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Original article
In this week’s Commercial Awareness update, we discuss pensions, Italian politics and debt, who bought Homebase for £1, a big deal in the music industry and the Obama’s sign for Netflix. Read this and much more.
Pensions for FTSE 100 back in black
The pension schemes backed by companies listed on the FTSE 100 shifted to a surplus at the end of 2017 for the first time since the financial crash of 2007/8. Earlier in the year, they were accounting a deficit of £31 billion but a new analysis suggests it now stands at a £4 billion surplus. But why the big swing back to black?
There are a number of reasons:
Firstly, FTSE 100 companies invested £13 billion in their pension schemes in 2017. On top of that, it was a strong year of investment growth and pension plans gained in value more than expected. This is because there hasn’t been a forecasted increase in life expectancy, so firms are likely to pay pension contributions for a shorter time than they were expecting a few years ago. Finally, firms have begun to be more “sophisticated” when setting discount rates - a calculation which works out how much a pension plan is likely to return and therefore, the amount that would be required today to cover any future liabilities.
This is positive news for the economy, especially after a number of high profile examples of companies not investing enough to cover their liabilities - BHS and Carillion have both attracted widespread criticism for lack of contribution before they collapsed. There seem to be positive steps so others don’t follow suit, but it wouldn’t take much to swing back into the red if there’s a spell of poor economic performance.
Questions to ask yourself… Should the government regulate more vigorously on how much firms have to contribute to pension plans? Should the government step in to cover pension liabilities if a company collapses?
Forming an Italian Government
There’s always something to talk about when it comes to Italian politics and it looks like the country could soon be heading back to the polls only months after the previous election. The anti-establishment Five Star Movement (32%) won the biggest share of the vote back in March, but have struggled to form a government (so have the right-wing coalition who won 37% of the vote). After weeks of negotiation, the populist parties (led by the Five Star Movement and involving the right-wing League) agreed on a coalition but this was vetoed by President Sergio Mattarella when he rejected the choice of Finance Minister, who is known to be anti-euro. Unless a deal can be struck, the country is likely now to have an interim government and new elections in the coming months.
The political uncertainty has caused a knock-on impact on financial markets across the globe, especially as many believe eurosceptic parties in Italy will strengthen their position and potentially affect eurozone stability. Italian bonds experienced a huge sell-off, which will impact borrowing costs for the Italian government. Overall, the Italian financial situation is a worry for the rest of Europe with debt currently at 130% of its economic output.
Questions to ask yourself… What would happen if Italy left the euro? How can Italy cut their debt?
Deals to watch
Sainsbury’s and Asda
If you read the update a few weeks ago we covered the planned Sainsbury’s-Asda merger worth £14.1 billion, but is the merger in doubt already? MPs from two parliamentary committees have called on the competition regulator to looked into Sainsbury’s plans. They are concerned if the two supermarkets merged (and took a 30%+ share in the market) suppliers would be impacted - with the new groups greater buying power they could potentially squeeze the prices they pay suppliers, who wouldn’t be able to afford to stop working with them. There are also concerns over Sainsbury’s plans to cut some managerial roles at head office however, they haven’t said they would cut jobs in their stores. New research suggests 73 supermarkets would have to be sold to allow the merger to proceed.
Homebase
The Australian conglomerate Wesfarmers has sold Homebase for £1 after a disastrous two years. In 2016, Wesfarmers paid £340 million for the DIY retailer, but now offload it after a failed rebrand. They have also racked up losses of £230 million in that time - for this reason, it has been labelled as one of the worst takeover deals in British history. Wesfarmers has sold the failing firm to Hilco Capital, who were responsible for HMV’s change in fortunes. There is expected to be a turnaround strategy in place, which is likely to mean closures of many Homebase stores. Current predictions suggest more than 50 stores could be in line for closures, with their 11,000 staff facing serious uncertainty over the coming weeks.
Sony
Sony announced last week it has agreed a deal worth $2.3 billion to take a controlling stake in EMI Music Publishing, giving them rights over two million more songs from artists including Beyonce and Pharrell Williams. Sony already controls 2.3 million songs and this latest deal means they will be the biggest publisher of music. Sony increased their stake in EMI Music Publishing from 30% to 90% after Abu Dhabi’s Mubadala Investment Company agreed to sell to the music and tech giant. With the streaming industry booming, Sony will now have more scope (a 26% market share) to grow the deals that have with the likes of Spotify and Apple Music.
Netflix
There’s one final deal to mention this week and this is one between the Obamas and Netflix. Yes, the former President and First Lady have agreed on a multi-year agreement to produce films and television series for TV streaming service Netflix. The Obamas have set up a company called Higher Ground Productions which will create scripted and unscripted documentaries and docu-series' which tell stories of the people they met while in office. The Obama’s want to "promote greater empathy and understanding between peoples, and help them share their stories with the entire world”.
Questions to ask yourself… Should the competition authority block the Sainsbury’s-Asda merger? Why is Homebase failing? Have Sony got a good deal over EMI Music Publishing?
Buskers go cashless
London’s buskers are going cashless as the capital becomes the first city in the world to trial a contactless payment scheme for street musicians. The new initiative in collaboration with Sweden payment company iZettle (who were recently acquired by Paypal) allows passerby to use card readers to give £2 to performers, rather than chucking a few coins into a case. The plan is to roll the scheme out more permanently.
Question to ask yourself… Does this new scheme pose any risks?