29 June 2017
Week In Brief: BUSINESS AND THE CITY
IN THE PUBLIC GAZE: Two big property companies were the talk of the market this week; one you have probably heard of, one you probably haven’t. The well-known one is Hammerson plc, founded in the 1950’s and now the third largest propco in the FTSE100, and an owner of shopping centres around the UK, the best known of which are to the north and south of London – Brent Cross on the North Circular Road, and the Whitgift Centre in Croydon. Now John Whittaker, one of Britain’s richest but most low profile tycoons has built up a nearly 5% stake in Hammerson through his private property company, Peel Holdings. Peel is reputedly the largest property company in the North West (though little known outside the industry) which Whittaker has built up from nothing over his long career. Whittaker also owns over a quarter of Intu, another major shopping centre owner – and Peel itself owns the Trafford Centre just outside Manchester, the main out of town retail centre in the north-west. Mr Whittaker is saying nothing, but the analysts are speculating that a three way merger of such interests would create the largest force in out of town shopping in the UK. Being a retail landlord is a very sophisticated business nowadays – tenants and suppliers like to deal with large landlords who can take an overall picture of their business, reflect and work with them in changing shopper needs, run big advertising campaigns, and use their purchasing power to secure economies on purchasing such essentials as electricity and water.
THE SON ALSO RISES: Carpetright, the national carpet retailer founded by serial entrepreneur Lord (Philip) Harris published very disappointing results for the year ended April 2017. Profits were down 93%, to a mere £900,000, though sales were almost static, showing that margins have been slashed right to the underlay. The group also took a hit to the bottom line by making an £11m provision for lease obligations on 43 stores, all of which are lossmaking and many of which are in the process of being closed down (some will be refurbished and relaunched). Although the group said turnover was slightly up in the second half of the year and more so in trading so far this financial year (up 2% in the seven weeks so far reported), the outlook on margins is still difficult. Lord Harris retired from the group three years ago and was replaced as chief executive by Wilf Walsh, previously at HMV and Coral Bookmakers. He is refurbishing some stores and working his way through the viability of his 430 stores – carpets do not lend themselves well to on-line retailing. But his programme has been hit by the rapid rise of a new competitor – Tapi, run by none other than Martin Harris, son of Lord. It is around half way through a three year programme to open 200 stores and is targeting, of course, the strongest locations, which is what is giving Carpetright such a hard time. If both chains are to prosper the British public is going to have to buy quite a lot more carpets.
NO SALE: The sale of the Coop Group’s banking business, Cooperative Bank, has fallen through. As mentioned in this column before this is one of the last hangovers from the 2008 banking crisis, when the bank got itself into trouble by aggressive lending, especially in the commercial real estate sector; it has struggled with a legacy of bad debt ever since. Earlier this summer a sale seemed imminent and several bidders were said to be attracted by the bank’s retail network and loyal customer base, but in the end the problem was not the business but, as so often, the pension obligations of the bank. That has proved insurmountable so the shareowners – Coop Group owning 20% and five hedge funds owning 80% between them, now have to move to plan B, which is to keep the bank and recapitalise it. The Coop probably cannot afford any spare capital and will confine its role to underwriting at least some of the pension obligations, reducing its shareholding to somewhere between 5% and 1%, whilst the hedge funds capitalise some of their existing loans and create some new debt instruments, to inject new money of about £700m. That should get the bank free of its obligations and able to trade and even to rebuild itself. But in the long term the hedge funds will still want to be out, so presumably no well-heeled potential purchasers will be turned away.
LESS CREDIT: The Bank of England has told lenders that they need to provide greater capital reserves on their retail (consumer) debt business. Unsecured loans have been slowly increasing in size and number as Britain’s consumers continue to spend but with wage growth slowing, or stalled, depending which figures you believe. But the real growth, and the Bank of England’s nervousness, centres around credit card debt which is growing fast. Credit card debt is very expensive – over 20% annualised in most cases, 30% on some cards. The best way to operate a credit card is of course to pay it off each month, even if that means having to take out a term loan to meet the card bill – or adding it to the mortgage. But increasingly borrowers seem to be using their cards as a long term debt source and those are by definition the bigger credit risk. The Bank thinks that in any downturn this would be a source of losses to the banks and thus wants another £11bn of capital to meet them. The message is of course that the banks should be careful with credit card borrowers and look more closely at appropriate credit card limits. Or even encourage their customers in the ancient art of saving.
JET FIRED: Bad news for all of our readers with private jets – though an opportunity for any reader thinking about acquiring one. The price of corporate jets has plunged as more and pre-owned models reach the market. Many of these are not so new – the problem goes back to a time before 2008 when any top executive who wanted to be taken seriously was buying a jet, if not two, usually using external debt. Although the supply of new jets has been falling over the last couple of years – the number registered in 2016 was half that of 2008 – there are just more planes than purchasers. Some of the rich boy’s toys are being sold by inadvertent owners – those that lent the money to buy them and have now found that depreciation has outstripped the amortisation of the debt. Having a corporate jet is not as popular as it was, especially with shareholders and regulators (or bankers presumably), so although many of the second hand ones seeking new owners are little used there still aren’t many eager new plane owners out there. The slump in prices – down 50% on a comparable basis – is also affecting the new market as manufacturers cut back on production, though those who charter their planes say that that end of the market is holding up – and that charterees prefer newer planes.
KEY MARKET INDICES: (as at 27th June 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.73% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.03% (steady)
US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.79% (falling)
Currency Exchanges:
£/Euro: 1.13, £ steady
£/$: 1.27, £ steady
Euro/$: 1.12, € steady
Commodities:
Gold, oz: $1,246, modest rise
Aluminium, tonne: $1,854 slight fall
Copper, tonne: $5,770, slight rise
Iron Ore, tonne: $55.25, rising
Oil, Brent Crude barrel: $46.93 slight rise
Wheat, tonne: £142, fall
London Stock Exchange: FTSE 100: 7,437 (slight fall). FTSE Allshare: 4,063 (slight fall)
Briefly:
The markets are again back to generally narrow trading ranges; spot wheat fell although four month delivery prices are £4/tonne higher and rising slightly. Otherwise it all looks like summer torpor, although those who study the ancient art of graphology might see the beginning of a recovery curve taking the oil price back up – not surprising given the current state of Middle Eastern politics.
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