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The Market
Blue chips ended sharply higher on Friday, aided by a powerful showing from Wall Street and the resumption of the on-off merger talks between drug giants Glaxo Wellcome and SmithKline Beecham. With benign U.S. consumer price data seen as reducing the risk of an aggressive U.S. rate rise next month and rising Vodafone AirTouch shares lending further support, the FTSE 100 ended the session 126.7 points higher at 6,658.2. At that time the Dow Jones Industrial Average was up around 139 points while the Nasdaq pushed on 119 points, both underpinned by strong figures from chip giant Intel. Over the week, the FTSE 100 was up 153.4 points. Elsewhere, the FTSE 250 closed up 26.1 points at 6,554.6, and the FTSE Small Cap continued its relentless forward march hitting 3222.6 - another closing high. Market turnover hit the 2 billion mark by 4.44 p.m., swollen by heavy trading in Vodafone AirTouch, Millwall and Marks & Spencer.
Glaxo Wellcome, up 78 pence at 1,818 pence, and SmithKline Beecham, 56 pence higher at 847 pence, underpinned the FTSE 100 even though both stocks closed off their early highs. London's reaction to the resumption of merger talks after a two-year hiatus was cautious. Many were concerned that the discussions might collapse again, while others reflected on the fact that the deal is being structured as a merger of equals. This implies there will be no take-over premium in the transaction. Nevertheless, analysts estimated that cost savings from the merger, which would create the world's largest drugs company, are likely to be about 7-8 per cent, and should lead to immediate gains of about 15 per cent in the combined value of the company. Talks between Glaxo and SmithKline collapsed acrimoniously two years ago amid accusations of bad faith from both sides, and they were not expected to renew talks while Jan Leschly remained chief executive of SmithKline and Sir Richard Sykes continued as chairman of Glaxo. But Leschly is due to step down in April, to be replaced by Jean-Pierre Garnier, who is thought to be better disposed towards a deal, while former research scientist Sykes is reported to be considering a move back to academia at London University's prestigious Imperial College of Science & Technology.
Dixons
Dixons, the electrical goods retailer and e-commerce group, reported that the exceptional credit of £215.5 million in the six months to November 13, mainly relates to the profit arising from the sale of approximately 20 per cent of Freeserve. Pre-tax profits increased 333 per cent to £299 million.
Total sales in Dioxins' retail division in the period increased by 18 per cent to £1,676 million, with like for like sales 8 per cent higher than in the first 28 weeks of 1998/99. New technology and price deflation were the key factors affecting the consumer electronics market. Mobile phones, widescreen televisions and digital products enjoyed strong growth. However, markets such as games consoles and VCRs suffered from particularly heavy price deflation that was not fully offset by volume growth. Retail gross margin declined by 0.7 percentage points reflecting aggressive pricing action and the growth of lower margin areas of the business such as PC World Business. Retail rents remain a source of cost inflation; although there is some evidence that rents are moderating on new leases.
Dioxins' Currys sales were £688 million, an increase of 9 per cent in total and 4 per cent like-for-like. Currys have piloted a range of fitted kitchens in four stores that have achieved good sales levels. As a result, kitchens have been rolled out to a further 20 stores with further expansion planned.
Meanwhile in Dioxins' PC World chain sales increased by 26 per cent overall and 8 per cent like-for-like. At Dioxins other chain The Link sales amounted to £125 million, an increase of 77 per cent in total and 43 per cent on a like for like basis. The Link benefited from the strong growth in pre-pay mobile phones.
Dixons continues to develop its e-commerce strategy and believes that software is a category in which on-line sales will capture a large share of the market. E-commerce will take a share of traditional retail sales within an expanding retail market. Customers will use the net to assist in making product decisions and for after sales service information. The group expects to invest more than £30 million over the next two years in developing its e-commerce activities.
Dioxins' European Property division made a 58 per cent increase in profits on lower operating assets which reflects the success of the re-focus of activity into Belgium, Luxembourg and France, where Codic has a strong record of successful projects.
At the end of the period, net funds, excluding amounts held under trust to fund extended warranty liabilities and funds held by Freeserve, were £403 million. The increase on last year reflects the funds raised for Dixons Group from the flotation of Freeserve together with cash generated from operations.
