Langton Capital – 2021-02-04 – PREMIUM – Bids & deals, employment costs, Compass, Whitbread, Stock Spirits etc. :
Bids & deals, employment costs, Compass, Whitbread, Stock Spirits etc. :
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I’ve always looked on enviously at those empty disabled parking bays that you see when you can’t find anywhere to park.
And now, since I’ve got a diminished sense of taste post Covid – no biggie but I’m hoping it comes back – I’ve got a fighting chance of pitching for a badge.
It might be a long shot, however.
Because it’s hardly serious and, some might say, I’ve never had any sense of taste so nothing’s changed.
However, I’m working on it and, as I’ve also recently taken to misreading the word carrot for cannot (I mean who really says the word ‘cannot’?), I think I may have a choice of disabilities to present to the local beak.
On a serious note, I know the spaces are reserved for those who deserve them. Even if they’re empty. Always. On to the news:
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CONSIDERING CORPORATE DEALS:
• We have believed for a while that corporate activity would pick up when operators (or financial buyers) believed that there was light at the end of the Covid tunnel.
• This extends beyond company takeovers and it will come (and indeed is coming) from a number of directions. Here we consider this alongside the Marston’s bid approach
Distress, balance sheet repair:
• We saw some of this back in April when many, many operators raised funds.
• JD Wetherspoon is the only operator (we’re aware of) that has come to the equity market for money twice.
• The first dip was to provide liquidity headroom and the second dip is for that reason but also to make site purchases where these make sense.
• The dust hasn’t even begun to settle yet, and we would expect several operators to equity either to survive or to replace debt or to make site purchases.
• Existing operators will likely want to buy distressed rivals. Targets may or may not succumb. There may be pressure from banks etc to do so.
• New entrants may wish to ‘bottom fish’. This is more easily said than done. Distressed leasehold sites may outnumber distressed but high quality freehold sites by perhaps 1,000 to one.
• A new entrant consolidator may make a success of putting together leasehold sites but this will not be without risk. New entrants will need management, brands, sites and money. it is simpler to say they will need everything.
• It would be safer for banks, equity holders and landlords to back existing operators.
• Financial buyers can see what they believe (or at least hope) will be attractive returns.
• But, often, the money that they need to raise to make a purchase requires access to the target’s books. And agreement may not be forthcoming.
• Marston’s is currently in receipt of three cash bids from Platinum, each higher than the last. It has rejected the most recent, at 105p, as it believes this still ‘very significantly undervalues Marston’s’.
• MARS says the latest cash proposal ‘represents a 19% discount to the Company’s share price at the start of 2020, pre-COVID 19; and since that time the Company has completed the transformative joint venture with Carlsberg to create the Carlsberg Marston’s Brewing Company, which realised significant value on completion and is anticipated to continue to do so as the benefits of the joint venture are realised.’
• It has also finalised its innovative, capital-light deal with SA Brain ‘to operate 156 high quality pubs within the SA Brain estate in South and West Wales, in a transaction which is expected to be accretive to earnings in the first full year of trading.’
A few words on this and other deals:
• Platinum has until 5pm on Friday 26 Feb to either make a firm offer for Marston’s or make clear that a bid will not be forthcoming.
• The would-be suitor has been told to go away and only come back if it can make a sensible offer. There is no blood in the water. And when there is no distress, the price of any deal must work for both sides.
• Platinum presumably knows this. If it doesn’t, then it should have done.
• A decision is easy now as 105p does not work for the seller. The price may rise (to make the choice a more difficult one) but the financial buyer will be limited by its own cost of capital as to how much it can bid.
• But ‘deal fever’ does exist.
• These are not machines. Human beings have a lot of input, corporations and buyers do get in fights and they may lose sight of the fact that there are prices at which sellers should sell and prices at which buyers should no longer buy.
• Buyers’ remorse is a risk for Platinum. But they can look after themselves and the share price isn’t anywhere near where it would have to be to win a recommendation.
• And maybe it will never get there. Marston’s may genuinely be worth more to Marston’s than it is to Platinum but consider the human angle.
• Show me the incentives, said Charlie Munger, and I’ll show you the outcome, don’t ask a barber if you need a haircut.
• There will be rooms full of corporate advisors active on both sides of this spat and, if any of them are paid by the hour, then we might draw our own conclusions as to whether this has a while yet to run.
PUBS & RESTAURANTS:
• IGD has reported on food & drink sales last year, in both, the on and the off-trades, saying that it declined in value terms by 12% last year. This will have been chiefly because of the partial closure of the on-trade and the switch to supermarkets.
