Business focus: Sainsbury's £12 billion Asda deal on life support

Business focus: Sainsbury's £12 billion Asda deal on life support

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D-day has arrived for Mike Coupe, the under-pressure boss of Sainsbury’s, and his £12 billion bet on an Asda merger that will define his period as chief executive. 

The competition watchdog’s initial verdict on Sainsbury’s audacious tie-up with its smaller rival, triggered when the deal was announced ten months ago, has landed and the news isn’t good. 

Coupe’s promise to investors from the merger of Britain’s second and third-largest supermarkets was to generate at least £500 million in cost savings and benefits if the deal goes through. Then there was the headline-grabbing pledge it would lower prices by 10% on items like milk and bread, which has been met with some scepticism. 

But the Competition and Markets Authority has to ensure it doesn’t lead to less competition, higher prices for shoppers or a squeeze on suppliers. And it fundamentally disagrees with Coupe’s own assessment of the threat from German discounters Aldi and Lidl and online rivals, which have been luring shoppers away from the Big Four supermarkets over the past decade.

Although the findings are provisional, they are a pretty good indicator of how the mega-deal will shape up, if it isn’t abandoned altogether. The regulator wants “significant” numbers of store disposals or it will ditch the deal, or even a sell-off of one of the Sainsbury’s and Asda brands altogether before it gives its blessing to the tie-up. 

That might destroy the rationale for the deal after the CMA originally identified 463 areas of the UK where the merger would raise competition concerns. That has now gone up to 629 areas in today’s damning assessment.

In contrast, when Tesco bought wholesaler Booker, the CMA earmarked 369 areas of concern and ended up waving it through without demanding any shop disposals. In the merger between bookmakers Ladbrokes and Coral, 798 stores were identified and the regulator said they should sell 359.  

The mood music on this deal sounds ominous. So what happens now?

The challenges 

Navigating the remedies demanded by the CMA to give the deal the green light, particularly the “significant” number of store disposals, will eat into Coupe’s £500 million cost savings target. 

Anything over 150 stores and the disposals would hurt the economics of the deal, while 180 could bring it to a crashing halt, analysts think. But the regulator today went further and said it could press for the sale of one for the brands completely, effectively killing the deal. 

The CMA has been pretty clear and prescriptive in who it thinks will be able to buy the stores, drastically limiting the shopping list of potential buyers.

The watchdog said it “would need to be satisfied that any purchaser has a strong management team with a proven track record in UK groceries retailing, can demonstrate a commitment to competing across all the relevant markets, and is able to demonstrate an ability to compete effectively by reference to a credible business plan”. But one of the most credible suitors, Tesco, looks a doubt, as too many of its stores are near Sainsbury’s and Asda’s. 

Another reason that the CMA is pushing for the sale of a brand is online grocery sales. It is concerned that many customers “would wish to continue to use the existing web offerings” regardless of who provided the service. 

That prompts “a need to achieve an effective remedy” to the lessening of online competition identified by the watchdog.

Clifford Chance partner Nelson Jung and a former CMA director said: “The crucial thing here is that the CMA has identified competition concerns that go above and beyond local areas as a result of Sainsbury’s and Asda overlapping. It has also lowered the bar for intervention [demanding remedies] than what we’ve seen in the past. This could have far-reaching implications for other deals.” 

Supermarket for sale 

Amazon could be the dark horse. It has kept the City guessing after it told the watchdog in November that acquisitions and investment in the UK grocery market are on the table. 

It recently emerged that it secured sites in London for Amazon Go, a small, cashless convenience store. The fact that it has a meagre 1% of the grocery market in Britain could work in its favour. It could use Whole Foods, which it bought in 2017, to expand and make the grocery market more competitive.

But the CMA’s stringent conditions on a UK track record could put the mockers on the US behemoth, particularly as the watchdog said it “may also take into account the current scale of the purchaser’s operations, in the UK and abroad” to judge if its business would be able to provide an effective competitive constraint. 

Morrisons is touted as the most interested buyer, but could play hardball on how much it is willing to fork out for any stores the merged pair are forced to sell, particularly with a glut of supermarkets due to hit the market. 

