27 April 2017

Week In Brief: BUSINESS AND THE CITY

ENGINEERING WOOD:  AMEC Foster Wheeler is one of those specialist engineering conglomerates which the fall of the oil price, and the consequent cost cutting in that sector, has knocked sideways.  The weakness in the oil market caught AMEC at exactly the wrong moment – it had just taken over the USA based Foster Wheeler business in 2014 and had taken on an oil tanker load of debt to do so.  Although the AMEC strategy has been to diversify into other major engineering activities and areas that are not oil related – the new Heathrow runway is one of its advisory projects – it has not been able to do that fast enough to build enough turnover and profits to support the debt burden; nor has it been able to make sufficient sales of peripheral businesses to get its obligations to the bankers down.  And in the core oil and gas based business not only has demand for specialist engineering fallen, with margins tightening to reduce profits, but the service side of the business has suffered as well, as facilities were closed or mothballed, or service issues deferred.  AMEC brought in Jon Lewis from American rival Halliburton as Chief Executive in 2016 but after a review of the business he says he can see no immediate upturn or easy solutions.

But into the breach has now stepped Wood Group, the Aberdeen based group which has been built from its specialist oil and gas activities and is a major rival to AMEC.  Wood has weathered the oil turndown much better, mainly through early cost cutting and by keeping its external indebtedness down.  However, although it thinks that the oil based side is going to recover soon with the oil price better and deferred works soon needing to be dealt with, it would also like to diversify; so it has offered to buy AMEC for £2.2bn.  This lifeline for AMEC could not be better timed.  The AMEC board has recommended the deal to shareholders and all is proceeding.  But that debt mountain continues to cast a long shadow.  There is a real danger that AMEC could shortly breach the banking covenants on its debt and put itself into default, thus enabling the bankers to demand immediate repayment of the loans.  So shareholders and board alike will be relieved that the banking consortium has now agreed modifications to the covenants which will avoid the potential default and will apply until June next year, time to get the deal done – or, if for any reason it does not happen, time to think of Plan B.

FINALLY FINE:  Tesco is finally closing the file on the accounting scandal which arose from its trading difficulties some five years ago; the trading problems were caused by the increasingly competitive nature of the food retail business and especially the rapid incursion of the two great German owned discount food retailers, Aldi and Lidl, into the UK market.  That put Tesco (and the other big four British supermarket chains) under increasing pressure over how to maintain profit margins.  Tesco, with heavy borrowings from its previous expansion and diversification, was concerned to avoid any potential breach of loan covenants and began in 2014 to anticipate profits to try to boost current year performance (and presumably hoped that in following years something would turn up).  When that was discovered, a full enquiry brought in the Serious Fraud Office and ultimately led to the resignation of Chief Executive Philip Clarke and the departure of finance director Carl Rogberg, along  with fellow executives John Scouler and Chris Bush.  The Serious Fraud Office has now concluded its investigation into the matter and Tesco has agreed to pay a fine of £129m, something the shareholders may not be totally happy with, having seen the value of their investments reduced by the scandal and its revelation and now having to pay a fine for it.  The SFO has also announced that Philip Clarke will not be charged with any offences resulting from this, although charges remain outstanding against the other three executives.  This leaves current chief executive Dave Lewis free to pursue his bid for Booker, itself causing waves currently.

ALL THAT GLISTERS …: … may be explosive.  There are many problems running a modern business, but Galantas Gold, which is, not surprisingly, a gold miner, and is quoted on the UK AIM market and on the Toronto exchange, has an odd problem which is outside the normal range of business difficulties.  It wants to build and operate a goldmine in Northern Ireland where prospecting has shown very hopeful signs.  Work is underway but to create a deep goldmine means digging a mine, and digging a mine requires explosives; and Northern Ireland is a place which is a bit sensitive about having quantities of explosives lying about.  Indeed, a licence for gelignite can only be obtained if arrangements can be made with the local police force for a police guard.  This, the Police Service of Northern Ireland says, it will only do two days a week and at a fee.  Galantas does not see why it should pay a fee for what is to it a normal commercial activity, and in any case needs to have the explosives available five days a week.  (It is not clear what happens to the stuff the other three days in a week – does senior management take it home for the weekend?).  At the moment things have reached an impasse with work on the mine stopped – which took the share price down a quarter on Monday.

NOT SO SWEET:  Willy Wonka it ain’t.  Things are not so good in the chocolate and confectionary industry, as competition hots up, and sales weaken with traditional markets increasingly going on health kicks.  Kraft Heinz’s recent failed bid for Unilever was a symbol of that; trying to diversify as its traditional lower and middle market food businesses (including Cadbury) struggle to maintain returns.  And that struggle to find consumers’ soft centres is affecting all the big food producers, including industry giant Nestle who own Cadbury’s UK rival ,Rowntrees.  Nestle has two concerns – one is maintaining profits in this fierce market; when you are the biggest in the market, getting continuing growth whilst maintaining profits becomes increasingly difficult; and the second is that even the biggest in the world is not immune from takeover at a time when investment bankers and other deal makers are also hungry for profits.  So keep the shareholders sweet is the game; which means looking very closely at costs.  To try to improve that bottom line and keep the dividends flowing, Nestle announced this week that it will be shedding around 700 jobs, an action it has traditionally tried to avoid.   About a third of them are in the UK, in York and Newcastle, from the former Rowntree business.

KEY MARKET INDICES:  (as at 25th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.67% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.09% (rising)

US$: 1 mth 0.99% (steady); 3 mth 1.15% (steady); 5 year 1.92% (rising)

Currency Exchanges:

£/Euro: 1.18, £ steady

£/$: 1.28, £ rising

Euro/$: 1.08, € rising

Gold, oz: $1,264, falling

Aluminium, tonne: $1,942, rising

Copper, tonne: $5,652, rising

Oil, Brent Crude barrel: $52, falling

Wheat, tonne: £148, slight rise

London Stock Exchange: FTSE 100: 7,275 (fall). FTSE Allshare: 3,992 (rising)

Briefly: News from France of the likely triumph of the middle was not good for the price of gold, but played well on the UK (and European) stock markets which have shown continuing strengthening.  Nothing seems to affect short term interest rates, though the dollar long rates, having come in, are now going back out.  And oil edged down again after that short recovery.

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