Langton Capital – 2020-06-11 – PREMIUM – RTN, CVAs, debt or death, Just Eat, quarantines etc.:
RTN, CVAs, debt or death, Just Eat, quarantines etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, Langton may be facing something of an existential crisis because, earlier this week, it found itself agreeing with Piers Morgan and Priti Patel in one, twenty-four hour period.
And that was 1) a shock but, 2) as we have always told ourselves that we should judge folk as we find them, we had to accept that stopped clocks aren’t always wrong and that 3) even complete ~@!!@&!!s are a little less odious when they’re saying something that you happen agree with.
Not that the two people above are necessarily odious, of course. They may be wonderful human beings. However, see no2.
Anyway, we’re facing up to the prospect that we might have to cut the jungle-like grass at the weekend because, after conspiring with the rain to sprout a foot or so in a week, it’s unfortunately dry enough on Sunday to strip away the excuses as to why I shouldn’t get outside and get some work done.
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DEBT IS BETTER THAN DEATH. But companies will need to make sure that the one doesn’t lead to the other. 11 June 2020:
When you are in a tight spot…
• This would appear to have been the reaction of government, companies, indeed everybody in the immediate wake of Covid-19
• Debt (or debt by another name) has been offered by government, sometimes landlords, the HMRC and banks and it has been taken up by companies
• But, unless the definition of debt has changed, it will need to be paid back at some point – and that may simply not be possible
Money with no strings:
• Companies that have received any of the £10k or £25k grants for each of the units that they operate will not have to pay this back
• Furlough payments made towards the cost of retaining staff have been a life-saver for many companies. This money does not have to be repaid. It will taper from next month – but it remains a very valuable support
• Some landlords have moved to monthly payments rather than quarterly. This will benefit working capital as, at any one time, the operator will only be paying half a month in advance compared with one and a half months at present
• This is interest free
• All companies have also cut costs. They have paused capex etc and has slowed down payments in a number of cases. This will help liquidity. Directors (and in some cases staff that have not been furloughed) have taken temporary pay cuts
Liquidity – the shareholders’ contribution:
• Dividends, across most leisure companies, have been ‘paused’. It’s unlikely that there will be any catch-up payments so such a pause represents a ‘payment’ by equity towards the survival of the company
• Share placing. These have been extremely widespread. We mean to write on them at some point because timing has been critical.
• The absolute amount of cash raised is what will have interested the issuing companies. They want or need £10m or £100m and they are, to some extent, indifferent as to whether that is raised at 200p, 250p or 300p or whatever
• ‘Indifferent’ is too strong a word as their share options, their non-executive directors and their shareholders will all point to a higher price
• But when a company needs to survive, it is the absolute amount of cash that is important
• So, timing has been critical. The low-point for shareholders and share prices was around the middle of the third week of March
• Companies that raised equity around then, should have seen their shares bounce sharply (often partly because of the life-affirming share issue) and hence the dilution of their existing shareholders will have been maximised
• Companies that waited a while, should have been able to raise funds at higher share prices
• Companies that transformed their balance sheets via non-equity means, such as Marston’s with its Carlsberg deal or Premier Foods with its pension deal and rumoured sale of Hovis, should have done best of all – at least from a shareholders’ perspective
Liquidity – but with strings attached:
• The biggest and most common string is that you must pay the money back. Some of it will carry interest and some will not.
• Companies are being allowed to defer VAT payments due in Q1 and Q2 this year until the end of Q1 next year.
• Company revenue may have been much reduced in Q2 but, with VAT at 20%, Q2 revenues say 25% of normal and input VAT reclaimed on drink and repairs etc but not on food, this could equate to a one year, interest free loan amounting to perhaps one fifth of annual turnover. This is interest free
• Some landlords are deferring rental payments. This is often (and worryingly) being added to the Q3 payment, which is due the week after next. Many companies will simply not be able to make this payment.
• This is a commercial negotiation but, in most cases, it should be interest free
• The velocity of money has reduced and companies are holding onto it where they can. This is interest free – but it may not be consequence-free as suppliers will be upset and commercial relationships may be damaged
• Bank debt in its many guises may also have been increased.
• This may be drawdowns of existing facilities or it may be new commercial loans or loans under one of the government-supported schemes
The scale of the problem:
• This will vary from company to company – but all companies are on a conveyor belt between success and, well, corporate death, and this has moved decisively in a non-optimal direction
• Companies that were near to the conveyor’s cliff edge may have been cast over it. They may not have been able to source debt or equity and government aid has been insufficient to save them
• This speaks to Jonathan Downey’s one third, one third, one third argument. That is that the industry splits broadly evenly between survivors, those still needing help and hopeless cases
• We might suggest 40:40:20 but the sentiment is the same
FOR TOMORROW (SUGGESTIONS & COMMENT WELCOME):
• The nuts and bolts of a CVA. What you need to do, will you get it through.
• An applied comment on who is where on the above conveyor belt.
• Comment on Restaurant Group and its CVA
• Perhaps something on who has raised how much money from shareholders and when.
PUB & RESTAURANT NEWS:
• A silver lining re off-sales and delivery in a post lockdown world?
