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

2019-02-21 07:50:34 admin

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

2019-02-21 07:50:27 admin

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

2019-02-21 07:50:18 admin

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

2019-02-20 07:44:48 admin

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.