In this week’s Commercial Awareness update, we discuss the planned Sainsbury’s-Asda merger, a bid for Wembley, how mortgage approvals rates track consumer confidence, Amazon’s revenue wins, TSB’s IT crisis and more.
Sainsbury’s plans Asda merger
In a surprising move, the second biggest supermarket in the UK Sainsbury’s has announced plans to merger with competitor and third largest supermarket Asda. More details of the deal are expected to be revealed this week, but Sainsbury's plans to buy Walmart’s British unit (Asda) for £7.3 billion in cash and stocks, creating a new group with a revenue of £51 billion a year. As part of the deal Walmart will still own 42% of the newly created group and offer strategic support. Combining Asda and Sainsbury’s will mean that £1 in every £3 spent on groceries will be spent at their stores and they will have a 26.7% market share (more than Tesco’s 25%). Sainsbury’s has already promised price cuts if the new group is created, pointing to the £500 million in savings they can make due to increased buying power. When markets opened this morning, Sainsbury’s share price jumped 20% to its highest level since 2014.
Given the size of the deal, the Competition and Markets Authority (CMA) is going to be watching closely and will likely have to give its approval for the deal to go through. Sainsbury’s plans to combine a number of Asda, Argos and Sainsbury’s stores, which could raise fears about a lack of competition in some areas.
Questions to ask yourself… Is this merger good or bad for the consumer? Should CMA approve this merger?
Fulham owner bids for Wembley Stadium
The Football Association (FA) revealed on Thursday that US billionaire and Fulham Football Club owner Shahid Khan has bid to takeover Wembley Stadium. It’s believed the bid is at least £600 million and comes after initial discussions with the FA had already taken place. The move fuels fire to the speculation that London is set to have an NFL franchise playing their home games in the capital - Shahid Khan owns the Jacksonville Jaguars, who are struggling to generate enough revenue in their Florida home. However, the billionaire stated that football would still be the priority, with England games being played at the national stadium, as well as FA Cup and League Cup finals.
The FA owes money to sports development bodies and still to the London Development agency (who supported the stadium build), which could be paid off after the takeover. In the deal, the FA would maintain many of its rights and revenues, including the £300 million Wembley Club hospitality.
Questions to ask yourself… Should the FA sell Wembley and invest in grassroots football?
Mortgage approvals down
Mortgage approvals have slumped to a three-year low, as they dipped 10% in March compared to the previous year. According to the high street banks, consumers are lacking confidence in the housing marketing and are reluctant to purchase when the market looks to be cooling. Data published earlier this month, showed that house prices in London and other parts of the UK are falling, which is a worrying sign for mortgage lenders. The house market tends to have a significant impact on consumer confidence and in turn consumer spending - these latest figures could be a worrying sign for economic prosperity.
It isn’t just the mortgage industry struggling in the first few months of 2018 - car manufacturing is down for the eight consecutive month, with a 13.3% year-on-year decline in output for March. Demand for UK cars abroad fell 4%, but the biggest worry for the car manufacturing sector was the 14.1% drop in the domestic market.
Questions to ask yourself... What can be done to improve confidence in the UK economy? What benefits come with a cooling housing market?
Companies to watch
On Thursday, Amazon reported its Q1 revenues, smashing expectations and sending their share price to an all time high. Amazon’s revenues jumped 43% year-on-year to $51.04 billion, with their key North American revenue increasing 46% to $30.7 billion. The rapid growth of Amazon Web Services in the last quarter contributed to the impressive figures, and there were also a strong showings for Amazon Prime subscriptions, their advertising business and the newly acquired Whole Foods. This revenue boost led to profits almost doubling to £1.6 billion for the quarter - this is an excellent sign for the company, as they have managed to increase their profit margins.
The future outlook is good for Amazon, with the company forecasting Q2 revenues ranging between $51 billion and $54 billion. Wall Street was clearly impressed with the above-target earnings, and the share price jumped 7% to an all time high in the hours after the announcement.
It was a bad week for high street bank TSB, after they were hit with an IT crisis which continues to drag on. Last weekend, they shut down their IT systems to move their 1.3 billion customer records onto a new modern platform. However, when it went live again, some customers were seeing accounts belonging to other people on their online banking. There were a series of Tweets and announcements throughout the week from TSB saying the system was up and running, but even a week after the initial problems many customers are unable to log in, transfer funds or make payments. On Friday, TSB Paul Pester says the bank is “on its knees”, and says external help from “global experts” at IBM has been enlisted to help solve the problem.
TSB will have a significant problem convincing customers not to switch accounts after this IT crisis, which has left questions about how they protect customers’ data. TSB has waived all overdraft charges for April and will increase interest on its existing Classic Plus current accounts to 5% - a move that will cost the bank significantly and may not be enough to keep many in their customer base.
Outsourcing firm Capita is looking to raise £700 million in response to their annual losses rising for the last financial year. After a bad start to 2018, there were further worries after they announced a £513 million loss for last year. Commentators have suggested Capita is in a similar situation to Carillion, which collapsed in January after many of their projects went significantly over budget. However, new chief executive Jonathan Lewis points to Capita’s strong cash flow, their low risk projects and the £1 billion in liquidity as reasons why it’s not going to go the same way as Carillion.
In an attempt to cover the storm and increasing losses (which stood at £90 million in 2016, but now are £513 million), Capita has announced a rights issues, which involves offering 1 billion new shares at 70p each (therefore raising £700 million). This is a significant discount from the closing price on Friday of 185p.
Questions to ask yourself… Is this a good time to buy shares in Capita? How can TSB avoid customers switching to other banks?