Suitors could even go as far as asking for extra cash from Sainsbury’s and Asda to change the shop fascia to their own or replace some of the systems, one former supermarket chief says. Sources played down Morrisons’ interest today, although a private equity bid for Asda, whose parent Walmart is desperate to offload it, remains reasonably likely.  

Another possibility is one of the smaller players like B&M and Iceland teaming up with Aldi and Lidl to split the space, effectively forcing Sainsbury’s and Asda to cede terrain as part of a deal that’s meant to futureproof the business against competition.

The spat with the CMA 

Predictably Sainsbury’s disagreed with the conclusions of the watchdog, accusing it of “moving the goalposts” and rejecting the chance to put money in people’s pockets. 

You’d expect tensions to rise over a deal of this magnitude, but this is strong stuff and the bickering has been going on virtually since the deal was announced. 

The back-and-forth between Sainsbury’s and the regulator turned particularly sour in December when the grocer took the CMA to court. A blizzard of papers from the watchdog flooded in over two days in November with the supermarkets chain expected to respond in seven days.  

A source close to the watchdog said Sainsbury’s hasn’t been particularly easy to deal with either. It emerged that Coupe had met with Alex Chisholm, the ex-CMA chief and now permanent secretary in the Department for Business, Energy and Industrial Strategy, which was seen by the CMA as an attempt to go behind its back.  

Where next?  

This deal might not be quite dead, but it is on life support. Coupe bravely said today that he’ll “fight on”, but the CMA says it’s “likely to be difficult” for him to satisfy their concerns. A return match in court over the regulator’s methodology looks likely.

Even if the deal does go through the tie-up leaves the likes of Morrisons looking dangerously exposed and could even trigger a wave of defensive mergers resulting in even less choice. And if that happens, it means the watchdog could find itself back in business again before long.

As for Coupe, he’s bet the farm on this deal. His Argos purchase proved a hit, but whether his credibility as a chief executive can survive the likely collapse of this bold — or flawed — attempt to reshape the UK grocery landscape remains to be seen. 

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February 21, 2019 |

Flybe snubs late takeover deal to pump in £65 million and stay listed

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UNDER-THE-COSH Flybe has knocked back a last-minute takeover deal from a New York hedge fund and a regional US airline. 

Backed by Flybe’s second-largest shareholder Andrew Tinkler, Bateleur Capital and Mesa Airlines have teamed up and offered to make a capital injection of £65 million at 4.5p a share and keep the company listed. 

But Flybe’s board today said it was sticking with an offer from Connect Airways, a group made up of Richard Branson’s Virgin Atlantic, Stobart Air and venture capital firm Cyrus which has vowed to put in £100 million. 

The deal with Branson and his partners is set for completion this Friday despite heavy criticism from Flybe’s two major shareholders, including Tinkler, who last week branded it “an insult to the aviation industry”.

The Branson team’s offer, which values Flybe at just £2.2 million, gives it Flybe’s 76 planes and slots at Heathrow and Stobart’s Southend airport.

Flybe, which has already drawn £15 million in working capital from Connect, said: “Flybe continues to regard the arrangements entered into with Connect as being the only viable option available, which provides the security that the business needs to continue to trade successfully. Flybe continues to work with Connect Airways on the sale of Flybe’s operating businesses.”

Flybe put itself up for sale last year as it struggled with cash flow as its credit card acquirers imposed tough requirements on the airline, withholding cash as collateral in case the airline found itself in trouble.

It is understood that the credit companies held back more than £50 million in payments, which the airline’s bosses claim is the reason why it is in so much trouble. Christine Ourmieres-Widener, the French chief executive of Flybe, said the squeeze on payments starved her airline of working capital.

She said: “The credit card companies were putting on more pressure. They knew that the outcome could be quite challenging, if not brutal.”

Shares in Flybe doubled this session, up 1.8p at 3.1p, giving a market cap of £6.5 million, but still a far cry from its £215 million valuation when it joined the London Stock Exchange in 2010.

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February 21, 2019 |

Gideon Spanier: Telly addicts are watching closely as ITV plots Britain's answer to Netflix

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Netflix has wound up rivals in the TV and film business by claiming it doesn’t see them as a threat. “We compete with, and lose to, Fortnite more than HBO,” it declared at its annual results when it suggested immersive computer games are more serious competition than any subscription TV or online video platform.

