Langton Capital – 2019-07-22 – PREMIUM – EI Group, holiday sales, Whitbread, Jamie’s etc.:
EI Group, holiday sales, Whitbread, Jamie’s etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, we spent midnight Friday night hanging around a chilly school carpark waiting for our daughter to return from a school trip to Germany.
Thank heavens for mobile phones, though, as we’d been told the coach was in at 11pm and, at half-past midnight, it still wasn’t there having had to negotiate road closures on the A1 and heaven knows what else.
But who would be sitting in a pub or in front of the TV with a crafty pint when they could be shuffling from foot to foot in the drizzle and the dark?
Anyway, all’s well that ends well and the Bearded Dragon which, apparently, we hadn’t been feeding at all right, was also pleased to see her as it immediately scoffed ten quid’s worth of locusts and then went to sleep. On to the news:
STONEGATE’S PURCHASE OF EI GROUP. SOME MORE THOUGHTS: The announcement that Stonegate is to buy EI Group could prompt further activity and will have consequences, both foreseen and unforeseen. 22 July 2018:
• This is a big deal. It creates a large, integrated company, similar in shape to the Beerage companies of the pre-Beer Orders era. Here we consider a few of the implications.
• EI Group has performed well but many of its assets will continue to require investment. A Private Equity investor may be keener to take money out than to put money in.
• Stonegate CEO Simon Longbottom has told the Morning Advertiser ‘the big thing is investment, we can unlock capital to invest in this pub estate, whether tenanted and leased or managed.’
• Outgoing EIG chairman Robert Walker says ‘Stonegate is committed to continuing to invest in the business for the future benefit of the combined business, tenants and employees.’
• The combined group will need to walk the walk.
Sale & leaseback options:
• TDR may wish to reduce the capital cost of its purchase by selling and leasing back some of EIG’s freeholds.
• Whilst this would free up capital and increase the return on investment, it would materially increase risks.
An opco-propco model?
• More radical still would be any move to create a property company to buy many or all of EI Group’s 4,000+ pubs.
• Such a move would disaggregate the investment into its operating and property owning parts.
• Investors interested in property would have a ‘cleaner’ vehicle in which to invest. Currently they need to invest in the pub-cos that typically own the properties themselves.
• Property investors may be willing to accept a lower yield than would investors in the blended vehicle
• But, and it is a very large but, any opco / propco split would likely see gearing increase across the combined businesses
• This is not without risk. Not least because the property owing company would be critically dependent upon the opco to pay its rent.
• This would not be a diversified property portfolio and the property owners would be taking an operational risk that was not necessarily reflected in their yield.
Two very different business models:
• Longbottom says ‘our rationale has been that these are two great businesses and they would be even better together.’
• Whilst assets may be shifted from the one business model to the other, the skill sets are arguably very different.
The impact on Tenants – unintended consequences:
• Market Rent Only provisions were meant to level the playing field between tenants and freehold owners such as Punch and Enterprise
• But EIG tenants will now find themselves part of a bigger group which has many different managed pub options
• There will likely be more pubs taken back by the enlarged group at the end of their leases.
• Stonegate will be willing and able to take back to run pubs in many instances in one or other of its managed formats
• Tenants, who perhaps imagined that they had changed business dynamics in their favour, may find themselves out of house and home
Concerns from left field:
• CAMRA has warned that Stonegate’s takeover of EI Group will cause ‘anxiety’ within the pub industry. It has called on the owners to make their plans clear as soon as possible.
HOLIDAY SALES ARE NOW RUNNING AHEAD OF 2018: But that’s not what the Thomas Cook share price is telling you: 22 July 2019:
• GfK last week reported that, in the UK, season-to-date bookings are up 1% yoy, driven by ‘nine consecutive weeks of passenger growth [and] strong late sales’ compared to the first four months of this year, when summer bookings were down 7% on 2018.
• David Hope, GfK senior client insight director, told Travel Weekly ‘The tough trading environment, with bookings coming later, has had a significant impact on cashflow. The industry has had to price holidays extremely competitively.’ But ‘In the last three weeks we’ve seen prices increasing.’
