Thursday 11/06/20

1. In MACRO AND M&A NEWS, the Fed says interest rates will be unchanged until 2022, Just Eat Takeaway combines with Grubhub, the PSA/Fiat merger faces close scrutiny and Simon Property tries to back out of the Taubman deal
2. In RETAIL-RELATED NEWS, US retail shows signs of recovery, Starbucks pivots to take-out, Monsoon puts jobs on notice, Zara’s owner plans to shut up to 1,200 stores, restaurant carnage continues and Ocado raises £1bn
3. In INDIVIDUAL COMPANY NEWS, Tesla talks trucking, Tyson Foods co-operates in investigation and Hertz continues the fight
4. AND FINALLY, I bring you a clever truffle dog (and my one as well!)…

So the Fed chief reassures, Just Eat Takeaway gets with Grubhub, the PSA/Fiat merger will be closely monitored and Simon Property hits reverse…

Fed officials project no rate increases through 2022 (Wall Street Journal, Nick Timiraos) sets out the stall for now as obviously they will change their minds if circumstances change. However, for now, the Fed has said that interest rates will be kept close to zero from now until the end of 2021 – and just to emphasise that fact, Fed Chairman Jerome Powell said “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates”. * SO WHAT? * Markets rallied a bit initially on the news, but then it all calmed back down again. Under normal circumstances, statements like that would send markets soaring – but these aren’t normal circumstances. I would say that this statement of intent provides more of a backstop than a boost, but at least this gives a degree of clarity.

Then in the world of M&A, Just Eat Takeaway combines with Grubhub in $7.3bn deal (Financial Times, James Fontanella-Khan, Andrew Edgecliffe-Johnson, Tim Bradshaw, Dave Lee and Miles Kruppa) shows that the European food delivery app has announced the acquisition of Chicago-based Grubhub in a $7.3bn all-paper deal (i.e. no cash) to create the world’s biggest online delivery company. Uber had been in the running for buying Grubhub (as had Germany’s Delivery Hero) but it seems that potential regulatory concerns scuppered the combination ultimately. It took the companies’ CEOs only three weeks to put this together! * SO WHAT? * This was pretty impressive going for Just Eat Takeaway as talks started straight after regulators approved Takeaway.com’s acquisition of Just Eat. The online food delivery market is still quite fragmented – but demand for it has become apparent during lockdown – and so further consolidation among players will no doubt continue as scale is important. Grubhub and Just Eat Takeaway’s business models are

similar in that they are both marketplaces where takeaway outlets can offer their services whereas Uber users its own delivery network to take meals to customers from restaurants who don’t normally do takeaways.

Then in PSA and Fiat-Chrysler face exhaustive antitrust probe over merger (Financial Times, Javier Espinoza, Peter Campbell and David Keohane) we see that the $50bn merger to make the world’s fourth biggest car manufacturer will have to undergo a full antitrust investigation after neither of them gave any concessions to the EU, especially regarding its potential dominance in the small van segment. The combined entity would have over 30% market share in Europe if the merger went ahead as is and would be more than double the share of Renault or Ford who have around 16% share each. Neither PSA nor Fiat-Chrysler want to sell their small van divisions because they are so profitable. * SO WHAT? * At the end of the day, it is likely that the EU authorities will clear the deal but concessions will surely have to be made. This probe is expected to take about four months but some close to the companies say that this move was priced into management thinking. Both companies have most overlap in Europe and the European Commission will be deciding on the merger next week.

Simon Property seeks to ditch $3.6bn deal by Taubman (Financial Times, Alistair Gray and James Fontanella-Khan) heralds yet the latest company trying to reverse out of an acquisition it negotiated pre-coronavirus. America’s biggest mall owner Simon Property Group is trying to reverse out of the $3.6bn cash purchase of smaller rival Taubman Centers and shares in the latter fell by 18% on the news. * SO WHAT? * Simon Property had agreed to pay a 51% premium to Taubman’s pre-deal share price because it liked the latter’s site locations and high-end tenants. It is now stating that the takeover agreement “specifically gave Simon the right to terminate the transaction in the event that a pandemic disproportionately hurt Taubman”. Sounds like a nasty case of buyers’ remorse. Maybe it’ll get messy or just maybe the two will save themselves a lot of time and money and just walk away, which is what happened when private equity firm Sycamore Partners pulled out of buying L Brands’ Victoria’s Secret.

