30 March 2017

Week In Brief: BUSINESS AND THE CITY

NOTHING HELPS:  When it was first announced, the proposed Tesco purchase of Booker was hailed as the final mark of the supermarket giant’s recovery from the accounting scandal and poor performance which have damaged its reputation over the previous four years and seemed to confirm that new chief executive Dave Lewis had truly started a new era.  Booker was a good fit with Tesco – if you take out some of the competition in the small “mini-market” business which is increasingly over-provided and where rationalisation of the Budgen and Tesco Metro chains would bring direct costs savings but give Tesco access to Booker’s core business of supplying the wholesale catering business where it is a market leader and enjoys rapid growth.  Most analysts praised the logic of the deal and the deal making skills of Mr Lewis and his team.  Until now, that is.  There seems to have a been a change of sentiment especially amongst some Tesco shareholders who are canvassing support for the deal to be cancelled, mainly on the grounds that Tesco is paying too much.  Also of concern is that the regulators concerned about competition in the retail food market (Tesco alone has over 21% of the market) will force the sale of more local stores than would be good for the supermarket chain.   Mr Lewis’s views in response have not been shared but Tesco has now issued a formal statement in response to the remarks and the rumours of shareholders combining to possibly try to stop the deal.  They say that the transaction remains on course and is good value for the group.

Some analysts say that for all Mr Lewis’s success in turning the Tesco business around and back to profitability, he has not been great at managing his main shareholders; several large institutions are significant holders including Schroders and Artisan Partners who hold 9% and have asked the board to withdraw, citing nervousness about renewed expansion so soon in the recovery programme.  A little more pre-discussion might help next time.

LIKE A HURRICANE:  The oil price slowly slides back from its recent circa  peaks of circa US$60.  It is now trading just above $50 with more pressure on future price trends.  In the USA Mr Trump is likely to dismantle at least some green energy measures which will enable coal and shale oil and gas to step up profitable production, and even in the UK, new oil reserves are being found offshore.  The latest is to the west of the Shetland Islands and has been discovered by Hurricane Energy which has been prospecting in this area for some time and believes it has discovered a major field.  Although it has long been suspected that there is oil under the Atlantic coast here, the practical difficulty was always how it could actually be extracted from such deep and stormy waters.  The ocean has not become any less difficult or forbidding, but the technology of extraction has much improved, so that platforms and drills are more robust and maintaining them easier.  And cheaper – at $50, such reserves can be extracted profitably – which is also the case for shale oil.  The thinking behinds OPEC’s attempts to restrict output from its members is that offshore reserves and shale need a breakeven price of $70/75 to work – but improvements in drilling have pushed that cost right down.  $50 seems to be the mark now and that could well mean that it is about what we will be paying for the basic barrel for the foreseeable future.  Most OPEC members can produce very profitably at that level of course, but as we have explored before, many OPEC members have got used to very high oil revenues and cannot meet their ongoing obligations without more of it.  They may have to learn…

BLOWN AWAY:  One of Britain’s great success stories in combining need and technology to produce profits is Dyson, founded by Sir James Dyson, who began by producing an improved vacuum cleaner, and is now a major producer of many products which move air – hand driers, humidifiers, heaters and so forth.  The products are well designed and well-engineered – and sell at a major premium to the competition; such is the benefit of brand reputation.  Dyson has kept much of its research and product development in its base in Wiltshire, but increasingly makes most of its products in the Far East, largely in Malaysia.  It has also recently opened a new plant and research facility in Singapore.  That increasingly looks like a clever move – Dyson saw profits rise 41% last year and most of that is from sales in the Far East, both to increasingly wealthy households in China and those in the rising nations ringing the South China Sea.  As Dyson is a private company it does not publish actual profits, but it did say that turnover was up 45% to £2.5bn, and that gross earnings were £630m – a remarkable margin in competitive products.  Half that comes from vacuum cleaners, but the growth now is in the company’s other products, where it is increasingly selling to business – hand dryers for company wash rooms for example.  The USA remains Dyson’s biggest market, with the UK second, but China is now fourth and India is starting to figure on the company radar – and that is where Dyson sees the next big area of growth.   India is not an easy market for overseas makers to break into, with high tariff and ownership barriers, but Dyson’s strategy is to start manufacturing there before long, and possibly form a partnership with a local company to help them sell and build.

FROM AIR TO WATER:  A warning to Dyson – what was once a similar much praised British success story, now struggling to regain momentum, is changing its name.  Wolseley was a leading brand of plumbing suppliers with a network of outlets across the UK and a great reputation for quality and price.  After twenty five years of unbroken profit growth things went very wrong – starting from that common problem, a US acquisition which very quickly started draining money out of the business – just as a downturn hit the UK building market.  The American business eventually got turned round but the UK end has never really got back to where it was.  The company has just announced that the improvement in profits seen last year has been sustained into the first half of this, showing £515m, and to consolidate on that recovery Wolseley will become “Ferguson”, the name of the American business.  That will emphasise where it performs best – the Nordic business will be sold and the UK business will see further cuts – the best growth message for the present time will continue to be the USA.

KEY MARKET INDICES:  (as at 28th March 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall); 5 year 0.80% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.13% (falling)

US$: 1 mth 0.98% (rising); 3 mth 1.15% (rising); 5 year 2.00% (falling)

Currency Exchanges:

£/Euro: 1.16, £ rising

£/$: 1.26, £ rising

Euro/$: 1.08, € rising

Gold, oz: $1,243, rising

Aluminium, tonne: $1,918, slight rise

Copper, tonne: $5,774, slight fall

Oil, Brent Crude barrel: $51.8, steady

Wheat, tonne: £148, rising

London Stock Exchange: FTSE 100: 7,343 (slight fall). FTSE Allshare: 3.997 (slight fall)

Briefly: Dollar short term interest rates continue to edge upwards, though for the first time for a while the movement up in long rates has reversed – this could well be a response to what is increasingly forecast as the economic consequences of Mr Trump, an early boom followed by a slowdown.  The rest of the market continues pretty steady – with oil still keeping above the $50 mark and wheat shifting upwards again.

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