• NPD Group has said that ‘publicans and bar operators have an opportunity post lockdown to focus on the contribution of off-premise visits to their businesses.’
• NPD says ‘in the year to March 2020, 9.9% of all British pub visits were off-premise – up from 7.6% five years earlier, with this growth driven by delivery services and takeaway coffee. Once the British foodservice industry’s lockdown ends, there is scope to expand the range of delivery and takeaway offerings significantly to include alcoholic and other non-alcoholic beverages along with takeaway hot and cold food.’
• Insights manager Peter Linden says ‘in Q1 2020, visits to British pubs declined by over 12% from Q1 2019 with this steep drop reflecting the UK government’s lockdown introduced on March 23rd. Visits to pubs essentially halted in April and there’s no reason to expect a material change for May when the figures come through. The pressure on business has been enormous and the impact has been devastating. When trading fully resumes, pub and bar operators will want to do everything they can to reinvigorate their offering while ensuring sales operations are as safe and socially distanced as possible. Doubling or tripling off-premise visits – from the current 10% to 20% or even 30% –is a viable ambition for some operators, and there’s also ample scope to grow on-premise orders via mobile apps.’
• Linden goes on to say ‘they [off sales] have all been growing rapidly and publicans and bar operators have an obvious opportunity to use technology to build post-lockdown business. But any moves to stimulate sales channels or add new ones in the current environment must be complemented by careful attention to cleanliness, health and safety.’
• City of London councillors have decided to suspend pavement licenses in The City. This to save pedestrians from weaving in and out of tables on the pavement and therefore risk coming into contact with each other. Though such a move does seem to be contrary to the idea that the virus doesn’t spread nearly as much out of doors. The City’s Deputy chairman Chris Hayward says ‘if it was a case of people having to dodge around tables and chairs and break social distancing that would be a very bad thing.’
• NRN in the US reports that consumer behaviour has shifted. It says ‘many of those stay-at-home habits are likely to stick with consumers long after bans are lifted.’
• The BBPA has said a ‘reduction of two metre social distancing guidance essential for pubs’ survival.’ This is perhaps true but, having said it was sticking with the 2m guidance only yesterday, there is perhaps little give in the short term.
• Despite that, the BBPA says it isn’t too late for the government to revise its guidance. It says that pubs will need to know by Friday if they are to re-stock in time for a 4 July opening.
• The BBPA says only a third of pubs ‘will be able to re-open’. Of that third, presumably not all will open absolutely as soon as they can. Young & Co has said it will wait until early August and many other operators have said that they are not in a ‘race to reopen’.
• The BBPA says ‘no reduction in the two metre social distancing guidelines will severely restrict the recovery of our sector. Countless other countries from across the world are using one metre for social distancing as advised by WHO.’ It says ‘if no reduction is made before 4th July this could result in devastating pub closures and job losses in communities across England that can been avoided.’
• UKH has welcomed the confirmation that Scottish hospitality and tourism businesses will be able to open from 15 July. It says nonetheless that ‘businesses will need ongoing support – many to see them through to the Spring of 2021 – this support includes grants to those with rateable values above £51,000 and any underspend on grants made available thus far must be directed in this way. The proposed recovery task force is a welcome step and there will be a need for radical steps including a substantial reduction in VAT to kick-start the tourism economy.’
• The Scottish Beer & Pub Association says of the 15 July date in Scotland that ‘the setting of a date for reopening is some positive news for the country’s pubs’ and adds it ‘gives some much-needed clarity for the sector and will also give industry the time necessary to put in place what is needed to reopen safely.’
• There is still some confusion as to official government guidance re re-opening and running pubs in the new-normal. Draft documents have been leaked during the consultation process but the finished product is not yet available.
• A swathe of retail and leisure jobs were lost yesterday. Restaurant Group, Monsoon, Quiz and Signet all signalled that they will not be reopening all of their units. Debenhams and others spoke earlier in the week.
• Pizza Express is to open more sites this week for click & collect
• Just Eat Takeaway.com has agreed to acquire Chicago-based Grubhub Inc. in an all-stock transaction valued at about $7.3 billion. The deal will create the largest food delivery company outside China.
• Uber had also been in talks with Grubhub. An Uber spokesman said ‘like ridesharing, the food delivery industry will need consolidation in order to reach its full potential for consumers and restaurants. That doesn’t mean we are interested in doing any deal, at any price, with any player.’
• Starbucks is to shut up to 400 stores in the US as it concentrates on plans to change the company’s focus slightly. The company says ‘our vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafés and Starbucks Pickup locations.’ CEO Kevin Johnson says ‘with Starbucks Pickup stores located within walking distance of a traditional Starbucks café, customers can choose to enjoy their Starbucks Experience in a Starbucks café or pick up their order at either that café or a nearby Starbucks Pickup store.’
• Beyond Meat is to launch its first facility in Europe, in the Netherlands.
• Ocado is to raise around £1bn via a share placing and a debt raise.
• Low2nobev has said that its inaugural product show has been moved to 2021.
