowe has announced the closure of all the overseas business except franchised outlets in Ireland and HongKong, where Marks products appeal to a local market, and in the Czech Republic, leaving M&S with an almost entirely UK operation. That operation too is going to see change. At least 10% of UK traditional stores will also close over the next three years or so – 45 stores or so, some of which will become food only outlets. This reflects the long term shift in the M&S business – food continues to grow and opened 21 new stores last year, seeing adjusted growth of 4%, whilst clothing, where the business has struggled for years to try to find a style that appeals to modern shoppers (or is not tainted by the retailer’s conservative and traditionalist history), dropped another 5% of turnover.
At the bottom line that produced half year profits (to end September) down 17% at £231m and turnover static. Head office costs are being cut by a redundancy programme announced several months ago, and Mr Rowe also says that the food business will concentrate on price competition and less on special offers, which in the long term he thinks is good for customer loyalty. M&S’s main food competitor is generally viewed as Waitrose and the winter may well see a bit of a price war between the two upmarket grocery competitors.
WHEN ONE DOOR CLOSES…: Marks and Sparks may be retreating from international business, but round at clothing retail giant Primark, Garfield Weston, head of the Weston family which owns bread to discount clothing ABF, said that Brexit is offering a big boost to the group’s Primark subsidiary which imports cotton and much clothing from India and Sri Lanka. This is not just because of the benefit of cheaper sterling, but also because Britain’s ability to do direct trade deals with those countries should make it easier to get through the complex bureaucracy of importing from none EC countries. It should also help ABF’s food import business. Mr Weston was announcing ABF’s annual results (to September 17th) – profits up to £1.04bn on turnover up 5% to £13.4bn. Primark saw revenue up an impressive 11%, though profits there were up only 2% – at £689m.
ROOMING BOOMING: Airbnb is the new entrant to the travel accommodation market which has appeared from almost nowhere in the last four years. 2015 saw further dramatic growth in the London where its business tripled as the short term home room rental boomed. For home-owners it offers an easy way of making a bit of extra cash; and for travellers a peer vetted option for bed and breakfast with locals. Not surprisingly, hoteliers don’t like it, and neither do most local authorities who are trying to impose the 90 day maximum stay planning rule (more than that and you need to apply for planning permission to operate a vacation business). But trying to spot those who are breaking it is almost impossible. Westminster say that they are investigating over a thousand possible planning breaches in this area but are considering prosecuting just two. So further growth seems likely – Airbnb reckon that by the end of December last year, they accounted for over 7% of all London short lettings, and it has grown considerably since.
LESS PEAKS, MORE TROUGHS: It’s a bad time to have a sweet tooth. Not only does the government’s Chief Medical Officer have you in her sights as she campaigns against obesity, but chocolate prices are going up as the weak pound hits the price of imported raw materials. Now the unkindest bite of all – premium chocolate maker Mondelez who makes Toblerone, the chunky saw-toothed (no pun intended) bar in Switzerland has announced that bars made for the British market will have fewer peaks – or if your prefer, bigger troughs – to reduce the weight of the bar and hold prices steady (although UK prices have already gone up by more than 10% this year). Will customs officers be soon searching for traditional shaped bars bought in Switzerland and hidden in travellers luggage?
KEY MARKET INDICES:
(as at 8th November 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (steady); 5 year 0.68% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.11% (steady)
US$: 1 mth 0.53% (steady); 3 mth 0.88% (steady); 5 year 1.30% (falling)
Currency Exchanges:
£/Euro: 1.12, £ slight rise
£/$: 1.24, £ rising
Euro/$: 1.10, € steady
Gold, oz: $1,282 steady
Aluminium, tonne: $1,721, steady
Copper, tonne: $5,154, rise
Oil, Brent Crude barrel: $46.20, fall
Wheat, tonne: £140, steady
London Stock Exchange: FTSE 100: 6,810 (slight fall). FTSE Allshare: 3,699 (slight fall)
Briefly: The markets mostly continue to be very steady with little excitement or movement. The exception is copper, which has seen a sharp upward shift, believed to be reflecting a possibly temporary delivery shortage. Oil continues to edge down although analysts expect the general direction to be up again soon. (Our figures are pre confirmed USA election results)
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