• Figures are now running higher against a World Cup and a heatwave last year.
• There is no comment here on margins.
• Bookings were running down for much of the booking season.
• That could have (and did) lead to discounting.
• Margins can easily be shot to pieces and Thomas Cook’s shareholders and bondholders are currently paying the price.
• A strong end to the season would be good, rather than bad. But it may be slightly too little, slightly too late
GENERAL NEWS – PUBS & RESTAURANTS:
• The Times has reported that the collapse of Jamie’s Italian cost creditors £83m. The celebrity chef himself is reported to have lost around £25m. Mr Oliver is reported to have paid some staff from his own bank account.
• AB InBev has sold its Australian subsidiary, Carlton & United Breweries to the Asahi Group Holdings for 16bn AUD. Carlos Brito, Chief Executive Officer of AB InBev, said: ‘We continue to see great potential for our business in APAC and the region remains a growth engine within our company’. Shares in Asahi slipped on the news.
• We covered on Friday Deliveroo’s move to set up a Food Procurement business that would source food for restaurateurs. It suggested this could save larger operators a fifth on their ingredients’ bills and smaller operators up to 40%.
• Food Service Equipment Journal ponders whether the above could extend to kitchen equipment and, on reflection, there is no particularly good reason why not. Just Eat has reportedly already begun exploring catering equipment procurement and there could be a market for it.
• The Mail on Sunday reports that Starbucks UK lost £17.2m in the year to September 2018 and closed 35 stores. The group has been criticised in the past for using transfer pricing (re coffee and licensing) in order to move profits to territories in which it pays less tax.
• Moody’s has reported that Anheuser-Busch InBev’s sale of its Australian business is a credit positive. It says ‘the company will use all of the sale proceeds to pay down debt, accelerating its deleveraging efforts.’
• Moody’s says ‘we continue to expect leverage to improve through EBITDA growth and debt reduction from the company’s strong free cash flow generation following its 50% dividend cut last year.’
• Hot weather on the way as the Met Office warns that thunderstorms in the north could cause disruption before the outlook improves. It says ‘temperatures will increase daily across much of England and Wales as hot air is drawn up from France and Spain. Temperatures could reach 34 C by Wednesday.’
• Propel reports that Black Sheep Coffee has bought eight Taylor St Baristas cafes for an undisclosed sum.
• Arc Inspirations, the northern England bar group, has reported LfL sales up 69% during the cricket world cup at its sport-led sites. CEO of the group, Martin Wolstencroft said: ‘The Cricket World Cup was a great boost for us and we’re proud to be at the heart of the action bringing people together to enjoy the drama of top-quality sport’.
• Nearly a quarter of Britons are consuming plant-based milk alternatives, while demand for traditional cow’s milk is falling. Emma Clifford, associate director of UK food and drink at Mintel commented on the recent findings: ‘This is part of a much wider plant-based movement, driven by concerns around health, ethics and the environment’.
• UKHospitality has welcomed the the Government’s action to tackle rogue employers but has urged them to retain some flexibility for hospitality employers. The Chief Executive of UKHospitality, Kate Nicholls said: ‘Hospitality is a fantastic employer and we are keen to ensure it remains fair. We certainly welcome moves to provide clarity on the rules of flexibility and action to tackle rogue employers’.
• The MCA has reported that a third of UK consumers are drinking less alcohol than they were a year ago, with 20% now not drinking at all.
• Deloitte reports that consumer confidence fell sharply in Q2 to minus 8 on its measure. It says ‘consumers’ finances are in good shape thanks to a long boom in jobs and strong wage growth. That said, uncertainties about Brexit and growth are weighing on consumer sentiment and their spending plans.’
• In the US, Slim Chickens secures an investment from private equity firm 10 Point Capital. As part of its expansion plans, Slim Chickens is currently developing more than 350 locations globally, with plans to open 600 restaurants over the next 10 years.