“Our focus is not on Disney+ [Disney’s new planned streaming service], Amazon or others, but on how we can improve our experience for our members,” Netflix added.

Reed Hastings, the co-founder of Netflix, was taking a calculated dig because he knows everyone in the media industry is obsessed with how his company is disrupting TV and film on both sides of the Atlantic.

Broadcasters and Hollywood studios have been fretting about Netflix and, to a lesser extent, Amazon Prime Video for years, but it has taken until now for them to mount a counter-offensive.

Disney, AT&T, Comcast and Apple are among those planning to launch subscription video on demand (SVOD) streaming services in the US in the coming months.

Meanwhile, ITV chief executive Dame Carolyn McCall is set to unveil a SVOD service at its annual results next Wednesday. McCall has been talking to the BBC about teaming up to create a “British Netflix”, along the lines of BritBox, their joint venture in the US. 

The fact ITV and the BBC might collaborate, with the blessing of regulator Ofcom, is a sign of just how much the global streaming giants have already disrupted British TV and changed viewers’ expectations, with potentially harmful consequences for homegrown content.

Netflix, the world’s biggest SVOD service, is rapidly approaching 150 million subscribers, including an estimated 10 million in the UK, and it has amassed valuable viewing data that informs its programme investments.

Revenue growth has allowed Netflix to borrow money to keep increasing its content budget and it has committed to spend at least $8.6 billion (£6.7 billion) on making and licensing shows this year, four times what the BBC spends on content.

Importantly, Netflix is attracting top talent because of its willingness to push creative boundaries as well as pay handsomely. 

Recent hits include Charlie Brooker’s interactive Eighties London drama, Black Mirror: Bandersnatch, which allows viewers to choose how the plot unfolds, Alfonso Cuaron’s Seventies Mexican film, Roma, which has 10 nominations for next Sunday’s Oscars, and political drama Bodyguard, a co-production with BBC1. New entrants to the SVOD market face daunting challenges: first, investing in streaming is costly because a company must build the technology, acquire programming rights and spend on marketing. 

That is a big outlay for a traditional media company, especially if shareholders expect it to keep paying a dividend. Disney last month reported a $1 billion loss on its stake in US service Hulu and other streaming operations. By contrast, Netflix is profitable and, like most tech giants, it doesn’t pay a divi. Another worry for new subscription streaming players is that consumers are not certain to pay for lots of streaming services.

McCall says ITV’s research has found that consumers would be willing to pay for a “British” TV streaming service and there is evidence that many Britons do subscribe to multiple streaming and pay-TV services because they love high-end TV.

However, recent history also suggests there are usually only a few big winners in any online sector.

Ultimately, the reason why streaming has taken off, particularly among teens and twentysomethings, is that the viewer feels in control.

Netflix’s obsession with user experience is good for consumers but is a serious threat to traditional media business models. Viewers are being conditioned to expect no advertising breaks and to watch instantly, rather than wait weeks or even months for a conventional TV series broadcast or cinema release. “We have got to evolve what we do quite quickly,” McCall warns.

Streaming has already prompted Rupert Murdoch to sell his Sky and Fox entertainment assets. More of media’s old order are going to be swept away by the streaming tide.

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February 21, 2019 |

Simon English: For Ratcliffe to earn our respect he should rethink his tax plan

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DO billionaires care about their public reputation? You might think that if you had a billion quid, part of the fun of it would be not caring less what anyone else thinks about anything, certainly not whether you’re a decent sort.

This may be part of the reason why you do not have a billion quid. No drive, see?

So let’s assume that billionaires do care what we think of them; the money isn’t enough. They want their names on buildings; on schools and on the News at Ten without connection to the word “scoundrel”.

They employ phalanxes of lawyers and PR people to protect their good name. They sue the press whenever it so pleases them. Old photographs of them looking fat are annexed. All photographs of the old wife are burned.

Warren Buffett, the billionaire with seemingly the least interest in actually being rich, once said this: “I know many people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them.”

His friend Bill Gates aside, other billionaires seem to ignore this wisdom. Love can surely be bought and presumably sold, just like anything else.

