FTSE 100 consolidates recent gains, losses pile up for Royal Mail owner, Burberry warns, takeovers for Hotel Chocolat and City Pub

“The FTSE 100 was flat on Thursday, consolidating its recent gains as investors await the next big push in any particular direction,” says AJ Bell Investment Director Russ Mould.

“The market may be in something of a holding pattern until the next central bank meetings land in early to mid-December – although takeover action has offered some excitement today.

“A mixed response to a meeting between President Joe Biden and Chinese Premier Xi Jinping saw Asian stocks retreat a little.”

International Distribution Services (Royal Mail)

“After being fined for its poor performance by Ofcom, Royal Mail’s owner is pleading for reform of its delivery obligations.

“The argument that a six-day delivery service is no longer realistic given the significant drop in volume of letters delivered may be logical but it is unlikely to be received with a huge deal of sympathy by customers, politicians or regulators.

“International Distributions Services needs to do something though as its losses continue to stack up. Years of trying to drive efficiency improvements have come to very little. New CEO Martin Seidenberg may argue the group has two businesses with real potential but only its international delivery arm GLS is really demonstrating any of said potential.

“Royal Mail is trying to claw back the market share lost when it was hit by industrial action and people turned to alternative delivery providers but both this and attempts to modernise are a slow and laborious process.

“Whether Seidenberg can deliver where his predecessors have failed in transforming Royal Mail or whether he can execute a spin-off which makes it somebody else’s problem, allowing him to focus on the profitable and cash generative GLS division, remains to be seen.”

Burberry

“Burberry’s warning off the back of a sharp slowdown in sales is the latest sign the luxury goods sector is not immune to an uncertain economic backdrop.

“Traditionally the wealthy clientele which shop for expensive clothes and accessories are seen as being insulated from the impact of higher borrowing costs and rising prices but apparently they are feeling some of the pain.

“This is particularly disappointing for Burberry given it has worked hard to position itself firmly at the luxury end of the market in recent years.

“Some improvement in tourism-related spend is encouraging as Burberry is heavily reliant on Chinese and US travellers shopping in Europe. Though this had the effect of depressing sales in mainland China as spending shifted offshore.

“The Americas is Burberry’s worst performer and sorting this out will be top of the agenda for CEO Jonathan Akeroyd.

“In one sense Burberry shareholders will be reassured to see other luxury peers struggling as it suggests the company is not facing problems of its own making. All it can do right now is protect and invest in its brand and wait for an improvement in the backdrop.”

Takeovers: Hotel Chocolat (Mars) and City Pub Company (Young's)

“The UK takeover machine keeps on whirring. Hotel Chocolat and City Pub Company have joined the ranks of London-listed stocks receiving bids.

“Hotel Chocolat is the latest in long line of British companies to attract bid interest from an overseas player. For once, this wasn’t a case of a London stock trading on a depressed valuation and someone swooping in to buy it on the cheap. Hotel Chocolat’s shares actually looked quite expensive based on near-term earnings because the company has been through a tough patch and has been trying to get back into profit

“The fact Mars is willing to pay a 170% premium for the shares is remarkable on two accounts. First, bid premiums are typically in the 25% to 50% range so Mars paying so much more would suggest it has taken a long-term view of what the business is worth. Second, it suggests that Mars has spotted an opportunity and there is no way it wants to waste time with a low-ball bid. This looks like going in with its best offer with the hope of wrapping up the transaction as quickly as possible.

“Mars doesn’t have to worry about sales of its eponymous chocolate bar, but it does have to think about the evolution of the business and tapping into parts of the market who are looking for a higher quality product. Hotel Chocolat ticks the right boxes and while its international expansion strategy hasn’t gone to plan, perhaps Mars thinks it has the necessary skills to make a good job of turning the UK chocolatier into a global name. It is hard to imagine shareholders turning down such a generous offer.

“Young’s making a bid for City Pub Company looks like a more standard takeover situation. The latter was always going to be a bid target from the day it was created. Executive Chairman Clive Watson was a founding director of Capital Pub Company which was subsequently acquired by Greene King. He then set out to repeat the business model of building up a portfolio of posh pubs via City Pub Company, and low and behold another big player in the market wants to snap it up.

“Young’s has been more of an organic growth story but buying City Pub Company would boost the size of its managed pub estate by more than 20%, making it a meaningful deal. The acquired pubs and bedrooms fit nicely alongside its own assets in terms of quality, giving it a bigger position in the UK pubs market and increasing its premium accommodation capacity by more than 25%.”

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