• IGD says ‘grocery retail share of the market grew from 64% in 2019 to 81% in 2020’ and adds that the ‘eating out sector shrank by over 50%.’ It says ‘e-commerce was the clear winner in the sector as shoppers switched to online due to lockdown restrictions and stay-at-home guidance. But the overall food and drink market declined by 12%, predominantly driven by consumers eating more meals at home due to government closures within the eating out sector.’
• IGD adds ‘despite restaurant delivery, innovation in relation to meal kits and in-home ‘experiences’, the research highlights that in general, consumers haven’t been consistently replicating out-of-home habits within the home, contributing to the decline in that market.’
• Foodservice analysts Peter Backman says ‘the second quarter of 2021 is going to be critical for the eating out market. Without any current indication of when the industry will reopen or government support, many businesses are sitting on a knife edge. We’ll see property debts, plus substantial hospitality costs due and the end of support measures, which will sadly mean that many businesses will have no choice but to shut up shop.’ IGD adds ‘2021 is going to be another interesting year of shifting behaviours and spend. We’re delighted to be working with Peter Backman, so that we can look at the market in its entirety, rather than the ‘retail’ and ‘hospitality’ silos that have historically shaped the food and drink industry. It’s a fresh, new approach.’S4Labour reports that the UK Hospitality industry still pays around £542 million in employment costs during lockdown despite the existence
• In its ‘The True Cost of Furlough,’ S4Labour says ‘Furlough is not the free lunch it is sometimes portrayed as.’ It says that, although operators using the scheme benefit from a grant up to 80% of their employee’s average earnings, there are other costs. It says ‘for a start, the employer continues to pay National Insurance contributions, holiday is still accrued, and pension costs are not included in the grant.’ It arrives at a figure of £542m per month.
• S4Labour points out that rent still has to be paid, along with all other occupancy costs other than business rates, which are scheduled to be reintroduced in April. S4 says ‘for most businesses who have little or no expectations of trading profitably for the first 4-6 months of 2021, funding is becoming more and more critical.’ It quotes Revolution Bars’ CEO Rob Pitcher as saying that the scheme, while welcome, has cost the business £1million at a time it has seen revenue vanish.
• S4 concludes ‘with the current levels of government support, businesses are going to run out of cash before they get the opportunity to reopen. The true cost of furlough is much higher than one might imagine.’
• The TUC has urged chancellor Rishi Sunak to extend the furlough scheme in advance of his 3 March budget. Frances O’Grady, TUC general secretary, says ‘it would be a dereliction of duty of any government’ to stand by and see jobs lost. She says ‘nobody should think it is responsible or acceptable for any government to consign people to the dole queues.’
• The BCC has similarly called for a furlough extension until July. Even when the majority of the population has been vaccinated, the British Chambers of Commerce says ‘you’ve got businesses in deep trouble, and still the possibility of flare ups in the virus. It’s not a case of just vaccinate and forget about it.’ Many businesses will have used up any fat that they may have had in reserve.
• The British Beer & Pub Association has reopened its cross-industry platform returnyourbeer.co.uk. This will ‘enable participating brewers to manage the safe destruction of their brands in pubs in order to reclaim excise duty for beer that has become unsalable as a result of the latest National lockdown.’
• CEO Emma McClarkin says the BBPA is encouraging businesses with spoilt beer to visit the site’ the ‘cross-industry platform is free to use and should help businesses of all shapes and sizes who serve draught beer as they re-stock and re-fresh ahead of re-opening.’
• Staycations should be big this summer – see Holidays & Leisure Travel below. Provided they are open, domestic pubs & restaurants, particularly pubs with accommodation and operators out of working-city centres, should benefit accordingly.
• IHS Markit has released its January PMI for Services and for its composite measure. It says ‘January data pointed to a steep and accelerated fall in UK service sector output, with the rate of decline the fastest recorded since May 2020. Survey respondents overwhelmingly linked lower activity to the impact of restrictions on trade and temporary business closures during the third national lockdown.’
• This will not come as news to operators. The figures, though not good, are a shade less bad than the flash numbers produced a couple of weeks ago.
• The services PMI for January was 39.5, implying sharp contraction.
• Some emerging optimism. Markit says ‘looking ahead, around 60% of the survey panel anticipate a rise in business activity over the next 12 months, compared to just 13% that predict a decline. Improved confidence towards the business outlook was strongly linked to the expected trajectory of the pandemic in 2021, with swift progress for the UK vaccine rollout providing hope of a timely return to growth and the release of pent up demand in 2021.’