• PepsiCo acquires Pioneer Foods for R110.00 per share in cash (c$1.7bn) representing a 56% premium to the 30-day volume weighted average price prior to the cautionary announcement on July 15, 2019. Pioneer Foods has strong positions in cereals, juices, and other African nutritional food staples, including well-known, scaled brands like Weet-Bix, Liqui-Fruit, Ceres, Sasko, Safari, Spekko, and White Star.
• The Giggling Squid sale process is reported to be edging towards a conclusion.
• Uber has announced its intentions to launch a new accelerator program in London in order to meet demand from customers on its Uber Eats food delivery platform.
• The private equity owner of Jack Wills is searching for a buyer after the group racked up steep losses.
HOLIDAYS & LEISURE TRAVEL:
• GfK has said that summer 2019 bookings are now up on last year despite months of sluggish sales – see Premium Email for comment
• Whitbread has announced the result of its £2bn tender offer saying it will buy back 10.2m shares at a price of £49.72.
• WTB says this marks the ‘successful completion of Whitbread’s capital return programme with a total of £2.5 billion returned, including the Tender Offer and previous share buyback programme’
• The number of shares tendered is c21% of the issued share capital of the company.
• A poll of more than 4,000 holidaymakers have ranked Thomas Cook, Tui and First Choice as the worst operators, rating poorly on customer service, accommodation, value for money and whether their holidays lived up to the claims made in brochures and websites.
• TravelPerk completes series C fundraising at $104m, with existing investors putting in $60m. As well as continuing its European expansion, the company expects to announce major product additions in the coming weeks and months that will bring a new level of disruption.
• Yotel announces its expansion into Australia with the opening of Yotel Melbourne in 2022.
• A report by MPs claims London’s Crossrail project will most likely go further over budget. MPs said they were ‘sceptical’ about the Department for Transport’s ‘ability to oversee major rail projects’.
• Data from STR has found that US hotel occupancy declined 1.3% to 73.5% with ADR down 0.9% to $134.52 and RevPAR falling 0.4% to $98.85.
• Egypt’s aviation minister, Younis al Masry has met with the British ambassador for the country and ‘expressed his displeasure at British Airways taking a decision unilaterally concerning the security of Egyptian airports without referring to the competent Egyptian authorities’.
• 4G signal will be introduced to London’s underground from next March.
• Avengers: Endgame is set to become the highest-grossing movie of all time, overtaking Avatar. On Friday the film had global gross revenue of $2.782bn, half a million dollars short of Avatar.
FINANCE & ECONOMICS:
• Public sector borrowing rose sharply in June up to £7.2bn from £3.3bn in the same month last year. Analysts had been looking for about £3.2bn. Amidst all the talk (but no action towards) ending austerity, in Q2, government borrowing was up 33% on the same figure last year.
• Sterling down vs dollar at $1.25 but up slightly vs Euro at €1.1144. Oil up a little at $63.25. UK 10yr gilt yield down 2bps at 0.74%. World markets higher in Europe on Friday but US lower and Far East down in Monday trade.
• Brexit & politics:
o Boris Johnson due to be annointed tomorrow. Some suggest he will breathe new life into Brexit negotiations whilst other suggest that his mendacity and lack of attention to detail could prove to be a weakness and divide the nation further.
o Chancellor Philip Hammond has said he will resign on Wednesday as he cannot sign up to Boris Johnson’s belief that any Brexit is better than no Brexit.
o Current Brexit secretary Stephen Barclay has said that the new PM must help small business to prepare for any no-deal upheaval.
o Business secretary Greg Clark has said that there could be a ‘wall of investment’ if Brexit is handled successfully.
o The CBI has called on the new PM to be more business friendly. Business, at the end of the day, creates the economic activity that begets the tax receipts that both contenders have been keen to promise to various recipients.
