Tuesday 01/02/22

1. In MARKETS & MACRO NEWS, the S&P and NASDAQ have a tough month, Eurozone growth falls, German and Spanish inflation stays high, markets expect a UK interest rate rise and the BoJo party debacle continues
2. In CONSUMER/RETAILER NEWS, food and drink prices are set to rise, some face a stark choice of eat or heat, French supermarket Casino has a profit warning and Tesco gives up on Jack’s
3. In M&A NEWS, Citrix is snapped up for $16.5bn, Sony buys Bungie for $3.6bn, Constellation buys into Lookers and the New York Times buys Wordle
4. In MISCELLANEOUS NEWS, the Rogan thing highlights issues for Spotify and Hipgnosis, streamer danger lurks and Ryanair hits turbulence
5. AND FINALLY, I bring you one hell of a prank…

So the S&P and NASDAQ have a ‘mare, Eurozone growth slows, German and Spanish inflation stays higher, markets expect a UK rate rise and partygate continues…

Stocks close higher on final day of tumultuous month (Wall Street Journal, Karen Langley and Caitlin Ostroff) shows that expectations for higher interest rates hit the S&P particularly hard as it ended its worst month since March 2020. Interestingly, only energy stocks managed to resist the downward trend in January. Tech stocks have weakened over the month as investors worry about the effect higher interest rates will have on sky-high valuations in the sector.

Meanwhile, in Europe, Eurozone growth falls to 0.3% as Continent gripped by Omicron (Daily Telegraph, Louis Ashworth) cites the latest figures from Eurostat which say that the bloc’s output saw pretty sluggish growth in Q4 on Omicron impact and rising energy prices, with particular weakness in Germany being offset by stronger performances from France, Italy and Spain. It will be interesting to see how this changes once tourist-centric countries like Spain start to pick up the pace as travel restrictions are lifted. In the meantime, though, German and Spanish inflation stays high to increase pressure on ECB (Financial Times, Martin Arnold) shows that big increases in energy and food prices have kept inflation at higher-than-expected levels in both Germany and Spain, putting further pressure on the ECB to get off its behind and do something for a change.

Talking about inflationary pressures leading to interest rate rises, Rate rise is a certainty, say markets (The Times, Arthi Nachiappan) shows that financial markets are pricing

in another interest rate rise this Thursday, which would be the first time that it will have done so since 2003. Mind you, financial markets priced in a rate rise in the November meeting and were wrong, so you never know! Having said that, given the noises coming from the Fed at the moment about aggressive rate rises, I think it’s easier for members of the Monetary Policy Committee to be more forthright in its stance. The most recent figures show that UK inflation is running at 5.4%, which it its highest level since 1992 and way above the usual 2% target. I would add that, given Andrew Bailey’s useless communication with the City at the end of last year, if the MPC doesn’t raise rate this time he should be sacked. I know this sounds a tad dramatic, but I think that part of his job is to communicate with the City and just letting imaginations run wild is not a good idea IMO.

Then in Boris Johnson rejects calls to resign after scathing Sue Gray report on lockdown parties (Financial Times, George Parker, Sebastian Payne, Jasmine Cameron-Chileshe and Robert Wright) we see that Boris Johnson continues to battle attacks from all sides to hang on to power. * SO WHAT? * FWIW, I think that now would be a good time to get rid of him if the Conservatives want to stay in office because it looks like we are over the worst of the coronavirus, there are still a couple of years in office and it would be possible to blame all sorts of things on BoJo to make the new candidate look good. The longer he hangs on, the harder it will be for a successor and the more likely it will be for the Conservatives to lose power because I really don’t think that the electorate is going to forget this when it comes to polling time. On another note, I often find myself wondering what would have happened if Corbyn got into power at the last election and how he would have reacted to the Russia/Ukraine crisis given his reported Russia-leanings. Ah well, we’ll never know…

