In­con­ve­nient truths for Tesco boss Nils Prat­ley

The Guardian - - FINANCIAL -

The Com­pe­ti­tion and Mar­kets Au­thor­ity rarely fails to sur­prise. The watch­dog worked it­self into a fine fury a cou­ple of years ago over the merger be­tween Pound­land and 99p Stores. It even­tu­ally reached the com­mon-sense con­clu­sion that the deal would not de­liver a fa­tal blow to com­pe­ti­tion on the high street, but it needed two at­tempts to get there.

Now, pre­sented with the more sub­stan­tial £3.7bn takeover of Booker by Tesco, the CMA has de­clared it can’t see why any­body would make a fuss. Small con­ve­nience stores should not worry about Tesco get­ting big­ger. The ca­ter­ing trade will be un­af­fected, ap­par­ently. The deal can pro­ceed with­out remedies.

The CMA “seem­ingly lives in a dif­fer­ent uni­verse”, de­clared Clive Black, an an­a­lyst at Shore Cap­i­tal. One can only agree. Tesco, with Londis and Bud­gens un­der its um­brella, is set to have an ex­tra­or­di­nary hold over the con­ve­nience-store mar­ket. It is baf­fling that the CMA did not in­sist, at the very least, on Tesco sell­ing its One Stop chain.

Tesco chief ex­ec­u­tive Dave Lewis pre­dicted ex­actly this out­come, so we should give him credit for be­ing able to read the minds of the CMA’s pol­icy wonks. Now comes the harder part of con­vinc­ing his own share­hold­ers that swal­low­ing Booker is sen­si­ble.

He’s al­ready lost one non-ex­ec­u­tive di­rec­tor over the deal – Com­pass Group’s Richard Cousins quit in protest, ar­gu­ing that mak­ing Tesco more com­pli­cated was the wrong way to go. And the re­sis­tance of Schroders and Ar­ti­san, two share­hold­ers speak­ing for 9% of Tesco’s stock, re­mains. “It doesn’t mat­ter how good a strat­egy is if you pay the wrong price,” said Schroders yes­ter­day.

Given that Tesco is of­fer­ing 23 times earn­ings on some mea­sures, the share­hold­ers’ ar­gu­ment is strong. No one else has yet ral­lied to the Schroders/Ar­ti­san flag, but maybe they were wait­ing for the CMA. Ei­ther way, Lewis should not take a thumbs-up for granted.

City an­a­lysts sus­pect he’s been un­der­stat­ing the po­ten­tial cost sav­ings and that he’s re­ally look­ing for twice the de­clared £200m. If that’s cor­rect, it’s time to speak up. Sat­is­fy­ing the CMA is one thing. What Lewis re­ally needs is the tra­di­tional thump­ing ma­jor­ity from the own­ers. Get­ting the deal across the line with a ma­jor­ity of, say, only 75% would be a moral de­feat.

Will miner pick Mick?

No­body ap­points Mick Davis to their board if they want a quiet life. Mick the Miner built Xs­trata from Glen­core’s cast-off mines into a global op­er­a­tor worth $50bn. Those were deal-mak­ing days and Davis was in the van­guard. “You’ve got to be a player. What’s the point of be­ing in busi­ness if you can’t be a player?” he said in 2009.

There were se­ri­ous mis­takes, such as a woe­fully-timed bid for Lon­min, and Xs­trata’s fi­nal year was dom­i­nated by the Glen­core soap opera. A merger of equals be­came a full-blooded takeover, with Davis’s spiky re­la­tion­ship with his coun­ter­part, Ivan Glasen­berg, un­der the spot­light. But Xs­trata’s long-term back­ers al­ways knew what they get­ting – drama, ac­tion and big per­sonal re­wards for Davis and his crew.

Many of those qual­i­ties should make him a ter­ri­ble can­di­date to be the chair­man of Rio Tinto. Mega pay pack­ets go down badly these days. And Rio (when it isn’t be­ing charged with fraud by US reg­u­la­tors, a mat­ter re­lat­ing to the fall­out from a 2011 deal) has spent the last five years try­ing to turn it­self into a model of cor­po­rate dull­ness. Solid cash gen­er­a­tion is sup­posed to be the goal.

It might be said hav­ing an in­dus­try vet­eran as chair­man of a big min­ing com­pany is hardly out­landish. And, if Rio’s chief ex­ec­u­tive, Jean-Sébastien Jac­ques, is re­ally as head­strong as he’s painted, it might help to have Davis on hand as the voice of ex­pe­ri­ence. He is also said to be have mel­lowed over the years (just as well, given the state of the Tory party, where he is chief ex­ec­u­tive).

In the end, one sus­pects Rio’s board will play safe and opt for a cur­rent nonex­ec­u­tive di­rec­tor. That would be very bor­ing, but prob­a­bly wise: if Rio’s in­vestors crave thrills, they can al­ways buy shares in Glen­core.

Stay on the line

It’s taken so long that we al­most stopped watch­ing, but the rein­vig­o­ra­tion of Voda­fone is hap­pen­ing. The tele­coms gi­ant up­graded its profit fore­cast for the first time in mem­ory. The old guid­ance said op­er­at­ing prof­its would im­prove by 4% to 8% but the com­pany now reck­ons it will do 10%. The dif­fer­ence may not sound much, but this is a very large busi­ness – top-line earn­ings should be around €14.8bn. Free cash­flow is run­ning at a shade over €5bn a year, so a div­i­dend cost­ing €4bn now looks very solid, which wasn’t al­ways the case.

Time for chief ex­ec­u­tive Vit­to­rio Co­lao to de­clare vic­tory and bow out af­ter nine years in charge? Ac­tu­ally, in his shoes you’d prob­a­bly keep go­ing. Gen­tler breezes from the eu­ro­zone, Voda­fone’s big­gest mar­ket, have ar­rived and you might as well en­joy them. And we’d all be glad if Voda­fone makes good on its prom­ise to pro­vide stiffer com­pe­ti­tion to BT in fast-fi­bre broad­band in the UK.

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