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“The FTSE 100 was flat on a day stuffed with deals and strategic plans,” says Russ Mould, Investment Director at AJ Bell.
“Barratt Developments saw its shares plunge on a proposal to buy housebuilding rival, Redrow, and a mixed set of results. Sainsbury’s was also in the doghouse with investors after outlining plans to spend big to support future growth ambitions.
“Brent Crude nudged ahead to just under $79 a barrel, extending yesterday’s gains driven by fears over a worsening geopolitical situation. However, the current price is not out of kilter with what we’ve seen over the past year and not high enough to trigger fears over renewed inflationary pressures.”
Barratt Developments / Redrow
“When an industry faces a difficult time consolidation is often the result and the proposed takeover of Redrow by Barratt Development is evidence of that.
“Alongside news of the all-share deal, both businesses revealed a major downturn in trading which lays bare just how significant the impact of lower mortgage availability, rising costs and falling house prices have been.
“The new ‘Barratt Redrow’ will have greater scale and will hope to achieve material savings in areas like back-office functions as they are combined. The merged business will be financially robust with more than £800 million of net cash on the balance sheet and this should underpin generous dividends.
“The deal has logic for Barratt as Redrow has consistently traded at a discount to much of the sector and is well diversified across different parts of the UK – apart from the London market which it exited a few years ago. It also doesn’t seem to have major skeletons in the cupboard around build quality or corporate governance like some of its peer group.
“Redrow’s management is fairly well regarded so it may raise some eyebrows that the board of the combined entity is set to be almost entirely dominated by Barratt directors, though Redrow CEO Matthew Pratt will continue to lead Redrow within the new structure.
“The fact Redrow founder Steve Morgan is on board with the deal is significant although whether an increasingly interventionist Competition and Markets Authority will want to look at the deal, given Barratt is already among the country’s highest volume housebuilders, is open to question.
“Putting the emphasis on how this deal can help deliver the homes the country needs could be seen as an attempt to win over the regulator and politicians.”
Sainsbury's
“Sainsbury’s has unveiled bold plans to make the company bigger in the future. There is a clear vision to get customers to spend more money, attract more people to its stores, and drive more traffic to Argos’ website, stores and supermarket concessions. At the same time, Sainsbury’s wants to be a more efficient business and have staff and customers rate it more highly.
“To Sainsbury’s credit, its performance has been good in recent years and there is finally an energy about the business which has been absent for decades.
“However, its growth plan is not something that is guaranteed to work its magic. It’s not hard to dream up such a wish list to improve the company’s fortunes as it is basic business sense. Achieving the goal is another matter and it will cost money – something the market typically hates. Sainsbury’s shares fell on the news, but interestingly so did Tesco and Marks & Spencer as they face new competitive threats.
“The grocery space is already highly competitive and other supermarkets have their own initiatives in the fight to grow market share. No doubt Sainsbury’s rivals will pull their own rabbits out of the hat in the quest to fill shoppers’ baskets.
“Offering cheaper prices to customers using the Nectar loyalty card is a carbon copy of what Tesco has been doing with its Clubcard, and Co-op is now also doing the same with its membership scheme. Nectar has been an underutilised asset for years and the loyalty scheme, until recently, has been fading into oblivion. It makes sense to give Nectar a new life, particularly as there is valuable information to be harvested from the data it collects. Yet there is an argument this should have been done years ago.
“Cutting prices on core ranges is a well-trodden path and is already being done by Tesco, Marks & Spencer and others as they try to compete against Aldi and Lidl.
“A broader range of food in more stores makes sense if Sainsbury’s wants to capture a greater number of customers doing a weekly shop and that means cutting back on non-food items to make space. Given the recent weakness in clothing and general merchandise sales, that’s not a hard decision to make.
“Argos increasingly feels like an odd fit for Sainsbury’s given its new primary focus on food and decision to reallocate space inside its supermarkets.
“The Argos brand has considerable weight in the retail sector but it doesn’t have frequent shoppers. Closing down hundreds of Argos stores on the high street in favour of supermarket concessions means Sainsbury’s has to work harder to keep the brand front of mind for consumers, let alone get them to spend money more often.
“If consumers see the brand less frequently when shopping on the high street, it’s going to be forgotten. Sainsbury’s has to do more work to drive people to the website or app and make its supermarket concessions more appealing. All of this costs time and money and it feels like there are better and easier opportunities to shift that effort to the food side.”
PZ Cussons
“Consumer goods firm PZ Cussons is constantly beset by problems with its Nigerian business, linked to the political instability in the country.
“The recent devaluation of the naira has seen that story play out once again and must be severely testing shareholders’ patience at this juncture, particularly given the savage cut to the dividend.
“The decision to take full control of the Nigerian arm last year is now cast in a far less favourable light and questions may now be asked about the long-term future of this part of the business within the group.
“Nigeria has been a big contributor to PZ Cussons’ growth but its unpredictability has been a thorn in the side of the business for some time.”
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