In this week’s Commercial Awareness update, we discuss the Turkish economy, Tesla private ownership plans, Virgin’s healthcare contracts, Sports Direct’s acquisition of House of Fraser and rises for renters.
Turkey financial crisis
On Monday morning, the Turkish lira fell 9% against the US dollar to hit a record low, amid concerns the country’s financial position is worsening. Nervousness amongst investors across Europe and the globe caused markets to fall as a result. Turkey’s economy has been growing quickly over the last few years (recording a 7.22% GDP growth in the second quarter of 2018), but this growth has been largely drive by credit, in the form of foreign-currency debt - this debt is now the same value as 50% of GDP. The Turkish government, after pumping money into the economy to fuel growth, is now spending more than its revenue, and to make matters worse they don’t have a large reserve to dip into during times of trouble.
In recent weeks Turkey has been embroiled in a tariff disagreement with the US, who have imposed tariffs on steel and aluminium, as well as other key imports. This has made investors worried about future economic prosperity, but most point to the economic mismanagement as the key reason why Turkey is in this position. Inflation in July rose to 16%, significantly exceeding the central bank’s target of 5%. The government could have stepped in to increase interest rates, which would most likely lowered inflation - however, they have kept them low to continue fuelling growth. Commentators worry that other economies around the world could face similar problems to Turkey or, if not, be impacted by their current situation.
Questions to ask yourself… Should the Turkey government increase interest rates to lower inflation? What else can they do to encourage greater economic stability?
Companies to watch
Last week, Tesla owner Elon Musk claimed the electric and autonomous vehicle company could be taken back into private ownership in a share buyout deal worth a potential $72 billion. It is believed Musk opened discussions with the board about how going private would best suit the company’s future ambitions. In the deal, each share has been valued at $420, which has angered some current investors who value them closer to $800. However, the markets reacted positively to the idea and Tesla’s share price rose 3.5% as a result of the news.
Musk, who owns 20% of the company, is having his ambitious plans reviewed awaiting a decision by the board. If successful, this would be the biggest buyout ever, which currently stands at £3.8 billion when power company TXU was bought by private equity firms. Musk is being put under increasing pressure to fully detail how he would source the finance to complete it - he has already said that he has held talks with Saudi Arabia’s sovereign wealth fund, amongst others.
Analysis last week found that Virgin has been awarded £2 billion worth of NHS contracts over the last five years. In the last year, Virgin Care (their healthcare arm) has won contracts worth up to £1 billion, making them one of the UK’s largest healthcare providers. In fact, Virgin and its subsidiaries holds over 400 contracts across a range of public sector services and relies on them for a significant amount of their revenue. Virgin’s expansion into the public sector has had its critics and last year, Virgin won a cash settlement from NHS trusts in Surrey over a children’s services contract.
Virgin has been in the healthcare sector for the last ten years, but claim they are yet to make a profit from their government contracts. Some worry that private involvement in the NHS will reduce the quality of service to patients and cost the taxpayer more.
House of Fraser
Sports Direct owner Mike Ashley has acquired the struggling high street chain House of Fraser in a deal worth £90 million. The billionaire aims to turn House of Fraser into “the Harrods of the high street”, after acquiring all of their UK stores, brands and their existing stock. Ashley already had an 11% share in the company and also owns a 30% stake in close competitor Debenhams. Many believe his aim is to make Sports Direct more upmarket and these connections with department stores will help him achieve this.
When professional services firm EY was appointed as administrators of House of Fraser, the plan was to close 31 of its 59 stores. Ashley hopes to keep as many stores open as possible, which should preserve more jobs, but may have to continue with this existing plan. This has led to uncertainty for many of their workers, and there are also fears about pensions. The deal with the administrators doesn’t involve the pension scheme which currently has a significant deficit. The full plan for House of Fraser’s turnaround hasn’t been fully revealed, so do keep a look out for what happens in regard to store closures and the pension scheme.
Questions to ask yourself… What advantages would there be for Tesla if they were to bring it back under private ownership? Should the NHS contract work out to the private sector? How would you go about rebranding House of Fraser?
And finally… rents set to rise
The Royal Institution of Chartered Surveyors (RICS) has warned that rents in the UK could rise 15% by 2023. In a recent survey they found that there are likely to be less small scale landlords in the market, therefore reducing supply. They believe the tax changes brought in last year to make buy-to-let investments less lucrative for individuals will directly impact the number of people letting properties. As the number of renters is steadily rising, the lower supply will start to have a major impact on prices. The changes in tax rules around buy-to-let is aimed at helping first time buyers - stamp duty for these individuals was also cut to assist with this goal. However, many people (especially young people) are looking to rent and with prices going up, commentators aren’t unanimously convinced that this is best for the economy.
Question to ask yourself… Should the government do more to ensure rental prices don’t rise this much?