Category Archives: The In & Out

Rights is right!

Dave Lewis, the new CEO of behemoth Tesco, has stated: “We are not currently working on a rights issue, but never say never”. So now we know:  A rights issue will come… but will not be announced just yet. What a blunder! And, surely, an early Christmas present for Mike Coupe, CEO of that other vessel in distress. He would be positively mad not to seize the opportunity and rush to the markets, first. Sainsbury’s will be presenting their “strategic update” in 2 weeks on the 12 November and one can only hope he will have the guts to go for a generous dose of ‘no pain, no gain’ medication. The supermarket’s shareholders and, indeed, the financial markets would welcome it! Further to this: Saintly Sainsbury’s!

GlenTinto: Big is beautiful!

We can analyse until the cows come home, but the fact is this merger makes complete sense. The consensus appears to be that Glencore has more to gain and with iron ore currently trading at rock bottom levels due to oversupply, the timing of Glencore’s approach is blatantly opportunistic. Nonsense.

Rio Tinto is the least diversified of all the big miners. Iron ore provides about 88% of its earnings. This is not a healthy state of affairs. The company will always be subject to what is a highly volatile market driven by constantly changing economic conditions. Leading shareholders in Rio may have dismissed Glencore’s approach as a predatory attempt to take advantage of the surplus of iron ore in the market and keep banging on about Rio’s “fantastic assets”. What a pathetic response: There is no such thing as a “fantastic asset” that is plunging in value.

Of course, Ivan Glasenberg is a smart cookie. After all, nobody understands the commodity market better than he does and, of course, he will try and strike the best deal possible for himself and his shareholders. Surely, he cannot be blamed for that? Pinkers would call it prudent management. Rio Tinto’s shareholders should ditch their misplaced pride. The truth is that Glencore offers the perfect escape route: Instant diversification.

One rather major stumbling block, however, remains: China. The Chinese commerce ministry probably wouldn’t be too keen on this deal with the country importing about two-thirds of the world’s internationally traded iron ore and hence making it not only heavily dependent on the newly formed mining giant but also further weaken the hand of China’s steelmakers.

The opening shot has been fired and one thing is for sure: Despite being barred under UK Takeover Panel rules from making another approach for six months, Mr Glasenberg will not give up on this eminently sensible idea. And nobody in their right mind would question that he will get his way. He always does.

Further reading: King & Core!

Saintly Sainsbury’s!

Pinkers Post had a most interesting e-mail exchange and subsequent phone conversation with Mike Scott from Sainsbury’s e-mail investor relations over the last couple of days. In our previous post Nuclear Fallout? we wrote:

“Pinkers, however, feels decidedly uncomfortable with the Netto tie-up. What is the point of teaming up with a foreign discounter and at the same time claiming that the in-house “Basic range” comfortably matches the discounters, on both price and quality? It simply doesn’t make sense and, indeed, smacks of desperation. Even worse, the idea to open Netto outlets within existing Sainsbury stores but with a separate entrance! Are we talking first and second class citizens? A much better idea would be to set up a separate convenience chain called ‘Sainsbury’s Basics’. Surely a more confident approach?”

Here Mr Scott’s response: 

Dear Mr Neill

Thank you for your e-mail. I have read your blog posts with interest.

I appreciate you taking the time to write to us with your idea for a ‘Basics convenience store’. We are of course constantly reviewing and trialling store formats and designs, and I know that this is an idea that has been considered in the past.

Thank you for your continuing interest in Sainsbury’s.

Regards
Mike

Pinkers wasn’t happy and asked for elaboration: WHEN was it considered and WHY had it not been trialled? The telephone conversation revealed more: Apparently Sainsbury’s lacks the discounter’s expertise in sourcing, design, presentation and distribution. Mr Scott also revealed that one of the reasons people like shopping at Aldi et al is the “continental range” of goods. That, indeed, is a good point. Still, we at Pinkers Post feel that a ‘Basic Sainsbury’s store’ chain could have and should have had the courage to go it alone rather than strike a deal with a foreign discounter. And, anyway, what is the ultimate objective? To take control of Netto? Is Netto for sale? It could work, of course. After all, Aldi has been successful with this strategy in California taking control of Joe’s Trader stores and defeating Tesco’s venture ‘Fresh & Easy’. Watch this space…

Finally, as previously disclosed: Pinkers is an active investor in Sainsbury’s and strongly believes that without pain, no gain. The company has announced a “strategic review” to be released on 13 November. That’s a month away and should be brought forward. Secondly, a word of warning: Radical action is needed. The dividend ought to be cut by at least half and a rights issue should not be ruled out. The balance sheet needs to be strengthened to pay down debt, bolster the pension fund and, last not least, boost the ‘war-chest’! And then, of course, the Netto investment needs to be funded, especially if the trial proves successful. This is not a time for short-termism and one can only hope that Qatar Holdings, the majority shareholder, remains supportive as a long-term investor. In his telephone conversation with Mr Scott, Pinkers made his view crystal-clear. The response was rather elusive… the usual line: “All options are under consideration”. Well, a firmer tone would have been more encouraging.