START THE DAY WITH A SONG:
Last Friday’s song was Baba O’Riley by The Who. Today who sang:
It wastes time
And I’d rather be high
Think I’ll walk me outside
And buy a rainbow smile
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The news that the private equity business Bluegem has agreed to sell a 40% stake in the London department store Liberty in a deal with its rival Glendower valuing the once troubled business at as much as £300m merited several photo opportunities in Saturday’s papers, with the FT going into detail on the financials of the turnaround. There were also quite a few snippets, eg in the Telegraph, about the news that the struggling Hilco-owned Homebase chain is looking to buy the bankrupt Bathstore business. The Daily Mail flagged that the wretched CMA is still considering whether to formally investigate the JD Sports acquisition of its rival Footasylum, whilst its “Zero of the Week” was Mike Ashley, as his dreams of becoming “King of the High Street” crumbled. The market report in the Daily Mail flagged that the CEO and FD of Dunelm both bought shares on
• Saturday’s Press and News (2): The Times flagged that hedge funds have made a small fortune shorting ASOS in recent months and that the embattled CEO Nick Beighton tried to stem the tide by buying some more shares at Friday. The Times also noted that a survey has shown that discounters (including B&M and Home Bargains etc, as well as Aldi and Lidl) are continuing to expand rapidly, with planning permission for 190 stores next year. The Guardian looked, enterprisingly, at “Waitrose in retreat” with some vox pop from customers at the Waitrose store in Sundridge Park, north of Bromley (which is being sold to Lidl), including this classic line “I don’t think Lidl will sell duck eggs”. Finally, we spotted in the Times that the ugly 1980’s Sainsbury store in Camden Town has been given listed building status…
• Sunday’s Press and News (1): The private equity business Bluegem remained in focus in the Sunday papers, with the Sunday Telegraph seizing the fashion model photo opportunity to blazon across its Business front page the news that it is still trying to offload its stake in the loss-making Jack Wills fashion chain and that the banks will lose £30m if the business goes into administration. The Sunday Times flagged that the entrepreneur Philip Day is still interested in buying Jack Wills, along with the likes of scavenger funds such as Hilco. The Mail on Sunday highlighted that the troubled Jack Wills is also involved with a spat with the landlord of its store in St Albans. With Mike Ashley also thought to have looked at Jack Wills, the Business Leader column in the Observer thundered that Sports Direct need to restore confidence by coming up with a credible plan for House of Fraser,
• Sunday’s Press and News (2): The most interesting story in the Sunday papers, however, was the Mail on Sunday scoop that Ted Baker founder Ray Kelvin is considering a plan to buy the struggling company out and take it private. The Mail on Sunday also flagged that Marks & Spencer has hired a former McDonald’s and John Lewis executive, Harriet Hounsell, to be its new HR Director (to help with its culture transformation) and noted that the founder of ASOS, Nick Robertson, shrewdly sold £15m of shares at £37.23 back in April. Finally, the Sunday Times highlighed that B&M is expected to report decent 2.5% LFL sales growth in its Q1 update next week, despite the cooler weather and it also had a big profile of the founder of the Online group The Hut, Matt Moulding (“Online boss whose control is as tight as his T-shirt”), in which denied any plans to take the group public.
Today’s Press and News: The Times follows up the Mail on Sunday scoop that the Ted Baker founder Ray Kelvin is considering a plan to buy out the struggling company and take it private (“Former boss ready to dress Ted Baker for a private party”) and also flags that Sports Direct has refused to drop its legal challenge to the Debenhams CVA. The FT has an article about the changing of the guard in the troubled UK property development industry and also flags that US retailers are leaving shopping malls at record rates.
News Flow This Week: This week will be dominated by the coronation of a shameless charlatan, one Boris Johnson, as the next Conservative Party leader and Prime Minister on Wednesday and his subsequent Cabinet reshuffle (although the election of the new Liberal Democrat leader later today will also be noteworthy), but there is plenty of Retail news to distract us, beginning with the Joules finals and the McColl’s interims tomorrow, closely followed by the latest monthly Kantar/Nielsen grocery sales figures. Wednesday then brings the B&M Q1 update, with Thursday bringing the Inchcape interims and the monthly CBI Distributive Trades survey. On Friday we then get the Howden interims, the Bonmarche finals and the B&M AGM. Friday may also bring the delayed Sports Direct finals, although we wouldn’t hold our breath…