Monday 15/10/18

1. In MACROECONOMIC NEWS, Saudi Arabia threatens retaliation and Germany’s Merkel has a setback
2. In RESTAURANT-RELATED NEWS, Patisserie Valerie survives for now and UberEats plans virtual restaurants
3. In INDIVIDUAL COMPANY NEWS, military electronics companies L3 and Harris merge and Sears files for bankruptcy protection
4. In OTHER NEWS, I bring you one of those photo optical illusions. For more details, read on…

So Saudi Arabia gets nasty and Merkel suffers a defeat that could help her…

Trump, Saudis escalate threats (Wall Street Journal, Vivian Salama and Margherita Stancati) shows that the war of words between Washington and Riyadh is hotting up over the suspected killing of a dissident Saudi journalist. On the one side, Trump pledged “severe punishment” on Saudi Arabia if an investigation shows that it did indeed murder (and chop up, if you believe Turkish intelligence sources) journalist Jamal Khashoggi who disappeared after he entered the Saudi consulate on October 2nd – and then on the other, you have Riyadh threatening to retaliate in spades. Various companies and individuals (including JP Morgan’s chief exec Jamie Dimon and media companies such as Bloomberg and CNN) are starting to pull out of attending the kingdom’s premier business conference later this month in protest and one former State Department official said that “this is the most damaging blow for Saudi Arabia and the United States since 9/11…at a minimum MBS (Mohammed bin Salman, the Crown Prince) is damaged goods”. Riyadh says it will hit back at any US sanctions over missing journalist (The Guardian, Patrick Wintour) highlights a statement by Riyadh which said that “The kingdom affirms its total rejection of any threats and attempts to undermine it, whether through economic sanctions, political pressure or repeating false accusations…the kingdom affirms that if it is [targeted by] any action, it will respond with greater action” and Ledger on oil and arms gives kingdom huge global influence (The Guardian, Rob Davies) emphasises that, as the world’s biggest oil exporter, Saudi Arabia has enormous influence on the world economy. An editorial in the Arab News by Turki Aldhakhil claims that Riyadh is looking at up to 30 retaliatory measures if the US decides to punish them, including an oil production cut that could drive prices from around $80 a barrel to over $400 that would not only drive up pump prices – it would also jack up the costs of all goods transported by road. Saudi Arabia also supports huge numbers of American jobs via its arms purchases as it is the world’s #2 importer of arms (India is #1) and a massive 61% of those imports are from the US. Saudi Arabia was America’s biggest arms customer last year, with the $17.5bn-worth of deals looking set to continue after Trump signed a $110bn defence agreement with the country last year. * SO WHAT? * If what the Turkish intelligence sources are saying is true, this is truly a horrific reflection of a country that is trying to change under its

modernising Crown Prince – murdering a journalist in a particularly grisly manner is not the way to win friends and give them that warm cuddly feeling. However, I fear that there is b*gger all that anyone can do about it. At the end of the day, Saudi Arabia has the rest of the world by the balls with its oil – and it would not be that difficult for the country to switch from being America’s BFF to Russia’s new BFF (after all, they already have regular relations on the oil front), if Riyadh felt slighted. Call me cynical, but I suspect a massive stitch-up is on the cards – and Turkey could be the big winner here if President Erdogan plays his cards right. He has already agreed to a joint Turkey-Saudia Arabia investigation (can you imagine how impartial THAT is going to be??) and you would have thought that he could be incentivised by both the US AND Saudi Arabia to make this all go away. What a brilliant move by that old dog Erdogan – this  could well have saved his ailing economy. Unfortunately, you have one (probably) dead journalist on the one side and then MASSIVE repercussions for economies and jobs on the other – and I suspect that the latter will be prioritised over the former no matter how uncomfortable that is.

In rather less violent political developments, Bavarians deliver stunning rebuke to conservative Merkel allies (Financial Times, Guy Chazan) shows that voters in Germany’s southern state of Bavaria struck a huge blow to the ruling Christian Social Union (CSU), which saw its share of the vote collapse from 47.7% in the election five years ago to 36.2% yesterday with the Green party and extreme-right AfD taking advantage. The CSU has ruled in the region without a break since 1957 and had been trying to take the wind out of the sails of increasing support for the anti-immigration AfD by picking fights with Angela Merkel over asylum policy. However, it seems that this tactic has backfired in spectacular fashion as voters abandoned them for the Greens in their droves as the party saw its share of the vote increase from 8.4% in 2013 to yesterday’s 18.1%. * SO WHAT? * This result goes to show the rather fragile nature of Germany’s coalition government with the CSU and Social Democrats (SPD) all weakening along with Merkel’s Christian Democratic Union (CDU) and raises the question of whether it will actually be able to last a full term. Result may strengthen Merkel’s hand, but fear of alternative is what holds coalition together (The Guardian, Jon Henley) puts an interesting spin on the result in that it could act in her favour by forcing some of her fiercest critics to back down after such a chastening defeat because if they don’t, the danger is that they could end up handing power to the extreme-right AfD party, which would put Germany and the EU in a very difficult position.