And so to Sir Jim Ratcliffe, making a run this week to be the most disliked as well as the richest man in Britain.

Fine work from the Sunday Times revealed that Sir Jim — knighted less than a year ago — has been working with PwC on a £4 billion tax avoidance plan, which involves moving his home and his money to Monaco.

Ratcliffe, who is worth more than £20 billion, once said he was “deeply pro-British”. He doesn’t like the EU.

Perhaps his tax wheeze is a cunning plot to give Brexiteers a bad name, though they were doing OK on their own.

Even PwC, fined a record £6.5 million for its duff auditing of BHS — among many other offences — was reportedly nervous about the scheme.

The point is not whether the tax plan under consideration is legal. It is whether it is the right thing to do or not. If Jim Ratcliffe can’t tell the difference, perhaps that tells us most of what we need to know about him.

At some point, very high personal wealth is a sign of policy failure. We can argue about what the amount might be — £3 billion? £5 billion? £10 billion? — but at a certain level it has nothing to do with that individual’s cleverness. It means the regulations were wrong, or governments were weak, or the tax system has failed.

Bill Gates admitted as much himself the other week, saying that he had handed over $10 billion of tax since founding Microsoft, but that he should have paid more.

Euro regulators have found Microsoft in breach of monopoly rules several times, dishing out fines that sounded high but weren’t remotely hefty enough to persuade the company to change its behaviour.

Microsoft remains one of those companies that it is virtually impossible to escape. You’d have to try very hard not to use its products. Which means it should have been broken up, several times over.

Gates’s reputation has survived the dominance of the not especially nice company he founded because he does lots of charitable work and doesn’t pretend his fortune resides in Monaco.

Ratcliffe’s business Ineos isn’t anything like as big as Microsoft, but he could still leave an extremely powerful legacy if he chose to behave differently.

He could say that, on reflection, the Monaco scheme is a duff idea and he’s dropped it. He could say that, while he does pay a lot of tax in the UK, that’s because he’s got an extraordinary amount of money and he’s only paying what he owes, just like the rest of us.

Or he could throw himself a testimonial dinner and get someone famous to give him a made-up award.

The second outcome seems more likely.

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February 20, 2019 |

Russell Lynch: HSBC's John Flint must get his teeth into the bank with 'negative jaws'

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“There’s not too much keeping me up at night,” says John Flint, the chief executive of banking titan HSBC. That peaceful sleep might not extend to investors who bought the shares lately, though.

Flint, to be fair, has just turned in £15 billion-plus in annual profits, even if the stock is down 15% in the 12 months since he’s been running the bank. Those earnings were a little short of City hopes but the dividend is at least safe, which is no small matter in very uncertain times.

What I don’t get from these results however is any sense of dynamism, and maybe even a touch of complacency betrayed by Flint’s comments.

HSBC’s measure of its revenue growth compared to costs, its surreally entitled “jaws ratio”, turned negative last year, thanks largely to a dire final quarter as markets tanked and operating costs soared ahead of revenues. 

The bank is pledging to return to “positive jaws” in 2019 but shareholders are entitled to ask whether Flint could do more on costs to earn his £4.6 million in pay last year. 

The bank’s workforce swelled to 235,000 employees as of December, up 6000 on the previous year: but when other banks are cutting their cloth Flint played down the prospect of any major cull to keep a lid on costs. “Moderating the pace of investment,” is the way the bank is going to go when maybe he should be wielding the surgeon’s steel.

The bank’s return on equity, essentially a measure of how well it is using its shareholders’ money, has improved but is still below the target of 11% by 2020. Those targets are being held for now, but the shares were off 3%.

For years HSBC has had a major advantage in its heavy exposure to Asian markets, but if I were Flint I would also be more concerned over the Chinese economy than these results sound. 

HSBC expects the world’s second-biggest economy to “maintain strong growth”; but momentum has certainly been lost compared with previous years, and the Bank of England Governor Mark Carney has also been vocal on the risks of a slowing Chinese economy. 

Closer to home in the UK, there’s more reason for Flint to reach for the Restoril as the bank, a relatively conservative lender, has seen “some softening of credit performance” as it prepares for the UK’s departure from the EU. 

