FTSE 100 higher ahead of UK rate decision, Sainsbury’s sells core banking arm to NatWest, YouGov warns and Tate & Lyle unveils major deal

“The FTSE 100 was in positive mode on Thursday as investors awaited the Bank of England’s interest rate decision at lunchtime,” says AJ Bell Investment Director Russ Mould.

“In all likelihood this will be something of a non-event as Governor Andrew Bailey and his colleagues are likely to sit on their hands and largely keep schtum given that we’re in the middle of an election campaign.

“While inflation has dropped to the 2% target, the underlying numbers behind this reading were not as encouraging. Given that services inflation is still running hotter than the Bank would like, investors are now trying to work out if this rules out a cut in August.

“A recovery in some of the housebuilding names, which sold off on mixed results from Berkeley yesterday, and some strength in the industrials sector helped to get the UK’s flagship index off to a decent start.

“Yet another name in the mid-cap ranks of the London market is set to fall into the grasp of private equity as financial services consultancy Alpha FMC succumbs to a bid from Bridgepoint.”

Sainsbury's / Natwest

“The big supermarket slimdown continues with pace as Sainsbury’s follows Tesco in selling its core banking operations. The deal makes sense as it leaves Sainsbury’s with a sharper focus on food and general merchandise.

“The £125 million sale price may not appear significant but the transaction is important from a strategic perspective. At least £250 million of excess capital is expected to be returned to Sainsbury’s once the banking deal with NatWest completes and this money has been earmarked for shareholders, albeit we don’t know if the money will be returned via a special dividend, share buybacks or a mixture of both.

“Don’t jump to conclusions that Sainsbury’s has got a bad deal versus Tesco’s sale of its banking business to Barclays as it is not an apples for apples comparison.

“Barclays paid £700 million for Tesco Bank which is more than five times what NatWest is paying for most of Sainsbury’s Bank. NatWest is paying less but it is also getting less. It is acquiring £2.5 billion of unsecured lending balances and £2.6 billion in customer deposits. In comparison, Barclays has taken on £8.3 billion of unsecured lending balances and £6.7 billion in customer deposits.

“It’s no surprise the market has given the thumbs-up to Sainsbury’s disposal. The supermarket has been on a roll over the past few years with its strategy of focusing primarily on food and removing any distractions elsewhere in the business could help to oil the wheels.

“The prospect of interest rate cuts making life easier for consumers could see the public start to trade up from discounters and spend more money in places like Sainsbury’s. In April, the supermarket said its Taste the Difference premium range was performing ‘especially well’ so it’s already off to the races before the trading up trend moves up a gear.

“Supermarkets have experimented over the years with ways to expand beyond their core focus, offering products that grocery customers might also want. On paper, it was a simple cross-selling exercise to get these people to buy supermarket-branded utilities such as mobile phone services and broadband, lifestyle products including sofas, plants and garden furniture, and financial services.

“Some initiatives worked, others didn’t, but we are now in an age where companies have a preference to focus on what they do best and retreat from the rest.”

YouGov

“Casual observers of YouGov might assume the company would enjoy a bumper time during the election but its polling operation makes a relatively modest contribution to group revenue.

“The data analytics side is more important and this is where the company is struggling. The company invested for an expected acceleration of growth in the second half of its financial year which, in classic fashion, failed to materialise.

“This may reduce some of the clamour for the company to move its listing to the US in search of a higher rating. The one reassuring element of the announcement is the recently acquired consumer panel business is performing as expected.”

Tate & Lyle

“The scale of the deal announced by Tate & Lyle to acquire fellow ingredients specialist CP Kelco is clearly making some investors nervous.

“Getting a deal wrong is often the biggest pitfall for a corporate entity and large deals have a nasty habit of destroying rather than creating shareholder value.

“The deal is being funded through a mixture of debt and existing cash, so there is the potential for some strain on Tate & Lyle’s balance sheet. However, the decision to press ahead with a previously announced share buyback programme is a sign of confidence on this front.

“A lot will ride on the company’s ability to deliver the cost savings from combining operations and the promised improvements in revenue growth and margins.

“Often a management team overestimates what they can do on this front and ends up disappointing investors. At least Tate & Lyle is buying a business it knows well, having collaborated with it over a long period. That might reduce the risk that it discovers some skeletons in the cupboard when it takes charge.

“Tate & Lyle will hope this transaction will put the enlarged company in a good place to serve a market among food producers looking to make food which is healthier but still tasty enough to fly off the shelves. Areas like ‘mouthfeel’ – literally the way food or drink feels in the mouth – are easy to mock but are undoubtedly considered important in this industry.”

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