FTSE 100 recovers as labour market tightens, Relief over Ocado legal battle, and Rentokil gets mixed response to blockbuster US deal

“The FTSE 100 was off to a strong start on Tuesday, recovering some of yesterday’s losses as investors await the big central bank action to come this week and as concern over the Omicron variant continues to wax and wane,” says AJ Bell Investment Director Russ Mould.

“More signs of a tightening jobs market may be good news for employees but could also add to inflation concerns ahead of the Bank of England’s meeting on Thursday.

“However, a move on rates looks unlikely given the uncertainty over the economic impact of Omicron.

“News that French telecoms tycoon Patrick Drahi’s firm Altice had boosted its stake in BT seems to have provoked consternation in the market, with the shares slumping, potentially amid some disappointment that a full bid doesn’t look to be forthcoming, at least in the short-term.”

Ocado

“The market has taken a positive view of Ocado’s collection of news, despite some of it being negative.

“It’s a massive relief to the business that it won the first-round ruling in a patent fight with Autostore over technology linked to robot warehouses.

“While the legal fight is still ongoing, the results so far mean investors can worry less about Ocado having to pay out money for patent infringement or having its reputation tarnished. However, Autostore is going to fight the ruling to the very end so there is still an underlying risk associated with the matter.

“In terms of trading, Ocado has seen an increase in average orders per week for its joint venture with Marks & Spencer, both on a one and two-year comparable basis. But revenue has slightly dipped on a one-year basis.

“Given that food prices have gone up in recent months and the joint venture has been growing customer numbers, management will be disappointed that overall sales haven’t matched or beaten the same period last year.

“While the latest quarter can be viewed somewhat negatively, there is no denying that the Ocado/M&S joint venture has been a successful one. Marks & Spencer has finally caught up with rivals in terms of having a decent online grocery offering, so could it go the next step and buy out its partner over the next few years?

“Fundamentally Ocado’s future is all about the provision of technology to retailers, not food delivery, so it would make sense for it to finally sever ties with its historical focus. If the Autostore legal fight finally went away next year, and M&S took full control of the JV at some point thereafter, Ocado could focus solely on helping technology customers to boost capacity while also increasing sales efforts to win new clients.

“Following the shock of the pandemic, 2021 was meant to be the year when Ocado picked up lots more customers for its warehouse systems as other grocery providers realised the importance of the online channel. So far, these new deals have been few and far between; however, such decisions may simply take time and corporates might be in a stronger position now coming out of the pandemic to commit to something like Ocado’s set-up.”

Rentokil

“We’ve got so used to UK companies being targets for overseas acquirers we almost forgot they could be predators as well as prey.

“Pest control and cleaning services firm Rentokil has delivered a stunning reminder with its multi-billion-pound takeover of US rival Terminix – a deal which so far seems to be getting a mixed response from the market. The shares were up initially but soon traded lower as investors digested the information.

“The company is paying a fairly chunky premium, though a significant component is accounted for by its own shares.

“Those shares are worth a lot more after a strong run during the pandemic when Rentokil’s hygiene and cleaning expertise has been in strong demand.

“There are clearly big savings to be made around back-office functions and the uplift to earnings will be impressive. The promise of a stronger market position in the US is obviously exciting for shareholders but could also draw the ire of anti-trust regulators across the pond.

“The use of the word ‘transformational’ to describe the deal by Rentokil boss Andy Ransom may also be giving some investors pause for thought. It’s not hard to see the strategic rationale behind the move but so-called transformational deals often transform the purchaser’s prospects for the worse rather than the better.”

These articles are for information purposes only and are not a personal recommendation or advice.