The good news is that revenues have bounced back a little since the start of this year. 

I’d be inclined to agree with Shore Capital, which reckons that if investors want to buy into banks more cheaply they should probably stick their cash in a mix of Barclays, Lloyds and Standard Chartered instead, which also gives them the exposure to Asia.

Flint’s chairman Mark Tucker has a reputation for taking no prisoners on the football field: maybe he should send a few tough tackles Flint’s way to shake him out of his comfort zone.

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February 20, 2019 |

Piers Morgan's vegan sausage roll spat lifts Greggs shares

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He may be disliked by much of the country, but Piers Morgan was in Greggs’ good books on Tuesday, after bumper sales of its vegan sausage rolls led to a profit upgrade.

The divisive TV presenter berated the meat-free snack and spat it out on TV, which only gave more publicity to the product which hit headlines on its launch last month.  

The bakery chain said profits will be higher than expected this year as the pastry lifted sales. The shares jumped 88p, or 5%, to 1691p. 

Greggs same-store sales rose 9.6% for the seven weeks to February 16, albeit the pace has eased off slightly this month. Its total sales were up 14.1%. 

Investec’s Kate Calvert said: “Importantly, innovation and newness is paying off, with management believing that new customers entering stores appear to be shopping across the Greggs’ savoury range. Elsewhere, existing customers continue to spend more.”

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February 20, 2019 |

Market Minnows: Shoe Zone should be shoe-in for dividend hunting investors

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This is not the glamorous end of the shoes market — no £500 Louboutins in sight. But Shoe Zone is fast becoming a solid little earner for small-cap investors, providing a reliable dividend and strong earnings.

The company manufactures its shoes in China and sells them across 500 stores in the UK. Prices are cheap, with adults’ and children’s shoes sold for a bargain, mostly less than £20.  

At its results last October it recorded a profit of £11.3 million, an 18.4% increase on the £9.5 million recorded the year before. Investors will be hoping it can do the same again for the year ahead as 60% of profits are paid out in dividends.  The firm also has a strong debt-free balance sheet which could appeal to a predator. 

But the real key to its success is its ability to control its rents. Shoe Zone’s average lease length is just two years, meaning it has frequent chances to renew. 

Chief executive Nick Davis says: “We’re small and not like John Lewis so we don’t have to commit to big and long rents. We make good property deals and are happy to play landlords off each other.”

The question is whether the firm will continue to grow. It has a 2% share of the total shoes market, slightly behind a gaggle of posher High Street retailers like Schuh and Office, and a bit further behind fashion stores like Next, JD Sports and M&S. They all trail Clarks, which has 9% of the market.

Davis adds that the company has moved into selling branded shoes such as Skechers and Hush Puppies, which are usually sold for a much higher price than its own branded shoes. 

It is also focused on developing its website. Last year online revenues contributed £9.8 million to overall sales, a marked 19.9% increase on the previous year. Nevertheless, analysts have warned that customers still prefer to buy shoes in store. 

Peter Smedley, researcher at finnCap, says: “Around 82% of shoppers still purchase footwear in-store, while 16-24-year-olds are most likely to use this channel. 

“We think this is best explained at the younger end as they typically only have cash as a payment mechanism and are therefore obliged to use stores.” 

Still, while the high street crumbles, Shoe Zone shows that with sensible pricing and a low cost base any firm can still compete.

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February 19, 2019 |

Entrepreneurs: Online innovator The Marque puts stamp on polishing high-fliers' profiles

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Google ‘Andrew Wessels’ and the first page of hits includes the bio of Andrew Wessels, the author of novel A Turkish Dictionary; Andrew Wessels, director of the film Blitzpatrollie; and Andrew Wessels, founder of The Marque, which is an internet directory that aims to help corporate high-fliers to beat Wikipedia and social media, by controlling their online image.

It’s the last Wessels that I’m interviewing, and the online cacophony of personal data is what inspired him to set up the company.

“I was looking up successful people, trying to track their career paths to see how they’d reached the top, but all the information was so disparate. Most CEOs and people with portfolio careers weren’t on LinkedIn. 

