Langton Capital – 2015-10-13 – SAB agrees bid, living wage, Parkdean & other:
A Day in the Life:
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I know that it’s green to save water and all that but don’t you find those gizmos that they put onto taps to froth up the water and kid you into pouring less of it than you really wanted a little annoying?
I mean I know what they’re aiming at. They don’t want people wasting a few pints of water when all they want to do is wet their toothbrush but, if you want to fill a bowl of water it takes you twice as long and, on at least a couple of occasions, you’ll stop the tap only to see the bubbles burst and find that you have no more than half an inch of water in the sink in which to get a shave.
But, I guess it’s the same as with chargeable carrier bags, it’s deemed acceptable to inconvenience the individual for the public good but, at least in the latter case, we’re likely to see a collapse in disposable carrier bag usage whereas in the former we’re just going to get a lot of bad language in the bathroom. On to the news:
Pub, Restaurant & Drinks Producer News:
• SAB says it has ‘reached agreement in principle on the key terms’ of an offer from AB InBev. A case of 4th time lucky.
• AB InBev says ‘under the terms of the Possible Offer, SABMiller shareholders would be entitled to receive GBP 44.00 per share in cash’. There ‘is a partial share alternative …available for approximately 41% of the SABMiller shares.’ The latter is clearly aimed at Altria and BevCo. AB says ‘the all-cash offer represents a premium of approximately 50%’ to SAB’s undisturbed price and the share alternative amounts to 0.483969 unlisted shares and GBP 3.7788 in cash for each SABMiller share. AB notes ‘the Board of SABMiller has indicated to AB InBev that it would be prepared unanimously to recommend the all-cash offer of GBP 44.00 per SABMiller share to SABMiller shareholders, subject to their fiduciary duties and satisfactory resolution of the other terms and conditions of the Possible Offer.’
• AB to pay SAB $3bn if the deal fails for regulatory reasons. Now needs agreement of Altria and BevCo followed by regulatory clearance
• AB InBev yesterday increased its takeover proposal of SABMiller to £43.50 a share ahead of the Wednesday deadline, valuing the company at £67.4bn. It has this morning increased it to £44. The improved proposal is pre-conditional on both Altria Group, Inc. and BevCo Ltd. accepting the partial share alternative in respect of all of their SABMiller shares. The bid is effectively the fourth in recent months.
• Julian Metcalfe-backed healthy Asian cuisine brand Itsu is all set for international expansion following a £40m refinancing. Itsu’s chief financial officer Landen Prescott-Brann said: ‘We see a lot of opportunity in the healthy-food market both here in the UK, outside of London, and internationally. Consumers increasingly want healthy food options while on the go and we can provide this. We are grateful to HSBC for its support of our ambitious expansion plans. It is important to us to have a partner that believes in our vision. The refinancing package is vital for our company’s continued success in the future, and our ability to reach new customers.’
• Square Pie has raised a total of £681,500 on Crowdcube — more than 50% over its target — with 300 investors now on board. The money will go towards UK growth and expanding the group’s retail and wholesale divisions. Founder Martin Dewey said: ‘We are delighted with the strong interest in our first ever Pie Bond which will not only support our business as it grows but enable Square Pie fans to get involved and get a slice of our success in future years. We’re excited for the future of the business, which has grown hugely since starting on a market stall in Old Spitalfields Market. We can’t wait to bring our quality British food to more places around the country.’
• The ALMR has urged caution over the National Living Wage and wants to ensure that businesses will still be able to invest in their staff. ALMR Chief Executive Kate Nicholls commented: ‘Our submission has stressed the importance of controlled increases to wage rates to ensure that businesses are able to sustain the increased outgoings. Research carried out amongst the ALMR’s membership shows 62% of businesses facing reduced profit margins due to increases in statutory pay levels and large-scale increases will continue to eat into margins. This erosion could curtail the sector’s ability to maintain the current level of investment in new openings, urban regeneration and job creation.’
• Camden has launched a consultation with regards to a late night levy and a report is set to go before the licensing committee on 18 November. Camden council performed a U-turn over a previous consultation earlier this year, downgrading it to an ‘informal exercise’. While the ALMR and the BBPA have remained firmly against levies, arguing that the added cost places a burden on businesses, operators in Newcastle, which introduced a levy in 2013, say they are starting to see the benefits of the LNL.
• Consumer spending growth rose 3.7% year on year in September after falling to its lowest point in 14 months in August. The latest Barclaycard data, which processes nearly half of all credit and debit card transactions in the UK, suggests entertainment spending grew by 12.8% year-on-year, while pub spending rose by 11.6% and restaurants grew by 12.6%.
• Morrisons has launched its Milk for Farmers brand in stores nationwide at £1.12 for four pints, 23p of which will go back to dairy farmers. The supermarket has also started selling Morrisons Milk for Farmers Cheddar Cheese in Mature and Extra Mature variants, priced at £2.52 per pack (350g) or two packs for £4, with 34p from each pack going to the farmers who supplied the milk used to make the cheese.