• As arguments about how and when to end the lockdown continue, Professor Neil Ferguson has told MPs that the UK’s Covid death toll could have been halved if lockdown was introduced a week earlier. New Zealand, for example, went in ‘early and haaaad’ and has now opened its country’s pubs and restaurants with one metre distancing.
HOLIDAYS & LEISURE TRAVEL:
• The Telegraph says that the UK’s quarantine system will damage hospitality business’s incomes. UK Inbound says ‘viable tourism businesses that rely wholly on inbound visitors will need to receive additional and extended financial support from the Government, if their businesses are to survive.’
• Quash Quarantine says that 59% of consumers support the idea of air bridges.
• PwC has said that destination hotels face a ‘valley of death’ as tourism business levels may not hit the ground running. PwC’s Nicolas Mayer says ‘the most-scary thing for me is the moment the tourism ecosystem opens, especially for hotels in destination. There is a valley of death where cash goes out when you start ramping up, hiring, investing in inventories, but the first cash inflows come after guests have left. That gap can be 150 days.’
• PM Boris Johnson has pledged to help the cruise industry.
• Consultancy Oliver Wyman has said that UK consumers remain keen to travel with 64% of adults who travelled abroad last year expecting to travel the same or more once restrictions are lifted.
• The problem for 2020 is that we are running out of 2020.
• Wyman finds, however, that the above is subject to Covid developments with 68% of UK travellers saying they would be unlikely to travel on holiday if there are fresh Coronavirus outbreaks in Britain or abroad.
• Boris Johnson is said to be heavily involved in efforts to create air bridges with some countries. This could lead to diplomatic rows as countries may be negatively discriminated against by omission.
• Whitbread has announced that its underwriters have placed the rump of its rights issue. The company was always certain that it was going to get the cash.
• The BBC reports that some consumers are becoming ill with worry in their attempts to recover deposits and holiday payments made on trips that will not now happen. Customers’ cash has long since been used as working capital by some companies. These operators are understandably reluctant and, in some cases unable, to hand the money back.
• Hurtigruten has announced the introduction of four itineraries from March 2021, which will go on sale from June 20.
• Emirates vice president Rob Broere has added his voice to those of other quarantine critics saying that quarantine measures will ‘kill travel’.
• Jamaica is to reopen its borders on Monday.
• MGM has announced further Las Vegas hotel re-openings
• Facebook News has been launched in the US.
FINANCE & ECONOMICS:
• The OECD has said that the UK is likely to be the hardest hit by Covid-19 among major economies.
• The UK also has the highest Covid death rate in Europe suggesting that, either the data and predictions are is incorrect, or the outcome is in some way suboptimal on most definitions (i.e. life and money).
• The OECD has suggested an 11.5% fall in GDP for the UK this year. If there was a secondary Covid outbreak, it says there could be a 14.0% fall in income. The OECD is predicting a 6.6% contraction in Germany.
• We tweeted nearly ten weeks ago: Destroy the economy or let 200k vulnerable people die? It’s a dreadful, dreadful choice and well above our pay grade. But one thing we do know. Don’t, whatever you do, do both.
• Given that other countries may have mitigated the problem, there is likely to be a stewards’ enquiry into what has gone wrong.
• The OECD says, not altogether cheerfully, Covid will have ‘|dire and long-lasting consequences for people, firms and governments.’
• The Resolution Foundation has said it could take seven years for employment levels to fully recover from the coronavirus outbreak.
• The US Fed has suggested that the US economy could shrink by 6.5% this year. The OECD has suggested that the UK could shrink by 11.0%. It says Germany could see a c6% decline.
• Sterling weaker at $1.2681 and €1.117. Oil lower at $40.35. UK 10yr gilt yield down 6bps at 0.27%. world markets lower yesterday & London set to open down around 120 points.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Today’s News: The B&M finals today were well trailed in last week’s bumper trading update, with PBT up 3% to £252m for y/e March. There is no further update on current trading, but B&M notes that its Gardening stock has sold through after a bumper May and the City isn’t convinced that the strong start to the year will be sustained. On a different note, Heathrow Airport has announced that passenger traffic slumped by 97% in May…and is moaning about having to cut more jobs. But the Retail sector today is dominated by the huge Ocado placing (see below) and the mega-deal by Just Eat to buy the US Online food delivery business Grubhub for over $7bn in an all-share offer.
Ocado: Our initial reaction on hearing the after-hours news yesterday evening that Ocado was looking to raise c£1bn through an equity placing and Convertible Bond offer was that it was a real cheek for Ocado to ask investors to stump up more cash, as the company still has a ton of cash in the bank from the M&S deal. But with investor appetite for Online stocks starting to wane in the short-term, after the huge rallies in recent months, the company must have been nervous that if it waited too long it might have missed the boat. The bulls point to the huge opportunity (and the cash flow demands) of building CFC’s with existing global partners and the massive boost to the Online Grocery market from the pandemic. The bears say that the perennially loss-making Ocado is only good for burning through cash and that the dedicated warehouse model is still not as flexible as the combined store
News Flow This Week: Later today we get the Morrisons AGM (at 9am in Bradford) and the Dignity AGM (at 11am in Sutton Coldfield).