Dramatic week on the markets draws to a close, private equity interest in Ted Baker and JD Wetherspoon faces costs challenge

“Investors have been subjected to significant forces this week. Heightened geopolitical tension, rising interest rates in the US and UK, and China’s pledge to stabilise markets have all been on the agenda and served to shake equities,” says Russ Mould, Investment Director at AJ Bell.

“Fortunately, the week looks like it will end on a calmer note with minimal movement in Europe and a nice tick-up for the main indices in China, India and Japan.

“The FTSE 100 was flat at 7,380 with strength in miners and financials offset by weakness in energy, consumer non-cyclicals and utilities.

“Polymetal jumped 6.4% after filling the big gaps in its board of directors after the mass resignations on 7 March. The share price continues to be highly volatile with a clear risk that the business might have to consider delisting from the London Stock Exchange if serious Western investors are no longer willing to own the equity.

“Pearson was the top faller on the FTSE 100 which doesn’t send a positive signal regarding current takeover talks. Private equity firm Apollo has already had two bids rejected but was still trying to come up with an offer that would win over the board and shareholders.”

Ted Baker

“It looks like someone might bring an end to Ted Baker’s horrific time as a listed company. US private equity group Sycamore is weighing up an offer, perhaps drawn to the fact the clothing retailer’s share price had halved between September 2021 and February this year. Even at the current 114p price, that’s still significantly below the near-£30 levels at which it traded in 2015.

“Ted Baker’s fortunes have collapsed in recent years. First came the hugging incident where founder Ray Kelvin was accused of inappropriate behaviour towards staff. Then the company was besieged by a series of profit warnings, a new chief executive who lasted less than a year, and accounting errors where it overstated the value of its inventory.

“It was forced to slash prices to compete in a heavily discounted market, which really hurt profit margins.

“Sycamore appears to have spotted an opportunity to step in and buy the company while its valuation remains low and to help with the recovery efforts.

“Ted Baker’s latest trading update shows an acceleration in sales growth, improved margins, a small year-end net cash position and encouraging comments from the management. That’s encouraging but the market has yet to be won over by the numbers, so Sycamore must be putting a lot of faith in the company’s turnaround potential.

“There are major headwinds over the coming months for retailers given the inflationary pressures on family finances. Therefore, acquiring Ted Baker now could come with additional challenges beyond those which have already shaken the business for years.”

JD Wetherspoon

“The boardroom at JD Wetherspoon might need a few reasonably-priced drinks to steady some nerves right now as it looks at the current economic backdrop.

“On the one hand a cost-of-living crisis could suit Wetherspoon’s budget proposition and its survival. The fact other independent competitors did not make it through the pandemic should result in a stronger market position for Wetherspoon.

“On the other hand if pressures on household budgets become so acute that people stop going out full stop or at least not as much then any hopes for a meaningful rebound could be squashed.

“Wetherspoon has been held back by having an almost entirely urban estate – with Covid restrictions and then people’s own tastes, influenced by infection levels, much better suiting large rural pubs with lots of outdoor space.

“The company’s business model has been more focused on volume than margins for years. This wasn’t such an issue when inflation was low. Now prices are surging, those skinny margins mean it doesn’t take much to push the company from a profit into a loss and the debt pile is starting to build too. However, if Wetherspoon responds by putting prices up too much its unique value-based selling point could be undermined.

“Wetherspoon will have to hope that a modest improvement in trading in recent weeks is sustained and that it can weather the storm and, eventually, enjoy a fulsome recovery.”

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