US retail shows some signs of life, Starbucks adapts, Monsoon looks very shaky, Zara’s owner looks to wield the axe, restaurant woes continues and Ocado raises £1bn…

Starting off on a more positive note, US retail shows tentative signs of recovery (Financial Times, Alistair Gray) cites data collated by Mastercard which shows that US consumer spending picked up in May with stronger sales of home improvement, ecommerce and groceries mitigating weakness in clothing, jewellery and other higher end items. Even department stores Macy’s, Kohl’s and Nordstrom said that sales at reopened stores were improving gradually. * SO WHAT? * Nice, but I don’t see any catalyst on the horizon that will move the needle very much on retail recovery. This is certainly progress, but it’s from an incredibly low base. Let’s hope it continues, though – and that it will gain momentum!

Coronavirus speeds up Starbucks shift to takeout (Wall Street Journal, Heather Haddon) shows that Starbucks will shed 400 of its traditional cafes in the US and Canada over the next 18 months and open more takeout outlets as it announced the financial impact of the coronavirus on its business and its forecasts for the quarter and the year. It hopes that its US business will return to quarterly same store sales growth early in the next fiscal year – but there’s good news in China (Starbucks’ second biggest market) where 99% of its stores are now open and over 70% have returned to full cafe seating. Same store sales there are improving but were still down 21% for May. * SO WHAT? * I guess that the coronavirus has given some companies reason to overhaul their strategies and I believe that Starbucks fits into this. After years of just opening stores, expanding into new markets blah blah, it is now being forced to have a good hard look at how the market is evolving and whether its current business model needs any changes. I think that people will appreciate the in-store experience more and value the convenience of take-out once people start commuting and working in offices etc. once again. Given that buying a coffee to drink in or take out is one of life’s little affordable luxuries, I would wager that Starbucks will pull out of this current slump a better company – but this won’t happen overnight.

On the other hand, Monsoon cuts 500 jobs with a further thousand at risk (Daily Telegraph, Laura Onita and Simon Foy) has an air of inevitability about it given that Monsoon Accessorize’s problems have been well-known for some time. Monsoon’s founder Peter Simon bought it out of administration and now owns all of its brands, IP, head office, design teams and distribution centre in

Northamptonshire – but not its shops. The new group company will be called Adena Brands and Peter Simon is now negotiating rent with landlords in order to keep about 100 outlets open (which will mean the loss of almost 1,000 jobs). * SO WHAT? * As the founder said, the group was actually trading quite well until the coronavirus came along, but it was just unable to withstand the hit of having to close all of its UK, franchise and joint venture stores for almost three months. Let’s hope its fortunes get better.

Elsewhere on the UK high street, Zara owner shuts stores after suffering first loss (The Times, Ashley Armstrong) highlights the potential closure of up to 1,200 shops over the next two years as the world’s biggest retail group announced its first quarterly loss. Inditex – which owns the brands Zara, Massimo Dutti, Bershka and Pull & Bear – has decided to accelerate plans for online sales and focus more on its larger stores in response to difficult trading conditions during lockdown. The majority of store closures will be among shops that aren’t Zara. The group aims to increase online sales to account for 25% of the business versus 14% as of last year. * SO WHAT? * I am a fan of Inditex, its efficiency and its ability to react rapidly to market trends. Although things aren’t great right now, I think it has the ability to get out of the other side of this crisis stronger – especially if it can boost its online capability quickly.