• Whitbread PLC yesterday announced ‘the successful pricing of two Green bonds, the extension of its Revolving Credit Facility (“RCF”) and its intention to repay Private Placement Notes.’ The company says ‘this refinancing maintains the Group’s strong balance sheet and financial flexibility, while at the same time extending the maturity of its debt.’ It adds ‘the impact on the Group’s combined gross debt and available facilities as a result of the £550m new Green bonds, is largely offset by a step down in the RCF of £225m in September 2022, and the proposed repayment of approximately £284m of Private Placement Notes.’
• WTB CFO Nicholas Cadbury says ‘we thank our new bond investors and our relationship banks for their strong support for the Group.’ He adds ‘we are particularly pleased that we have been able to reinforce Whitbread’s long-term commitment to sustainability by establishing this Green Bond Framework and issuing these Green Bonds.’ Cadbury concludes ‘the refinancing announced today demonstrates the strength of our underlying business, and is another key step in ensuring that we emerge from the crisis as a leaner, stronger and more resilient business.’
• Compass Group has updated on trading saying that organic revenue in Q1 is down by 33.7% across the group. This is marginally better than the minus 44.3% and minus 34.1% seen in Q3 and Q4 last financial year respectively.
• By sector, Compass says business & industry was down 43.4% whilst its ‘Defence, Offshore & Remote’ business was only down 1.2%. The group says its retention rate remains strong at 95.7%.
• CPG concludes ‘although the news around vaccinations is encouraging, the pace of volume recovery remains uncertain. As we enter the second quarter with varying lockdown measures in place across our key markets, we anticipate that Q2 revenues and volumes will be broadly in line with Q1. Despite this, we expect second quarter operating margin to improve by a further 50-100bps.’
• It adds ‘looking further ahead, we remain excited about the significant structural market opportunity globally, a return to organic revenue growth, continued margin improvement and returns to shareholders over time.’
• Stock Spirits Group PLC has updated on trading saying FY2021 is ‘on track despite continued On-Trade restrictions.’ It says on-trade ‘restrictions are still ongoing, albeit the Company is hopeful that they will start to lift as vaccinations are rolled-out across its markets. Whilst our performance in the On-Trade has been lower than expected due to these restrictions, this has been largely offset by our continuing strong performance in the Off-Trade. As a result, our performance is in line with expectations for FY2021 as a whole.’
• The Polish market has been strong as ‘the market continues to premiumise.’ The same trends are apparent in the Czech Republic whilst in Italy, ‘Stock Spirits grew volume and value share in all of its core categories.’
• Mirek Stachowicz, Chief Executive Officer of Stock Spirits, says ‘we are pleased with the start that we have made to the year, and our performance is in line with expectations for FY2021 as a whole. Our longstanding Off-Trade focus has continued to help mitigate the impact of the closure of the On-Trade across our markets, and our local sourcing and manufacturing strategy means that there has been no disruption to our operations since the start of the pandemic.’
• Imbiba-backed events company Camm & Hooper has undergone a CVA.
• Much has been said about delivery. Deliveroo is hoping to cash in on increased demand shortly but Foodservice Equipment Report (FER) points to the way that many major operators in the US have increased their drive-through capacity.
• FER says there is ‘no question that drive-thrus have been the saving grace for many restaurants as dining rooms were forced to close during durations of the COVID-19 pandemic. Seeing the results, big chains used the beginning of 2021 to share their resolutions for future investment in drive-thru service.’
• It then points to moves being made by Starbucks, Chipotle and McDonald’s. SBUX wants to ‘unlock the full potential for drive-thru’ and McDonald’s says that ‘doubling down on digital delivery and drive-thru’ is a part of its three-pronged approach to recovery.
• Marston’s, which is currently subject to three bid approaches from Platinum Equity Advisors, has updated on its environmental achievements to date saying that its team has ‘worked on creating and reaching a variety of sustainable milestones for the business.’
• MARS became the first pub company to achieve zero waste to landfill in 2018, two years ahead of schedule. It has removed all single use plastic straws from its estate and has also removed all single use plastic bottles from its lodges. In the first year, some 500k bottles were saved.
• MARS has also ‘delivered the UK’s largest private network of rapid electric vehicle (EV) chargers across hospitality sites in partnership with Osprey Charging, and it is one of the largest networks of any private business in Europe.’ Marston’s Andy Kershaw says ‘over the past few years we have really pushed and developed our sustainable actions and we are really proud of what we have achieved.’