“Wikipedia just wasn’t reliable, there was no single source of information you could trust. That’s what sparked my idea for The Marque.”

Inspiration struck after a varied career: Wessels had a spell as a professional cricketer in his native South Africa, was an investment manager at JP Morgan and then worked for Charles Dunstone at Carphone Warehouse’s investment arm. 

“After that, I wanted to do a business myself. I gave myself a six-month deadline to come up with something new,” the 44-year-old explains.

“But I found it very difficult. I first tried a sports business, but none of the ideas I came up with were scalable. I looked to buy a recruitment business but I couldn’t find anything. My six-month deadline was approaching, and I was thinking, ‘I’ll have to go and get a job’, which was a very scary prospect: I’d not worked for anyone for years.  

“I was clutching at straws, feeling desperate, and decided to pick a few business people I really admired, and research them to track their career since they had left school, to see if anything would inspire me.”

The Marque

Founded: 2015

Revenues: £1.5m (2019 forecast)

Business idol: “Charles Dunstone and David Ross — they taught me an incredible amount.”

Best moment: “The real euphoria when the first payments from clients came through — it showed they believed in the product.” 

Worst moment: “The stress associated with The Marque taking longer to grow than I anticipated.”

Wessels’ first target was Lord Rose, who had left the helm of Marks & Spencer, and become the new chair of Ocado. “Despite his high profile, I had to go through about 13 different websites to work out what was the correct information about him, and what wasn’t. I thought, ‘He should come up at the top of Google with a coherent, extensive profile.’ That was the kernel of the idea.”

Wessels took his plan to 20 corporate high-fliers and asked if they’d pay for an online profiling service; their positive responses saw him plunge ahead.

He personally invested £250,000 in building the site and the service: “I’d worked as a tech investor but had no idea how to build a website, so I found developers based in Serbia who impressed me, and they still run the tech side.”

It took four months to build The Marque, whose headquarters are in Berkeley Square, and which uses complex search engine optimisation methods to get its professionally-written profiles to the top of Google rankings.

Growth was slower than Wessels expected: “When I launched in May 2015, if you searched for someone and there was nothing online, that was seen as a good thing. Now, it’s a red flag,  you wonder, ‘What are they hiding?’  That shift has helped a lot; everyone has their offline image of how they portray themselves, but, before every meeting, people take a view of who you are via your online profile. Senior executives know that they need a digital twin that matches how they present themselves offline.”

Wessels has signed up 350 clients, who pay £1,500 a year for The Marque’s copywriters to write their profile and keep it updated with their latest business deals and appointments. 

Users include Wessels’ former boss, Dunstone, as well as New Look founder Tom Singh, former Kleinwort boss Sally Tennant, ad guru Johnny Hornby and Cobra Beer founder Karan Bilimoria. 

Backers, who include Boots dealmaker Dominic Murphy, private equity executive Larry Guffey and a wealthy Hong Kong family office, have put The Marque’s total investment at almost £1 million. “They also bring in crucial clients,” Wessels adds.

He’s expanding to the US, spending two weeks every month there “which  is really tough to combine with my family”, the father-of-three says, “but the global opportunities are just too great  to ignore.”

The difference between British and American profiles, he has found, “is that the first thing British clients say is,  ‘I don’t want to be seen to be promoting myself’ but that’s not an issue in  the US.” 

Wessels has just signed a deal with a large American charity where The Marque will manage the online profiles of 40 of its trustees. “The idea is, outsourcing the online work will save charity workers time to do other things,” Wessels explains. 

“And with the prospect of more large contracts on the horizon, the coming year is going to be incredibly exciting.”

And you’ll be able to read all about it on his The Marque profile.

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February 19, 2019 |

Hamish McRae: How global investors can counter corporate disasters

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If you wanted to take a moment to say that the banking catastrophe of 2008/9 has found closure this week is as a good as any. Britain’s three biggest banks give their annual results: HSBC tomorrow, Lloyds on Wednesday and Barclays on Thursday. If the solid return to profits last week at RBS is any guide, these figures should signal the sector is back to some sort of normality. Some court cases rumble on but the endless string of fines and provisions is moving towards a close.

