Dave Lewis’s big pitch at Tesco is that a better deal for shoppers will, in time, improve the lot of long-term investors who have seen their shares halve in value since 2013 and their dividends evaporate entirely. His plan is coherent – indeed, it is probably the only credible strategy in a market where the new price-setters are the discount twins Aldi and Lidl.
But the “in time” clause is critical, at least for shareholders. On that score, Lewis is still offering only caution. Trading conditions are “challenging”. Profits won’t improve in a “straight line”. More investment will be needed, which is retailers’ code for keener prices. In short, Tesco shareholders will have to be patient. Wednesday’s 8% drop in the share price was fair.
It is also fair – for the time being, at least – for Lewis to plead for time. The new regime can’t be faulted on what it has done so far. The top priority was always to arrest the slide in sales, and that has been achieved. Lewis can also argue he is taking the fight to discounters on fresh produce and meat, albeit via the dubious tactic of using fictitious farm names. On operating profits for the last financial year – the only tangible financial ambition Lewis had set publicly – the target was achieved with £944m.
But the question of where Tesco’s profit margins in the UK will settle in the medium-term remains anybody’s guess. The 5% rate of old, when Tesco was fleecing customers and gouging suppliers, is out of the question. Is the new level 2% or 3%? Last year it was 1.2%, with the second half better than the first.
Lewis’ reluctance to air an estimate is understandable – he probably doesn’t know himself. But the City won’t view the Vague Dave show as charming for ever. One of these days, shareholders will want to know if the boss thinks he is running a proper recovery stock or a business that is merely better than the hollowed-out 2014 version.
IPO reform overdue
About time, too. The Financial Conduct Authority has realised the London IPO, or flotation, market has become an exercise in smoke and mirrors.
Full prospectuses sometimes appear after shares have started trading. Independent analysts, who might be sceptical about the quality of goods on offer, are kept away from managements. Thus the only pre-float research that appears comes from analysts connected to the banks and brokers working on the IPO – and even that is kept within limited circulation. Meanwhile, the whole shebang is overseen by investment banks who slip extra shares to favoured fund managers when the newly-arriving company is genuinely a flyer.
The FCA’s interim findings are, therefore, welcome. The regulator must now ensure information becomes timely and useful. Prospectuses should be published a fortnight before trading day and independent analysts should not be gagged by lack of access.
Neither measure, in itself, would guarantee a superior level of scrutiny. Small companies, in particular, may still struggle to gain anybody’s attention. But the regulator can encourage a spirit of open and honest debate. Get on with it: reform was overdue two decades ago.
Premier keeps its head
After all the fuss, Mr Kipling is staying British. US spice maker McCormick has walked away from a bid for parent Premier Foods, saying it couldn’t meet the board’s price expectations. Cue a 25% fall in Premier’s shares and, one suspects, unhappiness in shareholder ranks. Potential cash bids at twice the old share price don’t come along often.
Indeed, this saga has already seen tempers flare over Premier’s side-deal with Nissin, the Japanese noodle maker and new friend in a mission to serve Ambrosia rice pudding and suchlike to the world. Agreement on a commercial partnership was quickly followed by Nissin buying a 20% stake in Premier.
Was it right for Premier, when negotiating the trading alliance, to tell Nissin of McCormick’s potential bid interest? A couple of big Premier shareholders thought they smelled an underhand tactic to frustrate McCormick.
Despite the kerfuffle, it’s hard to say Premier did anything wrong. The Takeover Panel was informed at every stage, one assumes. What’s more, the cooperation agreement can’t have acted as a poison pill because it couldn’t be signed until McCormick had decided whether to bid. As for Nissin’s actual share purchase, it couldn’t happen until everybody – shareholders included – had been told of McCormick’s interest. Add it all up, and Premier seems to have kept its head when all about were losing theirs.
It will be a harder task for Premier’s board to demonstrate that their debt-laden business is worth more than the 65p, or £537m, that McCormick was waving. But that’s next year’s story.