• UK retail sales up 2.6% LfL on annual basis in Sept per BRC-KPMG. Beats estimates + is fastest rate of growth since Jan 14. Total sales +3.9% giving an insight into the scale of new openings. Non-food sales +3.1% but food sales virtually flat at +0.2%. That’s still better than the negative numbers that have plagued the industry in recent months. Non-food online sales were +14.2% in September on the back of an annual 8.2% rise a year ago.
Holidays & Leisure Travel:
• The CMA has cleared the proposed merger of caravan park operators Park Resorts and Parkdean. It said on 2 Sept that it was ‘considering whether it is or may be the case that this transaction has resulted in the creation of a relevant merger situation [and] whether the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.’ It has presumably concluded that competition will not be unduly reduced.
• Tui is understood to have sold hotel booking website LateRooms to Cox & King as the travel giant looks to focus ‘on the integrated tourism business’.
• Hoseasons has added more than 9,000 properties from its sister Cottages4you brand into its own cottages portfolio. Its total UK cottage estate now consists of 11,313 Hoseasons sites and the operator has just reported its fifth consecutive record summer.
• Manchester airport has just concluded its busiest September ever, catering to more than 2.4 million passengers (+5.44% year on year).
• Fiat Chrysler has revealed that its luxury Ferrari brand, of which it owns 90%, will undergo an initial public offering. The carmaker will offload around 9% of its stake in the company, which is expected to debut on the NYSE under the ticker ‘RACE’ at between $48 to $52 a share.
Finance & Markets:
• World markets: UK down yesterday breaking 8dy upswing. Europe down, US higher but Far East down in Tues trade
• Oil price up a little this morning but down over 24hrs. Currently trading around $50.35 for a barrel of Brent Crude
• China imports down 17.7% in Sept, exports down 1.1%. County had a trade surplus of US$59.4bn on the month
• Labour has withdrawn its support for plans to force future governments to establish budget surpluses with shadow chancellor John McDonnell saying that it will “underline our position as an anti-austerity party”. Chancellor Osborne said this was a “grave threat to the economic security of working people”.
Premier Foods in 60 seconds: Cool summer supplies silver lining…
• Met Office stats: Temperatures in the UK in July were 0.7 degrees below long term average
• That’s a lot. August was 0.2 degrees below + September was 0.8 degrees lower.
• The above is not helpful for iced cream or sun tan lotion sales
• Beer gardens suffer but it’s good news for overseas holiday companies (Dart Group, TUI, Thomas Cook), indoor attractions (Cineworld) and food companies such as Premier Foods, which are big into sauces, custard + cakes
• Premier Foods reports H1 numbers on 10 November.
• As mentioned, the group should have been helped by the weather.
• Comps are now soft (look also at the food retailers) and the major supermarkets are more ‘aligned’ with their suppliers (in their battle with the discounters) than ever before.
• New products are coming to market, commodity prices are low and costs have cut.
• Some expansionary capex has been undertaken, debt should be down significantly this year (says the company) suggesting that the group may update positively in a month’s time
• Debt is an issue but the group’s shares trade on 4.0x earnings falling to 3.9x next year.
Langton Food Retail Index – The Grocer’s Dozen
• The FRI has had another strong seven days, again thanks to a rebounding supermarket sector. While Tesco’s H1 results and Sainsbury’s Q2 figures powered the index ahead, Ocado was also a strong riser in a week in which its chairman was announced as the head of the UK’s pro-EU campaign.
• Grocers: The main move of the week was undoubtedly Tesco, up 13.34% to 203.84p on the back of its mixed H1 results. While Tesco has continued to reduce prices, increase availability and strengthen its balance sheet, its operational investments have come at the cost of a 55% drop in first half operating profit to £354m. The group will not be paying an interim dividend.
• However its buoyant share price performance (up by over 20% in two weeks) has been fuelled by a renewed optimism in the sector. Tesco’s comment on the group’s recent trading and outlook shows more hints of recovery, with Q2 UK LfL sales down a less-than-expected 1% compared to a 1.5% LfL decline in Q1.
• The moderating sales downtrend chimes with Sainsbury’s Q2 results on 30 September, in which the grocer noted a ‘moderate uptick’ across its KPIs and an improved LfL sales performance of -1.1% for the 16 weeks to 26 September.
• Although the £4.2bn sale of Homeplus provides Tesco with breathing space, the failure to sell Dunhumby for the mooted c.£2bn and the ruling out of a sale of its Central European business means that the retailer is running out of meaningful non-core operations to offload. The Serious Fraud Office (SFO) investigation also rumbles on in the background and certain US pensions are said to be tooling up to sue Tesco over its £250m+ profit misstatement last year.
• Since its H1, CEO Dave Lewis has signalled a u-turn in management policy by buying Tesco shares in a show of faith for his ‘new caring, sharing supermarket’. The group has also followed in Morrisons’ recent footsteps by ditching its price matching scheme, and is today launching a brand guarantee scheme which will give shoppers instant discounts at the till rather than convoluted coupon alternatives.