Then there’s more disappointing news in Restaurant axe falls on 3,000 jobs (The Times, Dominic Walsh) which shows that The Restaurant Group announced yesterday that it plans to cut 125 loss-making restaurants, which will involve the loss of 3,000 jobs. The company is also simultaneously trying to improve rental terms with numerous landlords. Most of the restaurants slated for closure are Frankie & Benny’s but Coast to Coast, Firejacks, Garfunkel’s and Joe’s Kitchen will also face some closures. Its Wagamama, airport concessions and pubs will, however, remain untouched. The tough times continue.

Meanwhile, Ocado’s £1bn gamble on riding the online wave (Daily Telegraph, Laura Onita) shows that the online grocery specialist has decided to launch a £1bn fundraising. It wants expand its internet sales operation and production of robot factories for supermarkets around the world to take advantage of the huge uptick in demand for food deliveries. Chief exec and co-founder Tim Steiner has decided that it’s important to take advantage of the current opportunity and he needs money to do this quickly. * SO WHAT? * Ocado’s weaknesses in the face of the coronavirus outbreak were laid bare as its website got overwhelmed when the country went into lockdown and it was left wanting for warehouse capacity and drivers. In contrast, its “non-specialist” rivals managed to recover quickly and take advantage of the online shopping boom. Clearly, it needs to improve – and £1bn will definitely come in handy!

Tesla stirs things up, Tyson Foods plays nice and Hertz tries to stay alive…

Tesla shares soar past $1,000 on Elon Musk’s plan to move forward with semi truck (Wall Street Journal, Tim Higgins) shows that Tesla has created more hype as Elon Musk said to his employees that the company was ready to begin volume production of its all-electric semitrailer truck. Tesla’s current share price now means that it is valued at almost the same level as Toyota! In another memo to employees, Musk talked about prioritising the ramping up of production of the new Model Y. * SO WHAT? * I get the feeling that there is a lot of hype here and not that much in terms of concrete positives. Their cars aren’t cheap, I think that the Model Y WOULD have been a great best-seller (but not since coronavirus – all car sales are going to be tricky for now as many people have less money to spend on big ticket items like cars) and delivery targets are still tight. Great concept but I think that the current economic backdrop is going to make things much more difficult for Tesla. The lorry sounds like a brilliant idea – but current charging networks just aren’t up to it IMO.

I haven’t mentioned anything about it in Watson’s Daily up until now because there have been other things going on, but Tyson Foods cooperating in US probe of chicken price-fixing (Wall Street Journal, Brent Kendall and Jacob Bunge) looks at current developments in the US chicken

price-fixing scandal. In this, executives from Pilgrim’s Pride and Claxton Poultry Farms were indicted on charges of price fixing and bid rigging. Tyson Foods is helping the Justice Department with their investigations in return for leniency. * SO WHAT? * This comes at a difficult time for the companies who have been trying to cope with demand for their product during shutdown whilst simultaneously coping with staff calling in sick as they fall ill with the coronavirus (not to mention Trump forcing them to stay open!). I bet the plant-based protein producers must be loving watching their meatier counterparts squirm right now!

Then in Hertz share rally fizzles as it vows to fight delisting (Financial Times, Matthew Rocco) we see that speculative traders buying Hertz shares believing something/someone will save the company got a shock yesterday when they heard that the NYSE is planning on delisting the company’s stock. Hertz is fighting to keep the listing and will stay listed until the results of a hearing decide its future. * SO WHAT? * There has been a lot of trading activity by speculative retail traders recently in companies that have gone/are going bankrupt. This just goes to show how risky that is because there’s always the possibility that the share price will go to zero. Hertz has been looking shaky for a while now and you can’t blame it for pursuing all avenues to stay alive. As for the speculators, I would say that trading (or rather trading successfully over a sustained period of time) is NOT easy , despite what anyone says!

…in other news…

I thought I’d leave you today with the rather clever dog in Dog in Australia Digs Up Two-Pound Truffle Worth $1000 (mental_floss, Michele Debczak https://tinyurl.com/yclb52fu). If only my dog could do this! Here she is:

…expert truffle hunter potential??