• Kershaw continues ‘more than ever, green thinking is becoming the forefront of consumer and business minds, so as well as constantly developing and striving forward, it’s important that we also take time to recognise our milestones and celebrate our achievements.’
• SIBA has partnered with Kegstar to make its event BeerX Online free to attend. It says ‘with many small brewers struggling to make ends meet, and no sign as yet of an end to lockdown, it is more important than ever that we come together as an industry to support each other.’
• Community platform Grapevine Local has launched a customised noticeboard specifically promoting hospitality venues that are offering takeaway and deliveries during the current closures.
• Delivery on the up. Amazon Q4 sales up 44% to $125.6bn. Alibaba Q4 sales up 37% at $34.2bn. Ebay has reported earnings ahead of estimates. It says it will emerge “stronger” from the COVID-19 pandemic.
HOTELS & LEISURE TRAVEL:
• Less news than might be expected in this sub-sector. Perhaps unsurprising since most foreign holidays are either not allowed under current rules or would result in quarantine on return.
• Re staycations, holiday cottage letting agency Sykes Holiday Cottages has said that there has been a boom in summer bookings. Last week, these were up by 126% on last year. Searches for July and August were up 129%. Devon, Cornwall and Cumbria were up by the largest amounts.
• Sykes says ‘we’ve seen a significant increase in bookings for later this year, showing that confidence is returning and just how eager we all are to take a much-needed break away this year. With millions more Brits now choosing to forgo foreign holidays in favour of UK breaks, not only is it a huge boost for the UK economy, but it is also adding to the attractiveness of holiday letting as an investment opportunity.’
• Perhaps understandably, the World Travel & Tourism Council has reiterated its opposition to blanket travel bans. Without an obvious source for its data, the WTTC says ‘shutdowns are also shown to be entirely counterproductive and simply don’t stop the spread of COVID-19, and its emerging variants.’ It is keen on testing and vaccinations.
• IATA says last year was a “catastrophe” for global airlines. It says passenger demand was down by 66%. It sees a 50% uplift on last year’s level in 2021.
• PwC research suggests that black market gambling has doubled during the pandemic. The Telegraph reports ‘the amount of money being staked on “black market” gambling websites doubled to £2.8bn in the last year.
FINANCE & MARKETS:
• Markit PMIs for Services (see Pubs above) and for the composite measure for January were released yesterday. Services was 39.5 and the composite, pulled up a little by manufacturing, was 41.2. Both numbers imply contraction.
• Optimism for the future is up a bit. Markit says ‘service providers experienced a steep downturn in business activity due to the third national lockdown in January, although the speed of decline remains much slower than last spring.’
• The Telegraph has said that the ‘economic hit to Scotland from independence [would be] three times bigger than Brexit.’
• The IEA has bemoaned the fact that Business Secretary Kwasi Kwarteng has dropped plans to shake up employment legislation. It says this was ‘probably a Cabinet decision, prompted by fears of upsetting ‘Red Wall’ voters.’
• Sterling weaker at $1.3601 and €1.1320. Oil up at $58.85. UK 10yr gilt yield up 3bps at 0.38%. World markets mixed yesterday with London set to open up around 16pts.
RETAIL WITH NICK BUBB:
• Today’s News: There is still no more news on the mooted Boohoo acquisition of the rump of the Arcadia brands, but the mooted JD Sports share placing has gone ahead overnight: the company announced after hours yesterday afternoon that it was seeking to issue up to 6% of its share capital and it has announced this morning that it has placed 58.4m shares at 795p (a relatively modest 2.5% discount to last night’s closing price of 815p), to raise c£464m in gross proceeds (“to invest in the expansion of the group and to capitalise on acquisition opportunities, as it builds on the success of its International growth strategy”). And Watches of Switzerland has announced an impressive Q3 update, maintaining full year guidance despite the current UK store closures, with 6.6% constant currency sales growth in the 13 weeks ending 24 January (+1.5% in the UK and +19% in the US): Brian Duffy, the
• This Week’s News: Unconditional dealings in the Moonpig IPO start tomorrow, following the launch of conditional dealings on Tuesday. The MPC meeting interest rate/QE news will be announced at mid-day, but no big moves are expected, with the Bank of England relying on the Budget on March 3rd and the vaccine rollout/end of lockdown to stimulate the economy.