Tuesday 30/07/19

  1. In M&A NEWS, the Pfizer/Mylan deal goes official, the Just Eat/Takeaway.com merger delivers excitement and the LSE/Refinitiv deal puts LSE back into play
  2. In UK HIGH STREET NEWS, Grant Thornton quits as Sports Direct’s auditor while falling rents on retail/commercial property make waves
  3. In INDIVIDUAL COMPANY NEWS, Netflix pays up for expensive new films, Beyond Meat aims for profitability, Ryanair gets downbeat and Fortnite’s creator wants to launch a gaming league
  4. In OTHER NEWS, I bring you stinging nettles…



So Pfizer/Mylan, Just Eat/Takeaway.com and LSE/Refinitiv cause a lot of excitement…

Following on from what I was saying yesterday, Pfizer and Mylan to combine off-patent drugs business (Financial Times, Hannah Kuchler, Eric Platt and Donato Paolo Mancini) shows that the deal went official as Pfizer will combine its Upjohn unit with Mylan to create an off-patent pharmaceutical group (i.e. a group that specialises in making drugs whose patents have expired*). This will help Pfizer to focus more on its higher-value innovative medicines and, as chief exec Albert Boula put it, the new company will be a “champion for global health…by bringing Mylan’s growth assets to Upjohn’s growth markets, we will create a financially strong company with true global reach”. Pfizer shareholders will own 57% and Mylan’s 43% of the enlarged entity, which will have an equity value of around $25bn.

* when pharmaceutical companies come out with a new drug, they get a patent that protects others from copying it for a number of years so they can make money, which is fair considering the MASSIVE costs of getting a drug to market (it takes years of trials and approvals). When this expires (or comes “off-patent”), generics drug makers are allowed to start making it. As you can imagine, when the drug is protected by a patent the pharmaceutical company that makes it can charge quite a lot of money and makes decent profits, but when it goes off-patent and generics makers use the same “recipe” to make the drug the price they can charge falls off a cliff.

Just Eat £9bn merger plan sends shares soaring (The Guardian, Julia Kollewe) shows that investors got excited not only by the prospect of Just Eat and Takeaway.com combining to form one of the world’s biggest online food delivery companies but also that another company could spoil the party by lobbing in a counter-bid. Potential candidates for counterbids include Germany’s Delivery Hero, South Africa’s Naspers, Japan’s SoftBank, Amazon (!) or private equity. As far as the current deal is concerned, though, the new group would be headed up by Takeaway.com’s chief exec Jitse Groen, it would have its HQ in Amsterdam and listed on the London Stock Exchange. * SO WHAT? * As I said yesterday, the deal sounds fair enough from a strategic standpoint, but I would personally be more excited by a merger where there was more overlap because then you can have a bit of integration going on and some cost savings into the bargain. Scale is vital for this business and it is just ripe for more M&A in my opinion, as there are still a lot of smaller operators in this space.

Refinitiv bid puts LSE back in play (Daily Telegraph, Harriet Russell), much like the Just Eat/Takeaway.com deal above, is expected to put the London Stock Exchange back into play as it has, in the past, fended off two approaches from Deutsche Borse and others from Australian bank Macquarie, Nasdaq and the Toronto Stock Exchange. Berenberg analysts said that “LSE has been the target of a bid approach once every two-and-a-half years on average since it listed in 2000. LSE is more than simply the right size and able to be acquired, it also owns assets with real strategic merit”. * SO WHAT? * I guess that if anyone has harboured a desire to own the LSE, yesterday’s news of a deal is surely going to smoke out bidders given that if the Refinitiv acquisition goes ahead, the LSE might be too big to swallow. Exciting times!



