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In this week’s Commercial Awareness update, we discuss the market which J.P. Morgan think you should be investing in, the biggest merger ever in the betting market, Tesco’s Dave Lewis resigns and worries for Pizza Express.
Where should people and businesses be investing?
Global asset management firm, J.P. Morgan, said last week that they see the best value in eurozone stocks and encouraged its clients to invest in them over US stocks. Despite looming Brexit worries, possible recessions in leading economies and political uncertainty, they believe that stocks across Europe are currently undervalued and will bounce back in the near future. So far this year, US stocks have outperformed those in Europe, but there could be a few reasons why J.P. Morgan has taken this position.
Firstly, the European Central Bank (ECB) has recently committed to policies to stimulate the European economy after worries about slow growth. As we discussed in last week’s update, they have lowered base interest rates, while also restarting quantitative easing to inject more money into the system. There was also good news as employment figures released on Monday showed that unemployment in the European Union has dropped to its lowest level in 19 years - 6.2% in August. These figures are taken from before the ECB acted to stimulate the economy, and suggest that firms generally have confidence in the future - if companies are hiring more, they believe business will continue to prosper. It’s not common for unemployment to fall while the economy is slowing, but that could be a good indication for the future.
In the UK, there are less healthy signs as data suggests the service sector contracted in September. The IHS Markit/CIPS UK Services PMI Business Activity Index fell to 49.5 in September from 50.6 in August. The service sector, including finance, retail and much more, makes up over 80% of the UK economy. Many commentators see this as a major blow just weeks ahead of the Brexit deadline. On the index, 50.0 is considered to mean no change for the month, so the 49.5 shows a slight decline.
Questions to ask yourself… What can the Bank of England do to stimulate growth in the service sector? Is unemployment a good way to measure economic performance?
Companies to watch
Paddy Power and SkyBet
The owner of Paddy Power and Betfair, Flutter Entertainment, is set to merge with competitor, The Star Group (TSG), the company that owns PokerStars and Sky Bet. The new company will be worth around £10 billion and have around 13 million customers, making it the world’s biggest online betting group - in 2018 their annual revenue would have been £3.8 billion. The merger is expected to bring approximately £140 million of savings, but the main reason for the merger is to drive forward in the expanding American sports betting market, after the US Supreme Court ruled that states could legalise sports betting. Since then, 18 states have done just that, with many more set to follow according to reports. It’s a big opportunity for betting companies, especially if the UK market saturates.
The deal will mean that Flutter Entertainment shareholders would take 55% of the new company, while the remaining 45% will be owned by TSG’s shareholders. The headquarters will reside in Ireland, but its primary listing will be on the FTSE 100. On news of the deal, Flutter Entertainment’s share price jumped 20%.
Tesco’s CEO, Dave Lewis, is set to step down after suggesting its the right time for new leadership of Britain’s biggest supermarket. The surprise announcement coincided with the release of their half-year figures which revealed a year-on-year growth in profits and strong revenue numbers. One of the key targets for the CEO, known as ‘drastic Dave’, was to increase the profit margin to 4%, which they surpassed by 0.4% in the first half of the year. This contributed to the £1.13 billion operating profit, a strong 12.6% year-on-year increase.
Dave Lewis will leave the firm next summer, after leading a turnaround plan since 2014, which most consider to be very successful. When Lewis arrived from Unilever, Tesco was in a difficult position with accounting errors leading to an announcement that they had overstated profits and a problem with declining customer numbers across the UK.In 2015, the supermarket lost £6.4 billion. The turnaround plan involved a number of head office cuts and store closures, as well as moving away from the label of being a ‘one-stop’ shop. By moving away from electricals, clothing and homeware, as well as shutting down their Tesco Direct website, they were able to focus and become profitable again. There’s still significant challenges for the business, especially from German discounters, Aldi and Lidl, but Lewis has definitely left the business in a better state than when he started.
High street restaurant chain, Pizza Express, has reportedly called in financial advisors as rising debt puts them at risk of being the next big restaurant chain to go out of business. Pizza Express has a debt of £665 million that they need to pay back by August 2022, but they are struggling with changes in consumer behaviour and rising costs. The debt burden is significantly higher than it was last year and the situation isn’t helped by the recent announcement they had an 11% year-on-year fall in pre-tax profits in the second quarter.
Pizza Express has 470 branches across the UK, but has faced significant challenges as competition has increased and more customers are choosing takeaway options compared to eating out. In recent months, both Prezzo and Jamie’s Italian have filed for insolvency, highlighting how hard the market conditions are.
Questions to ask yourself… Should the UK have more restrictions on betting? How can Tesco fend off competition from Aldi and Lidl? What can Pizza Express do to be more competitive?