Retail sales for the first eight weeks of the second half to 8 January 2000 increased by 15 per cent in total and 5 per cent on a like for like basis. Dixons expects to achieve a satisfactory result for the year. Looking further forward, the group's plans will be based on continuing strong growth in its UK retailing business, international expansion and the development of e-commerce opportunities.
Freeserve
Freeserve, the Internet service provider announced that it had 1.675 million active registered accounts as at 2 January 2000, representing continued growth at an average rate of 14,000 per week. In addition, it announced 165.8 million average weekly minutes of use in the seven weeks to 2 January 2000, a 6 per cent increase on the average for the second quarter.
Freeserve boast that they have the most recognised Internet brand in the UK and through its arrangements with BT Cellnet and others, it is building on this to ensure that Freeserve is available wherever the Internet can be accessed. Freeserve plans to continue to build on its position using the strengths that come from its understanding of the UK user, its unparalleled distribution through Dixons Group and the quality of its partners.
During the first half of this year and in subsequent weeks, Freeserve has undertaken major new initiatives in connectivity. Freeserve will continue to work with Planet Online and Energis to ensure that the quality of its dial-up service is second to none. It will also provide diversity of access enabling people to connect through as many communications channels as possible; and diversity of content by providing an ever-increasing range of services through its portals tailored to the individual wants and needs of its customers.
In the second half of this year Freeserve aims to extend its market leadership further, continuing to use a strong access proposition to drive traffic to its portal sites, which will then reap the rewards of advertising and e-commerce.
Pace Micro Technology
Pace Micro Technology's chairman argued that the accelerating growth of digital TV has been particularly strong in the UK as a result of competition between satellite, cable and terrestrial transmission. Pace provides the integration technology that enables the customers of each of these systems to receive digital TV services.
Business within the UK represented over 90 per cent of group revenues as Pace was able to take advantage of the launch of free set-top boxes by BSkyB and ONdigital and of the initial roll out of digital cable services by CWC, Telewest and NTL.
However, overseas business was depressed. In Latin America economic difficulties slowed sales and in European markets new products were delayed by component shortages. Whilst performance in Latin America will take time to improve, Pace increased revenues in Europe over the second half of last year and won a new contract to supply Canal+ with at least 100,000 units next year.
Meanwhile in the US, Pace gained its first cable contract with Time Warner Cable for a minimum of 750,000 units over the next three years. Also, the group was successful in being included in a consortium led by Cisco to explore ways of integrating and rolling out new technologies such as VOFDM, that will remove barriers to interactivity and increase bandwidth for advanced home gateways.
As planned, the group has driven sales and market share through an aggressive pricing policy. Costs could not be reduced as quickly as planned because new integrated components sourced from third parties were behind schedule. Additionally, the component supply market, in particular for memory devices, has been experiencing a hardening of prices, due to the increased demand for mobile telephones, disk drives, DVD players and set-top boxes.
For the remainder of this financial year, Pace is expected to continue on the pattern of the first half of the year with further rapid deployment of the home gateway in the UK. Margins are expected to remain under pressure as a result of the competitive nature of the market at a time of continued supply restraints. Whilst such an environment involves both challenge and opportunity for the group, Pace can look forward to the future with confidence.
Ellis & Everard
Ellis & Everard, the chemicals distributor, reported an 8 per cent increase in pre-tax profits to £18.3 million for the half-year to October 31. In Europe, turnover was similar to last year, with small volume gains being offset by lower average selling prices. The food ingredients sector in particular continues to provide good growth opportunities and in this area, Ellis & Everard plans to create an integrated stand alone business.
In the USA, margins have improved and tight cost control led to an excellent performance with underlying operating profit up 17 per cent. The group's chemical business in the North Eastern region achieved an excellent result and in the South and West an improved trading climate in some key industries such as oil field services contributed to a good performance.
Ellis & Everard believes that its existing infrastructure gives it an edge in e-commerce. This is because of the need to deliver chemicals from one location to another in a safe and environmentally sound manner. This new way of reaching customers will bring benefits in the future and the group has allocated significant resources to continue developments in this area.
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