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Welcome to the first Commercial Awareness update of 2018. This week, we discuss a record for the FTSE 100, the acquisition of Aspall, the Christmas winners and losers in the retail sector and increasing rail fares. Before we dive into the key stories of the last two weeks, it’s worth considering what could be coming up in the Commercial Awareness updates for the year ahead.
What to look for in 2018
The Transition Deal - After the Divorce Deal was provisionally agreed in December last year, the new Brexit negotiations will centre on trade. They’re likely to restart in early spring and the two year transition deal will be high on the agenda for all concerned. If things don’t go the UK’s way, many financial companies could be moving jobs out of the UK by the end of 2018.
Cryptocurrencies - Is Bitcoin a bubble? Will cryptocurrencies plummet? 2018 is the year we’ll see if Bitcoin and other digital currencies can sustain their value or even grow further. Bitcoin futures markets are set to open and trading them should become a lot easier, but many authorities are worried about the potential for fraud - will they start introducing new legislation to govern Bitcoin?
Saudi Aramco - This year we’re likely to see the biggest IPO ever, as the Saudi oil company looks to move forward with plans for a floatation. Experts predict Saudi Aramco is worth $2 trillion, as they look to float 5% to fund diversification plans. It will trade some of its stocks on the Saudi market, but could it also list on the London Stock Exchange?
FTSE 100 - The market rose above 7,600 for the first time ever before Christmas to finish the year 7% up. On paper, it’s a good year, but compared to other global markets it actually lagged behind - many putting this down to nervousness surrounding Brexit. Some commentators believe markets won’t do quite as well this year, but if Brexit trade negotiations start showing signs of progress, it could be a good year for the FTSE 100.
In the first week of trading in 2018, the FTSE 100 hit a record high of over 7,700 points. Recent history suggests the markets do profit from a ‘good-feeling’ boost in January, but is this set to continue? Many global economic indicators suggest it will.
Political Leaders - Both Theresa May and Donald Trump faced frequent calls to resign in 2017 (for very different reasons), but managed to stay in office. In the UK, there appears to be little appetite for another general election or a leadership contest within the Conservative Party, despite May’s weak political position. In the US, Trump is pushing ahead with his tax reforms, while he’s embroiled in another row - this time with author Michael Wolff, after the former released the book Fire and Fury: Inside The Trump White House last week. Can Trump and May survive 2018? In Germany, Chancellor Angela Merkel is having her own political problems, as she continues to negotiate with other parties to form a coalition following the general election last year - keep an eye on this in the coming months.
Companies to watch
British cider company Aspall has been bought by American beer giant Molson Coors - the firm that owns brands like Carling (the UK’s best-selling beer) and Miller. The financial terms haven’t been released, but experts believe the deal means Aspall is valued at £40 million including debt. Aspall has been a family owned business for 300 years and currently has 1.6% share of the UK cider market. The UK is the world’s biggest market for cider and Molson Coors plans to grow Aspall to have the largest market share of any premium cider brand. This isn’t the first time Molson Coors has invested in the UK - back in 2011 they acquired Cornwall-based Sharp’s brewery for £20 million.
Many retailers are in the spotlight this week, as the dust settles after the busy Christmas period and they announce their results. Shares in department store Debenhams dropped 15% last week after it issued a profit warning as a result of poor Christmas sales. They now expect pre-tax profits of £55 million from analysts’ earlier prediction of £83 million, as their like-for-like sales fell 2.6% over Christmas compared to last year. They are currently carrying out a restructure, which they expect will generate savings of £20 million and could lead to the closure of poor performing stores.
If Debenhams were the losers, Next could definitely be seen as the winners, as the latter announced their sales unexpectedly rose over Christmas. They attribute the boost in sales to the cold weather - they saw a 13.6% rise in online sales during the 8-weeks up to 24th December. Shares rose 7.5% as a result of the announcement and their annual profits are now expected to reach £725 million.
Staying within the retail sector, surfing brand Billabong has been acquired by the owners of Quiksilver, Boardriders. The deal values Billabong at $155 million, offering a lifeline to the brand which lost $58 million last year (triple its loss from the year before). Boardriders is owned by US private equity fund Oaktree Capital Management, which is already an investor in Billabong, making it a logical acquisition for the firm. The two businesses will have a combined 630 shops and operate in 28 countries. In 2012, Billabong rejected a takeover bid four times the value of this deal, but in the years since they have struggled to turn a profit.
Questions to ask yourself… What will be the biggest challenges to the retail sector in 2018? What can Molson Coors do to increase Aspall’s market share?
In the largest fare increase since 2013, commuters in the new year were hit with an average ticket price hike of 3.4%. Some of those living outside London find themselves paying an average of 13% of their wages for train travel, with more and more routes costing over £5,000 per year for a season ticket. In comparison to other European countries, the UK pays significantly more - in Germany, commuters pay approximately 4% of salary for their train travel on commuter routes. The price rise is capped in line with inflation, but this is significantly greater than at any point since 2012.
The price hike has also led to many questioning whether having privatised railways benefits customers and the UK economy. Now privatised, the rail services receive less funding from the government and rely on fares to cover 70% of the cost of running the network - in the past this was much lower.
Question to ask yourself… Should the railways be renationalised?