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Investors' Corner
The Market
Leading shares in London closed week off their lows as the prospect of renewed bid activity in the banking sectors in the wake of the shock £21 billion hostile bid form the Bank of Scotland for NatWest offset further sharp falls led, yet again, by the technology sector. The FTSE 100 index closed 32.1 points lower at 5937.6, well off its day's low of 5,900.8, though the index would have been another 38 points lower but for the sharp gains in the clearing banks.
Banks and insurers rode high on Natwest's wave following the Bank of Scotland's 1250 pence a share bid for the UK high street bank. Certainly the surprise offer has awakened the UK retail banking sector to the risk that it is about to enter a period of intense consolidation. The offer, rejected by the NatWest board on the grounds that it undervalues the group, is expected to trigger a spate of counter bids as banks seek to enlarge their high street market share and cut costs. As counter-bids are expected to roll, the implications for the rest of the sector are huge. On the news hitting the market, NatWest shares jumped up 308 pence or 29 per cent to 1354 pence, as speculation of a counter-offer built up throughout the day with most players feeling the Scottish bank's initial pitch was not a knockout blow. Prospective counter-bidders are said to include a raft of UK banks as well as several European banks who are keen to establish a footprint in the UK financial sector. Bank of Scotland were hoisted 43.5 pence to 750 pence, excited by the prospect of cost savings from the deal and with some suggesting that the approach could leave the Scottish bank itself vulnerable to a bidder, probably in the shape of Lloyds TSB. In the wake of the Scottish bank's rally, its offer for NatWest is now valued at 1340 to 1350 pence. But analysts feel that even this higher offer will be insufficient to win control of NatWest and that, on current fair value estimates, any counter-offer will have to be pitched around 1500 pence to win institutional support.
Meanwhile for Legal & General, the news was much bleaker, as its shares slumped 6per cent to 180.5 as its planned £11.5 billion link up with NatWest was thrown into jeopardy by the Scottish bank's move. Bank of Scotland made it no secret that its ambitions towards NatWest did not include Legal & General, with the bank calling on NatWest shareholders to reject the linkup at an EGM on 6 October. But even without the NatWest deal, most analysts feel that Legal & Generali's days as an independent player are numbered. According to analysts, the insurer is likely to be inundated with offers, with Sun Life parent Axa and Dutch giant Aego, along with Halifax and Barclays, named as credible buyers. The take-over fever spilled into the rest of the financials, where Royal Bank of Scotland, seen as a major contender to launch a counter-bid for NatWest up 127 pence at 1276 pence, Abbey National 85 pence higher at 1086 pence, and Barclays up 81 pence to 1736 pence.
Alliance Unichem
Alliance Unichem, the retailer and distributor of pharmaceutical products, reported further strong progress in the first six months to June 1999, with increases in sales and market share in all divisions, and expansion of its business in growing markets. Overall group sales were up by 19per cent. Before goodwill amortisation, profits before tax were up 13 per cent and diluted group EPS grew by 12per cent.
The pace of Alliance Unichem's expansion has continued, with significant acquisitions in the first half. The widening of the geographical coverage of its wholesaling businesses in 1999 has included acquiring three wholesalers in the Czech Republic and a major Spanish wholesaler in Andalusia. Alliance Sante France achieved a strong sales performance, with a 6.9 per cent increase in total turnover to FFr 14.1bn including a 6.5 per cent increase in like-for-like turnover of prescription medicines, in line with market growth.
The UK wholesaling business increased its turnover by 10 per cent, well ahead of market growth which is estimated at 8 per cent for the first half. The division has continued to increase the number of its full line pharmacy customers and, significantly, has won an important contract for second line supply to Boots.
Alliance Unichem's Moss Chemists again achieved a strong all-round performance. Total sales, at £193.9 million were up by 16 per cent over last year with like-for-like NHS sales up by 6.4 per cent in a market which grew by an estimated 5.4 per cent. The outlook for the healthcare market remains positive, with it being largely unaffected by factors affecting the grocery sector, such as the arrival of Wal-Mart, due to the sector's low exposure to non-prescription business.
Alliance Unichem's Alleanza Salute Italia reported that the wholesale market in Italy continued the stronger than expected growth seen throughout most of last year, recording an 8.0 per cent gain over the first half of 1998. Alleanza again increased its market share, achieving turnover of ITL1,144bn up by 11 per cent over the comparable period last year and including like-for-like sales growth of 9.8 per cent. Meanwhile businesses in Spain and Portugal, Safa Galenica and Alliance UniChem Portuguesa, have both increased their sales ahead of market growth with sales of PTA50.1bn and ESC36.3bn respectively. Both businesses are actively expanding and rationalising their operations, although in Portugal this process is drawing to a close.
Competition levels in the European markets, as ever, remain high, particularly in fragmented markets where regional wholesalers tend to compete solely on discount terms. Management in each territory has responded to market pressures by raising cost efficiencies, and we have demonstrated our ability to grow profits and revenues through restructuring and other initiatives, despite incurring substantial reorganisation costs. These initiatives, taken with the underlying long term growth rates in Alliance Unichem's markets, mean that the prospects for growth are positive.
Tesco
Tesco, the retailing group, reported that the core UK business has performed well in a competitive first half-year, where we have seen strong volume growth. Non-food continues to grow and gain rapid market share. Tesco is already well positioned against its main competitors in both Central Europe and Asia and over 36 per cent of the group's space will be overseas by the end of next year.
Overall Tesco's sales growth will be moving to higher levels than in recent years. Its expectations are that its average earnings growth is likely to reflect this, particularly as its international business achieves economic scale. New stores contributed a further 3.7 per cent to total sales growth before store closures of 0.5 per cent.
In this competitive environment Tesco continues to perform well above the market and is one of very few major UK retailers to deliver continued profit growth. Group capital expenditure was £532 million with £364 million in the UK, including £213 million on new stores and £56 million on extensions and refits. Total overseas capital expenditure was £168 million including £61 million in Asia.
Tesco has a dedicated team which has been working on the year 2000 issue for over three years with the specific objective of ensuring business continuity. It has made the necessary changes and re-tested all its business critical computer systems. In addition it is continuing to work with its suppliers to ensure product supply and continuity of services. The estimated final cost of this project over 3 years is £30 million.
Tesco is working to be as strong in Non-food as it is in food and has made great headway in this market where it has a market share of 3 per cent. It still has a lot of scope for further growth and expects to double market share over the next 4 years. Tesco has recognised for some time that retailing would become an international industry. However, this consolidation process is only just beginning.
This year in the UK Tesco will add a total of 1 million square feet through extensions and the opening of 34 stores. One key part of Tesco's overseas strategy is to access growth internationally in markets where it can develop a leading position and add value to local retailing. In Ireland, a developed market, Tesco has achieved this through acquisition and in the developing markets of Central Europe and Asia it is achieving this through its hypermarket development strategy.
In Central Europe Tesco's lead country is Hungary where it has six hypermarkets. It plans to open a further three this year and four next year including a large store in Budapest. In Asia, assisted by acquisitions, it operated 14 hypermarkets in 1998. This will be 19 by the end of 1999 and 30 by the end of next year. Tesco's stores in Thailand are also competing well against local and international competitors. These initiatives will mean that having purchased a business that was losing money Tesco expects to break even this year and move into profit next year.
Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.
James DeBono can be contacted by e-mail: JamesDeBono@CompuServe.com
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