07 September 2017
Week In Brief: BUSINESS AND THE CITY
BACK IN CREDIT: The long running saga of the restructuring of Co-Operative Bank has finally concluded. After various attempts to procure a sale, or a major backer, as covered in these pages, the existing five hedge fund owners have finally decided to do it by themselves (plus one new hedgie investor, Anchorage Capital Group). They are putting in another £250m of new money, and converting £443m of shareholder loans to equity. This gives the bank a stronger capital base and should reassure the regulator that there is sufficient committed liquidity to deal with any likely problems. The loser in all this is the bank’s former 100% owner, the Co-operative Group, which had to dilute its ownership to 20% when the bank was rescued after a series of loan write downs (mostly in commercial property) and board room troubles after the 2008 banking crash. Now Co-op Group is to be further diluted – to a mere 1% of the shares. The bank’s few remaining small investors have also taken a haircut – not that they will be able to afford one after this, being bought out at 45p in the pound, payable in cash.
The bank has made great play with being the UK’s only true ethical retail bank and says that this will continue to be its USP; it expects a rapid return to profitability now the distractions of recapitalisation have been removed. It will face some stiff competition in rebuilding its mainly Midlands and Northern customer base but it will continue under the Co-op brand which, given the continuing strength of the Co-op food retail business, should help. However there is one small cloud on the distant horizon – hedge funds are not usually long term owners of businesses and, if the bank can be returned to profitability, it is likely that they will want to sell out within the next five years or so. So there may be yet more turmoil in the boardroom to come. But at least the balance sheet is sorted.
NEW LOOK, OLD TECHNIQUES: Fashion continues to operate revolving doors for senior management. The latest retail fashion chain to spin the exit is New Look, which last week saw the departure of its chief executive Anders Kristiansen, paying the price of a year of sales going in one direction – downwards. Last quarter’s results, just out, showed that sales were down 7.5%, which took the profit performance from a plus of nearly £6m to a loss of more than £15m. New Look is owned by the South African conglomerate Brait, which bought it about two years ago, Mr Kristiansen already being in situ – indeed he was one of the reasons Brait bought the business as he had turned it round having been brought in by the previous owners. He had cut the size of the UK chain, brought in separate men’s stores, and opened 110 shops in China, but fashion is all about…fashion, and just recently the chain does not seem to have got that vital element right, meaning a diminution in footfall and price cutting to try to shift the stock. Mr Kristiansen had a sort out of his buying and merchandising team, but too late it seems; he had to pay the price of getting it wrong and left immediately, whilst the company begins the search for a new (and more fashionable) leader.
SAME LOOK, SAME PERFORMANCE: Fashion retail can pay consistently though maybe it helps if you don’t have any shops. Boden, owned by the Boden family began as an upmarket catalogue clothing business and is now an online upmarket clothing business. Profits last year continued a long term rising trend – up 9% to £26m from sales of £308m. About 40% of sales come from the USA now, mostly east coast, and that element is expected to rise further. Boden is about to take a dangerous step though – it is opening its first high street shop. In Chelsea….that must be OK.
MORE AND MORE: Manufacturing growth in the UK is showing further growth, the latest manufacturing purchasing managers’ survey shows. The index is not only showing an increase over the last four months, but also that growth is accelerating (slowly). Although one might assume that this is due to the continuing, indeed accelerating, weakness of sterling, in fact most growth seems to be domestic, suggesting a pick-up in investment. Growth in the export sector is from Europe, the USA, Australia, and China, all economies which themselves are expanding. This seems likely to further improve employment statistics, and may even give that push to wage growth which the Chancellor would like to see, providing of course, that it is linked to productivity.
BRINGING THEM BACK: Asda, the big four supermarket giant, has also been the weakest of the big four for some time – as the one with the most “value” focussed approach it has also suffered most from the rise of the German discount traders, Aldi and Lidl. Asda is owned by the US superstore leader Walmart, and, although it accounts for only 6% of Walmart’s worldwide business last year, Walmart decided the time had come to intervene and turn Asda round. It brought in Sean Clarke, an experienced Walmart veteran, to succeed Andy Clarke in the hot seat – not to be confused with Philip Clarke ex of Tesco (you don’t have to be called Clarke to lead a major supermarket chain), and Sean C has quickly applied his experience from Walmart in the US to turning the business round. That has meant trying to get its former price conscious customers back by cutting prices and competing head-on with the Germans. It seems to be working; before Sean’s arrival Asda lost 7% of its footfall in one quarter, but that erosion has reduced and in the second quarter this year the stores returned to positive growth of nearly 2% (that is 275,000 new or returning shoppers, says the store chain). Unlike its rivals Asda is still opening new stores (albeit cautiously) and it also has the advantage of the popular George clothing brand which is a big draw in its larger outlets. It has no high street units, a market which it decided not to enter some time ago. Now it is probably too late to do so, but given the ferocious competition at that end of the market, Asda may well be better out of it anyway. It has the weakest on-line offering of the big four which Mr Clarke is improving but he says that the core of what he is doing is just getting the basics right, the right stock, the right price, an attractive appearance, a clean tidy layout, and friendly staff. Get that right he says, and the customers will arrive. So far, it seems to be working.
KEY MARKET INDICES: (as at 5th September 2017; comments refer to net changes on last 21 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.28% (unchanged); 5 yr 0.72% (unchanged).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.05% (fall)
US$: 1 mth 1.23% (steady); 3 mth 1.32% (steady); 5 year 1.74% (fall)
Currency Exchanges:
£/Euro: 1.09, £ slight fall
£/$: 1.29, £ steady
Euro/$: 1.187 € slightly stronger
Commodities:
Gold, oz: $1,335 rise
Aluminium, tonne: $2,095 rise
Copper, tonne: $6,872 rise
Iron Ore, tonne: $77.87, rise
Oil, Brent Crude barrel: $53.21 rise
Wheat, tonne: £148, rise
London Stock Exchange: FTSE 100: 7,402 (rise). FTSE Allshare: 4,060 (rise)
Briefly:
Whether the markets are reinvigorated by the summer break or by the possible crisis in the Far East, every commodity – and the LSE – was up this week (which covers the last three weeks after our own summer break). The considerable strengthening of the gold price and the reversed trend in oil suggest that the reason could be the latter one.
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