Consumers face more pressures and some supermarkets face tough times…

UK food and drink firms warn of shortages as ‘bailout’ of CO2 industry ends (The Guardian, Joanna Partridge) shows that UK food producers and brewers are warning that meat, beer and fizzy drink prices are set to rise because the CO2 bailout agreed last September ran out yesterday. CO2 is used for putting bubbles in drinks, keeping packaged meat fresher for longer and in the slaughtering process for livestock. CF Industries, an American firm, makes 60% of the UK’s CO2 and the government used taxpayers’ money to keep it going and avoid supply chain chaos. * SO WHAT? * This is another thing that could have serious repercussions for prices and therefore for households’ spending power. On top of the whole utility bill thing, this could really hit household budgets hard. Given that bills make up a higher proportion of poorer households’ disposable income, this is going to be very tough for some unless the government steps in somehow. Again, as with utility bills, maybe targeted help would be a better solution here than to subsidise everyone with another bailout of CF Industries.

Continued pressure on consumers is forcing some to make difficult decisions as per Poor face choice to ‘hear or eat’ as British energy price surge looms (Financial Times, William Wallis and Delphine Strauss), which cites some heart-breaking stories of individuals who just can’t cope with higher prices. The latest official data showed that earnings are rising at 3.8% versus inflation levels that could rise to over 6% by the spring (benefits are only going up by 3.1%), meaning that things look like they will be getting worse, not better, unless something is done. * SO WHAT? * I think that the difficulty with all these things is getting the

benefits implemented quickly but in a targeted manner. Although doing something like cutting VAT on energy bills would, I imagine, be relatively quick to bring in, the problem is that it would help richer households more than poorer ones. The difficulty with means-testing, though, is that more admin is involved and it will, therefore, take longer to implement and may catch people out as a result. I think that things like this show why the Bank of England needs to step up and do its bit to curb inflation by increasing interest rates. OK, so there won’t be much of an immediate effect, but at least it should provide a better backdrop.

On the retailer side of things, Casino profit warning triggers sell-off in food retailer (Financial Times, Leila Abboud) shows that shares in French supermarket operator Casino dropped by a chunky 14% in trading yesterday after it announced a profit warning. It said that the recent Omicron surge dented demand in its city-focused Monoprix and convenience format Franprix. * SO WHAT? * Casino is France’s sixth biggest grocer with 7.5% market share, which is way behind leaders Leclerc and Carrefour with 22.7% and 19.6% share respectively. Carrefour also saw its shares hit yesterday as a result of this news as investors assumed it had suffered similar weakness but I guess things are trickier for Casino as it has particularly precarious finances.

Then in Tesco scraps Jack’s after failure to challenge discounters Lidl and Aldi (Daily Telegraph, Laura Onita) we see that Tesco has decided to ditch its budget food chain, Jack’s, after it failed to make a splash in the discount grocer pond dominated by Aldi and Lidl. Six of the 13 existing outlets will be turned into Tesco’s and the remaining outlets will be shut down. * SO WHAT? * Jack’s hit the scene in 2018, but it was always going to be an uphill struggle given that it was only a miniscule part of Britain’s biggest supermarket. Hopefully lessons will have been learned here but Tesco now aims to take on Aldi and Lidl directly.

Some very interesting acquisitions came to light yesterday…

Citrix Systems sold for $13bn as hybrid working beds in (Daily Telegraph) shows that the US software maker is the first big leveraged buyout of 2022 as Vista Equity Partners and Evergreen Coast Capital (the PE arm of Elliott Investment Management) at a 30% premium to the December 7th closing price, which is when the market started to speculate on the deal. Citrix makes software that helps workers log on to their corporate programs remotely, something that has clearly been a hot area under lockdown. The firms aim to combine Citrix with Tibco Software, an enterprise data management firm that is one of Vista’s companies, to make one of the world’s biggest software providers. Interestingly, Elliott/Vista/Citrix: going back for seconds risks indigestion (Financial Times, Lex) reminds us that this is the second time that Elliott has taken Citrix private. It is doing so now at a price of $104 a share, but last time it waded in at $50 a share in 2015, exiting in spring 2020 at around $140. * SO WHAT? * The problem with Citrix is that although it did well early on in the pandemic from remote working, it failed to convert new customers into permanent ones and it remains to be seen whether Elliott can do a better job than it did the first time, this time around.