Patisserie Valerie survives and Uber Eats is on the verge of launching 400 virtual restaurants…

Café chain could sue auditor over £40m hole (The Times, Dominic Walsh) heralds the latest development in Patisserie Valerie’s current drama as the exec chairman and 37% shareholder Luke Johnson staged a rescue bid for the company on Friday by providing a £10m interest free loan with a £10m bridging facility to be repaid after the completion of a £15.7m share placement with institutional shareholders in which Johnson will buy about £5m of the shares to be priced at 50p versus the 429.5p the shares were at before this news hit and the shares were suspended. This means that the company’s market cap will suddenly drop from £446m to £68m. Although Johnson has not directly referred to suing Grant Thornton, its auditor since 2006, for its failure to notice a £40m black hole in its finances, you would have thought that the auditors aren’t going to get away with it. * SO WHAT? * Well at least the company isn’t going to go under for now. However, this MASSIVE decline in value is going to be extremely painful and I suspect that there are going to have to be some pretty dramatic cuts in jobs and outlets for the sake of its ongoing survival.

There’s potentially good news for those who live in areas with few restaurant options in Uber Eats to launch 400 virtual restaurants in UK (Daily Telegraph, Matthew Field and Olivia Rudgard) as the company is planning on a roll-out of “virtual restaurants” which basically increase takeaway food choices by optimising the use of existing kitchen space. Basically, the way it works is this: UberEats finds out what foods people in specific neighbourhoods are searching for and if  that food isn’t served in that location, Uber will approach an existing restaurant and see if they want to serve the missing cuisine. If that establishment agrees to do so, Uber will “build” a virtual restaurant that only exists in its app (i.e. you can’t go to it in person) that people can order from. This means that, say, a restaurant will suddenly be able to utilise its existing equipment to make a whole host of other dishes whilst making more money by reacting to real-time demand. One of the great things here is that with a virtual restaurant, you can test individual menu items or completely new cuisines without having to build or invest in a real world presence. Pretty amazing, no? * SO WHAT? * I think that this is a very interesting concept indeed and is great not only for the consumer but also the restaurants in question as it gives them the ability to react to reliable customer “intelligence” and broaden their offering with lower financial risk. This could be particularly good at the moment (and possibly in the near future) given the tough times restaurants are experiencing as it will either offer existing restaurants a potential lifeline or will give customers a viable “replacement” for outlets that have to shut down.

In individual company news, L3 and Harris get together, Sears files for bankruptcy protection and Tencent continues to suffer…

In L3 and Harris merge in $33bn all-stock military electronics deal (Financial Times, Sylvia Pfeifer, James Fontanella-Khan and Eric Platt) we see that the two defence technology companies are merging in an all-paper deal to create the sixth biggest defence company in the US, with estimated combined net revenues of $16bn. * SO WHAT? * There’s a lot of consolidation going on at the moment in aerospace and defence as companies combine 

to get greater market share of Trump’s promised increase in military spend. The chairman and CEO of L3, Christopher Kubasik, has said that he wants to be a challenger to the likes of Boeing, Lockheed Martin and Northrop Grumman. 

Sears files for Chapter 11 bankruptcy (Wall Street Journal, Lillian Rizzo and Suzanne Kapner) follows on from what I was talking about last week as it filed for bankruptcy protection from creditors early this morning. Under a deal reached with its lenders, it will keep hundreds of its stores open for now although it will close 142 loss-making stores by year end with liquidation sales to begin shortly. Sears currently operates around 700 Sears and Kmart stores and employs about 70,000 people. Edward Lampert will step down as CEO but stay on as chairman. Talk about how the mighty fall!

And finally, in other news, I bring you one of those photo illusions…

I suspect this won’t be quite as viral as the whole blue/gold dress thing but this is quite amusing: Back or neck? Thousands baffled by optical illusion as they attempt to work out what they are looking at (The Mirror, Courtney Pochin https://tinyurl.com/y8zg6ytd). It’s definitely a back. Or a neck…