It has taken a decade for banking to recover from its own arrogance, greed, mismanagement and stupidity. However, investors in the sector, including the government, are still nursing losses. For many in Scotland, who thought the safe thing to do was to split their savings between RBS and Bank of Scotland shares, it has been a catastrophe. 

So the question is how might investors avoid such systemic destruction of value in an industry in the future. 

There are obvious candidates of entire sectors that may be devastated over the next decade. The motor industry is one. The combination of Elon Musk’s visionary use of laptop batteries to drive a car, coupled with the switch from diesel, precipitated by VW’s manipulation of emissions testing, has utterly transformed the industry. All the skills of the German manufacturers in developing sophisticated internal combustion engines and transmission systems may be worth nothing. Instead the expertise (and low production costs) of battery technology developed in China will dominate the globe. 

Of course Western car manufacturers will fight back, and will retain some market share. But note two facts. Last year China built more than half the world’s electric cars. And save for a couple of models, including the Mustang, Ford is stopping making traditional cars in North America. 

Another sector facing seismic change, and I think destruction of shareholder value, is high-tech America. I am in awe of the way a clutch of West Coast companies have over one generation utterly transformed our lives: Apple, Google, Facebook, the old stager Microsoft, and so on. But while the high-tech revolution has many years to run, the dominance of these companies will ebb. The reassessment of their value began last autumn. Apple, the first company in the world to have a market capitalisation of more than $1 trillion (£775 billion) is back down to $800 billion. 

Facebook is being challenged for its ethical practices – today MPs said there needs to be independent ethical oversight of it – while Google and Amazon are under pressure over their accumulation and use of personal data. These companies have changed the world, but it is not hard to catch a sense that customers and governments will push them back. That has started already. Amazon being forced to abandon its plans for a New York headquarters was last week’s example of a reversal that would have been unthinkable a few months ago.

The question for anyone interested in building wealth through investment is: what do you do about the systemic risks that dominant sectors inevitably face? 

One obvious response, and a wise one, is you spread risk. You spread investments geographically, including now at least some foothold in emerging markets. You spread between sectors. You spread between large corporations and smaller ones. And you have some stake in alternative investments and property. Had those Scottish families followed those rules 10 years ago they would not have come such a cropper over RBS and HBoS. 

The more specific reaction to corporate disasters is to screen for environmental, social and governance (ESG) risks. The screening does what it says on the tin. With environmental risks identifies specific dangers that management is ignoring, such as the damage from being caught cheating on emissions. 

Among the social factors are the ways in which employees are treated, an area that Amazon seems to have fallen short. As for governance, one obvious red flag would be any weakness in accounting standards, and we have had in the UK a string of accounting/auditing failures, including Carillion and most recently Patisserie Valerie. 

The big point is this is not governments or regulatory bodies requiring companies to carry out a box-ticking exercise. It is a framework that investors can use to require boards to have an orderly approach to identifying and managing the risks their enterprises run. 

As the banks trot out their results this week, ask how they rank on ESG criteria and how much they have changed over the past decade. 

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February 19, 2019 |

Millennium & Copthorne Hotels suffers Brexit-induced recruitment woes

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Millennium & Copthorne Hotels on Friday reported lower profits and warned Brexit is making it harder to hire staff in London.

The FTSE 250 operator of hotels in areas such as Knightsbridge, Kensington and next to Chelsea football club said it has faced difficulties in recruiting EU workers in the capital. They account for more than half the firm’s London workforce.

That is one of a number of headaches the hotelier is facing. It also pointed to UK wage rises, and competition from the growth of Airbnb.

Kwek Leng Beng, the group’s Singaporean billionaire chairman, said: “The hospitality industry faced a range of geopolitical and global headwinds in 2018, many of which look set to continue in the current year.”

Comparable revenue per room increased 2.4% last year at the company, which has hotels across the globe.

But, total reported revenues decreased to £997 million from £1 billion. Pre-tax profits fell 28% to £106 million. 

Millennium & Copthorne Hotels, which also runs Bailey’s Hotel in Kensington, had a number of one-off costs during the period, including lost revenues from the Mayfair hotel in Grosvenor Square, which has been closed since November 2017 for a large refurbishment. 

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February 16, 2019 |
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