Mega mergers and retail woes
While takeovers are proving lucrative for some, the continuing slump in traditional retail is a cause for concern, says Angus McCrone.
Plus ça change, plus c’est la même chose. The phrase was coined in mid-19th century France, but it has plenty of echoes today, such as Christmas Day arriving with leaden skies and no snow. Or the UK economy.
We were supposed to be in a new era after the Brexit vote in 2016 – one in which the financial sector would have to take second place while industry, the neglected regions and those left behind by globalisation and austerity had their day.
But, as spring 2018 has shown, entrenched trends are not easily reversed.
Financial sector versus retail
Takeover battles between Melrose and GKN (£8bn), and between Fox and Comcast for Sky (£22bn), and agreed takeovers by Takeda of Shire Pharmaceuticals (£46bn) and Sainsbury’s of Asda (£10bn) will produce hundreds of millions of pounds in fees for City investment banks, lawyers, financial advisers and public relations consultants.
There will also be windfalls for shareholders in the first three target companies.
Meanwhile, over on “main street”, a litany of distress from retailers has seen House of Fraser, Maplin and Toys R Us enter administration, while Carpetright, New Look and Mothercare have been shedding jobs.
In all, retail analysts estimate that 21,000 retail jobs were lost in the first quarter alone, and the total could reach 200,000 by the year-end. If the Sainsbury’s-Asda merger goes ahead, large-scale job losses look likely even if, as promised, stores are not closed.
Uncertainty over the end result of the Brexit process has contributed to an underperformance by the UK’s stock market.
The two phenomena – the spurt in takeovers and the High Street distress – share some of the same causes.
Low interest rates, Brexit and the weak pound
For a start, the prolonged period of record low interest rates has made it possible for companies to borrow cheaply, whether to mount takeover bids or, in the case of retail, over-expand.
In addition, uncertainty over the end result of the Brexit process has contributed to an underperformance by the UK’s stock market, which has recorded growth of 7% below that of the US S&P 500 index since the referendum, and 4% against an all-world index.
That, and the weakness of sterling, has made UK companies more affordable to overseas bidders.
The Brexit effect has also contributed to an economic shift that has hit consumer spending.
In the years immediately after the financial crisis of 2008-09, average earnings growth languished behind inflation, in defiance of the previous tendency for real wages to grow in most years. This finally reversed in 2015 and 2016, but in 2017 – due in large part to the decline in sterling after the Brexit vote – inflation caught up with earnings growth once again. Real wages ceased rising, to the detriment of High Street spending.
However, each of the phenomena also has causes that are purely its own.
In the case of the takeovers, the long world bull market in stocks has emboldened managements and investors to think of mega-mergers in the search for new profit opportunities.
In the case of retail, there is the erosion of traditional activity by the internet. Online sales reached a record high of 17.4% of all retail goods in March 2018, up from 15.9% a year earlier. Overall retail sales fell 0.5% in volume terms in the three months to March compared to the same period in 2017, while “non-store retailing”, the category dominated by internet sales, grew by 10%.
As an aside, the declining use of cash and increasing use of contactless payments does not seem to be helping. Bank of England figures show that the value of notes and coins in circulation, which has increased by an average of 5.8% year-on-year in the last decade, saw its growth rate plunge from 8.6% in 2016 to minus 0.5% in the last 12 months.
Where will the takeover summer and the High Street winter take us?
The former looks set to heat up further – until higher international interest rates or tougher regulation of takeovers (there are already signs of this on both sides of the Atlantic) cause bidders to think again.
The latter looks like a secular development that will significantly shrink the jobs and property footprint of UK retailing.
New uses will have to be found for some of the real estate currently given over to High Street shops or retail parks.
In the short term, we can expect depressing vistas of signs advertising closing-down sales and premises to let. In the longer term, some of the space may be converted to residential use.