• However, with its SFO investigation ongoing, Aldi and Lidl’s market raid continuing apace, the additional costs from the upcoming National Living Wage, and unspectacular progress on the group’s balance sheet, it remains to be seen whether the modestly improved LfL sales trends is enough to jumpstart what remains a very ambitious turnaround project. Jack Brumby – firstname.lastname@example.org
Retail Roundup from Nick Bubb:
BRC Retail Sales figures for September (5 weeks to Oct 3rd):
John Lewis Sales Watch: So, moving on to October (the 4 weeks to Oct 31st), how do we think that things are going for that great High Street bellwether John Lewis? Well, September was better for them too, but the “Indian Summer” that we all enjoyed last week won’t have helped Fashion sales and so, against a tough comp, we would only pencil in flat LFL sales overall (ex the impact of the new Birmingham store), ahead of Friday’s official figures for w/e Oct 10th. The cooler weather this week, however, should see John Lewis’s trade regain momentum. Nick Bubb – email@example.com
This was produced for distribution yesterday afternoon: So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following:
SAB Miller / AB InBev:
• We’re guaranteed more news this week. AB InBev must make a formal offer by end-trading Wednesday or walk away for 6mths.
• Press suggests it will sweeten offer & that SAB directors will at that point engage in conversation.
• Risks both ways. A 6mth cooling off period would see the shares fall & directors come under increasing pressure to cut costs & boost earnings – or at the very least to re-solicit an approach at higher levels. A raised bid, on the other hand, would (perhaps) force SAB Miller to come to the table.
• Risks, perhaps on balance, weighted to the upside.
VAT reductions for leisure services:
• Asking HMRC to cut VAT to as little as 5% on all licensed retail sales was always an extremely ambitious request.
• Even asking it to cut VAT on pub & restaurant food to 5% looked tricky.
• Supermarkets (and Greggs etc.) after all have to charge 20% VAT on hot food and licensed retailers add a lot more service, all of which is elsewhere fully VATable.
• But there’s something about asking for a VAT reduction on gym membership that feels somehow more achievable.
• Time will tell but, at relatively little cost, HMRC could make a gesture that would benefit health & fitness operators (almost all of which are currently privately owned) greatly
• Good question as numbers out in the UK tomorrow (elsewhere later in the week) are likely to show that inflation is most notable for its absence.
• Low inflation makes it more necessary for companies to work for their living.
• Various books, papers etc. are now suggesting that, with the exception of the 70s and part of the 80s, deflation (excluding also wartime) – or at least stable prices – was the norm over the last 100yrs or so.
• The absence of inflation makes the National Living Wage a bit more of an issue. It presumably wasn’t struck at and RPI-plus target for political reasons – that is, it sounds more impressive if you decline to mention that you are talking about future prices.
Is the UK really still binge drinking?
• We mentioned this morning that media agency Maxus reported Britons drink more heavily than their fellow-Europeans.
• Whilst this was the impression that the Maxus comment gave, what it actually said was that consumers in the UK are more likely to binge drink, go to the pub or drink at home than were respondents in Germany, Australia, America and China.
• Some 66% of Brits admit to drinking at home at least 2x per week compared with 63% in China, 62% in Australia, 57% in Germany and 55% in the US.
• It says 15% reported that they had at least one “high energy” night of drinking per week and author of the report Nick Vale says ‘from the malmsey wine of the 14th century to the craft gin producers of today, we Brits have a long and distinguished heritage of creating, sourcing and enjoying the best drink in the world.’
• Whilst the reported spin is negative, Vale says ‘we British are a hugely sociable nation, we love to chat, and booze facilitates that. The pub gives us somewhere to meet and alcohol helps lubricate our conversation.’
• Recent hard statistics suggest that UK drinking per capita peaked in 2004 – here
• The UK is not in the top 10 in Europe (although Europe, perhaps not to its credit) does supply all of the top 10 drinking nations in the world – here
• Brits drink about as much as the Swiss – here
• Heavy drinking is not a positive but, to put the above in context, Brits drink 1) less than their neighbours and 2) less than they did 10yrs ago
Random information, hopefully not all of it useless (re most leisure operators etc.):
• Hard commodities on the up, Zinc has best trading period in 6yrs (on back of Glencore capacity reduction).
• Oil price firmly anchored above $50.
• Soft commodities yet to follow suit. Only Corn, Cocoa & Wheat noticeably up. Some others bumping along the bottom (and soon will be up y-o-y as comps get increasingly easy).
• Risk on kind of day on Friday. Indices firmly above their 50dy moving averages. Miners up strongly. Week ending Friday, basic materials companies +16.7%, oil & gas +12.3%.
• Re grocery deliveries, Nick Bubb this morning quotes The Grocer as trialling Amazon Fresh’s offer in Birmingham. It says 33 item basket was delivered in perfect order in just 46 minutes. This could prove to be something of a problem for the existing delivery companies.