Elsewhere, Sony pulls trigger on Halo game maker in £2.8bn deal (Daily Telegraph, Giulia Bottaro) shows that Microsoft’s recent acquisition of Activision Blizzard may have prompted Sony to buy Bungie, the developer behind the Halo franchise, for $3.6bn. This will be the third major acquisition in January after Microsoft’s deal and Take Two Interactive’s purchase of Zynga. * SO WHAT? * It’s interesting to see how Sony, which usually buys smaller

studios and pushes them with its impressive marketing and development resources, has bought a company that has become synonymous with Microsoft and the Halo franchise. It’s all looking a bit like the battle in streaming with the acquisition and development of different franchises, isn’t it? It’ll be interesting to see if there will be an ultimate showdown between console and cloud-based gaming on multiple devices over the next few years as content increasingly goes exclusive on the different platforms.

Then in Constellation snaps up 20% stake in UK car dealer Lookers (Financial Times, Peter Campbell and Sarah Provan) we see that Europe’s biggest second-hand car dealer Constellation Automotive – which owns Webuyanycar, Cinch and British Car Auctions – has bought a 20% stake in UK dealership Lookers shortly after buying rival Marshall Motors. * SO WHAT? * This sounds like Constellation is taking advantage of the boom that we’ve seen in second-hand vehicle sales that have been driven by a shortage/increase in delivery times of new cars and the desire for people to avoid public transport. This sounds great at the moment, but I do wonder whether demand for used cars will fall once delivery times for new cars get shorter. Also, I would expect the demand for used to decline over time as people switch to EVs.

Wordle sells for millions three months after launch (Daily Telegraph, Giulia Bottaro) shows that the The New York Times just bought viral puzzle game Wordle for a sum “in the low seven figures”. Not bad for a game that was played by just 90 people on November 1st and is now played by millions around the world!

The Joe Rogan thing brings up a number of issues, streamers face tough times ahead and Ryanair muddles through…

Rogan bust-up makes Spotify podcasts the talk of the town (Daily Telegraph, Ben Woods) follows on from what I was saying yesterday and makes some very interesting points! Spotify makes 95% of its sales from music, but margins are very thin and it doesn’t own the content. On the other hand, podcasts have the potential to make the company a lot of money as it has the power to increase margins over time. Neil Young Spotify row changes mood music for Hipgnosis (The Times, Patrick Hosking) also makes the point that investors in Hipgnosis, the company that has being buying up back catalogues of various major music artists, may get increasingly nervous about the fact that although the company has paid vast amounts for the rights, it has limited control if the artist decides that they want to take their content off platforms for one reason or another. It is thought that it paid $150m for Neil Young’s back catalogue, but if his songs are taken off Spotify then this could dent earnings. Hipgnosis needs to get control of this ASAP otherwise its value is going to be decimated if more artists protest in the same way.

I know I’ve mentioned this before, but Disney+, HBO Max and other streamers get waves of subscribers from must-see content. Keeping them is hard (Wall Street Journal, Benjamin Mullin and David Marcelis) reinforces the fact that even great content isn’t enough to keep users on the respective platforms. As I have said before, I really believe that there will ultimately have to be consolidation among the streamers at some point in the next few years as the amount they have to spend on content rises and margins get progressively thinner.

Finally, Lossmaking Ryanair turns to discounts as Omicron dents bookings (Financial Times, Harry Dempsey) shows that Ryanair is going to offer flight discounts to stimulate demand as Omicron dented prospects early in the year but Ryanair: near-term uncertainty remains (Financial Times, Lex) implies that things are looking up for the second half and that it is in a better financial position than rivals Wizz, easyJet and Jet2. The whole industry will no doubt be praying for more vaccines, less travel restrictions and no more nasty variants.

…in other news…

I have to say that I really didn’t expect the ending of the prank in Woman leaves table gobsmacked after challenging them to Rock Paper Scissors (The Mirror, Paige Holland). She is absolutely brilliant!