FTSE 100 higher as Saudi pledges oil output cuts, reports that Asos received £1 billion takeover approach and Diageo’s new boss steps up early

“Higher oil prices typically translate into a strong showing for the UK market due to BP and Shell’s heavy weighting in the index and so it proved again on Monday,” says AJ Bell Investment Director Russ Mould.

“Saudi Arabia’s pledge to cut output suggests it wants to see an oil price above $80 per barrel and that it is concerned about the demand implications of a global economic downturn. The FTSE 100 was up 0.5% in early trading, extending the gains seen on Friday after the non-farm payrolls data from the US.

“The market seems keen to take the view this is indicative of a potential soft landing for the US economy given the jobs figures were higher than expected but wage growth has cooled.

“For the time being investors are prepared to squint and see the sunny side of most data points, with services PMI data from across the Atlantic later today potentially proving to be the next test of the market’s optimism.”

ASOS

“Reports that ASOS received a circa £1 billion takeover approach last December at between £10 and £12 a share goes to show that someone was prepared to look through near-term problems and focus on the potential to revive the company’s fortunes and put its brand back at the top of the fast fashion segment.

“Given that it has been six months since Turkey’s Trendyol reportedly made the approach, one can assume that talks are not ongoing, otherwise we would have heard something from ASOS by now.

“However, some shareholders may be frustrated that ASOS didn’t publicly disclose the approach, assuming the reports are correct. With the shares having slumped to £3.50 last week, there may be a group of investors who would be eager to accept a bid potentially three times that level.

“The weekend reports about the bid talks may force ASOS to issue a statement and one would have thought CEO Jose Antonio Ramos Calamonte’s phone won’t have stopped ringing since the weekend.

“Takeover interest often emerges when a broken company lays out a recovery plan and there are early signs it is working. Those green shoots can give a suitor confidence it is worth making a bid now rather than waiting for the company to be repaired and then having to pay a much higher price when the risks are lower.

“ASOS reported a significant improvement in profitability at the start of the year, perhaps explaining why it may not have been prepared to entertain takeover talks. It has since raised £75 million to help fund its turnaround and strengthen its finances.

“However, half-year results in May were disappointing with losses widening and an ongoing struggle with day-to-day trading. It has suffered from holding too much inventory and having to slash prices to clear this stock. That goes to show its recovery plan is still in the very early stages and that it remains vulnerable to further takeover interest while the share price remains in the doldrums.”

Diageo

“It’s not the succession Diageo was envisaging but Debra Crew starting a month early is unlikely to create the sort of drama seen at Waystar RoyCo for the world’s biggest spirits maker.

“Stepping up to the plate in these circumstances to replace stricken long-time boss Ivan Menezes may even earn Crew some goodwill and allow her to get an early read on the business and how she plans to grow it.

“In his near decade in charge, Menezes delivered an annualised total return of nearly 8%, a decent showing given this period encompasses the pandemic which massively disrupted Diageo’s on-trade sales.

“Spirits is a decent business to be in as they are cheap to make and typically have strong brand loyalty.

“However, Crew needs to demonstrate she can make a good return from some of the pricey acquisitions of premium spirits by Diageo in recent years.

“The company has focused on profitability, cash flow and growth in emerging markets under Menezes, and tapping into the growing middle class in the developing world makes sense. However, recent times have shown this exposes Diageo to volatility too.”

These articles are for information purposes only and are not a personal recommendation or advice.