Further reading: Sick of Sainsbury’s? and Nuclear Fallout?

PS: 23 October!

Sir Richard going, going, gone! And not a a moment too soon! After the great management clear-out, the behemoth Tesco is finally addressing the real issue: The top of the crumbling pyramid. Even at the time of Philip Clarke’s appointment it was crystal clear to everybody (except the company’s board!) that this ‘safe pair of hands’ was a disastrous choice. Mr Clarke was all about the ‘old’ Tesco; He even lived (or still does?) in the same village north of London on the same street as his (soon to be in?-) famous predecessor. With fossilised Tesco blood clocking up his arteries, hardly the man to carry out the radical reforms required to turn around a supertanker in trouble. So it’s encouraging to hear that the man who was responsible for this truly ill-considered appointment finally follows him out of the revolving door.

But Tesco is not the only vessel in distress.  And credit where credit’s due: Jamie Oliver was clearly ahead of the curve when he decided to abandon Sainsbury’s in 2011. Well, his fan club appears to have followed him! Questioning the Kantar figures not a clever strategy, either. Rings hollowen to us… Mr Coupe: If in doubt, say nowt! Further to this: Rights is right! and The Sains go marching in!

Nuclear fallout?

So here we are:  Sainsbury’s revealed that sales from stores open at least a year, excluding fuel, fell 2.8 per cent in the three months to September 27. Analysts had forecast a 3-4 per cent decline in like-for-like sales. Including fuel, the decline was 4.1 per cent. It wasn’t quite as bad as feared but the market took a fright, nevertheless. And for good reasons, too. Trading updates and results are digested quickly but guidance is another matter altogether.

The good news: No accounting issues a la Tesco. Provided management can be trusted… The bad news: All the rest. The Qatar Investment Authority which owns 26% of the company through their subsidiary Qatar Holding, will not be amused. The announcement of a “detailed strategic update” alongside November’s half-year figures is what spooked the markets. Investors fear a a possible rights issue and drastic cut in the dividend aimed to bolster the balance sheet. This, however, should be interpreted as good, not bad news. Richard Marwood at Axa Investment Managers says that Sainsbury’s “cutting the dividend … would destabilise the shareholder list… .” Destabilise the shareholder list??? What about the business??? Mr Marwood should get his priorities right. Surely, any sensible investor would support any action required, however drastic, to ensure the survival of the business? Hardly a time for short-termism. Shareholders in Sainsbury’s and the other ‘big four’ have to wake up: Major surgery is required to save the patient and a 50% divi cut would be a good start.

Pinkers, however, feels decidedly uncomfortable with the Netto tie-up. What is the point of teaming up with a foreign discounter and at the same time claiming that the in-house “Basic range” comfortably matches the discounters, on both price and quality? It simply doesn’t make sense and, indeed, smacks of desperation. Even worse, the idea to open Netto outlets within existing Sainsbury stores but with a separate entrance! Are we talking first and second class citizens? A much better idea would be to set up a separate convenience chain called ‘Sainsbury’s Basics’. Surely a more confident approach?

On a more positive note, Clive Black, retail analyst at Shore Capital and without question the most experienced, best informed and knowledgeable pundit in the field, recently stated that the German discounter’s “free lunch” is coming to an end. Pinkers agrees.

Finally, what has been largely ignored in recent reports but is a well-known fact: Food retail is not just about price and quality. It’s a cultural issue. Hence the failure of Tesco’s ‘Fresh & Easy’ adventure in California – to name just one example. Or to put it more bluntly: Different people, different palates and different approaches to shopping. Aldi et al will continue to grow (albeit at a slowing pace) and they will occupy an important niche in the UK grocery market; however, they will not be replacing the entire sector as we know it. Change is on the cards, a revolution is not.

Further reading: Sick of Sainsbury’s? and Saintly Sainsbury’s!