Sports Direct loses its auditor while plummeting retail rents are hitting commercial property values…

Grant Thornton to quit as Sports Direct auditor over €674m tax bill (Financial Times, Tabby Kinder and Jonathan Eley) just adds to the catalogue of headaches for the embattled retailer Sports Direct as Grant Thornton notified regulators that it will be quitting as auditor in September. Apparently, the final straw came when Sports Direct revealed a €674m tax bill only hours before the accountancy firm was due to sign off on the annual accounts. * SO WHAT? * I think that Sports Direct is in a very dark place right now. The number of top brass departures is pretty shocking and when you have the “main man” ranting and raving and talking about a 29-year old (whose only qualification appears to be that he’s about to marry Mike Ashley’s daughter) as being the future of the company, it’s all sounding rather desperate. If you compound that with massive and expensive failure with House of Fraser, accountancy firms all turning down the prospect of doing the company’s accounts and major sportswear manufacturers shying away from supplying the company’s core business with their best gear, you’ve just got to wonder whether Ashley’s empire is all going to come

crashing down. On the auditing front, if no-one sticks their hand up to do the accounts, the Department for Business can force an appointment. Like I said yesterday, I bet Debenhams are quite pleased they didn’t get involved with him – but then again, they’ve got their own problems. I would be willing to put a tenner on Debenhams going out of business completely/shutting down if not before Christmas, shortly after.

High street pushes rents into reverse across the board (The Times, Louisa Clarence-Smith) cites findings from property advisory firm CBRE which show that rentals for high street shops, shopping centres and retail warehouses fell by 1.1%, 1.2% and 3.1% respectively in the three months to June. CBRE senior research analyst Robin Honeyman said that “Downward pressure from the retail sector [is] pushing ‘all property’ rental growth into negative territory. A decline of 0.2 per cent in the second quarter is the largest fall in ten years”. * SO WHAT? * Fall in retail property values deals hammer blow to profits (The Times, Louisa Clarence-Smith) shows the effect that all this is having on landlords such as Hammerson as lower rents are hitting the value of property portfolios. The proliferation of CVAs – plus now, the successful retailers negotiating improved rental terms – will keep the downward pressure on retail property valuations, which could then spiral lower because landlords will resort to selling off properties to shore up their balance sheets. With more properties coming onto the market, prices will edge down even further. Not a great time to be a retail landlord.



Netflix invests big in films, Beyond Meat aims for profitability, Ryanair cites turbulence and Fortnite’s creator wants to launch a gaming league…

Netflix splurges on big-budget movies (Wall Street Journal, R.T. Watson and Ben Fritz) highlights Netflix’s decision to spend over $520m on making three major films (Red Notice, 6 Underground and The Irishman, if you wanted to know!). The company says that its movies attract around a third of viewers, while the rest want the TV series. It is spending big in order to retain its over 150m existing subscribers and get new ones. * SO WHAT? * TBH, I think that many of the Netflix Originals movies are distinctly average – surprising when you consider who stars in them and what the budgets must be. I mean, “Bird Box”, anybody?? I just hope that they won’t just keep chucking money at Hollywood studio cast-offs forever because even Netflix can run out of money. Let’s hope that the company finds a winning formula soon that will keep existing and attract new subscribers. Proprietary content costs a huge amount to produce, but at least it’s yours and you can’t get it snatched from under your nose like other content. Still, I believe that there will come a time when people reach “peak subscription” and the streaming industry will have to consolidate IMHO.

Beyond Meat on track to deliver profit this year (Wall Street Journal, Jacob Bunge) highlights the company’s success in its first quarterly results announcement as the company hiked up its 2019 sales forecasts to triple the

2018 level and aims to hit profit from 2020 onwards. It had almost quadrupled its sales over the quarter and its share price has shot up by almost 800% since it floated in May. HOWEVER, it then announced that there would be a big sale of 3.25m shares, which prompted a 13% fall in the share price in after-hours trading. If you want to get a bit more detail on Beyond Meat and its meat-alternatives brethren, have a look at my short guide HERE. * SO WHAT? * Given that the distribution and demand for its product continues to grow from strength to strength, it would seem to me that this share sale is a blip (as long as there’s nothing sinister lurking). I agree that it’s not cheap, but it’s products are already getting a reputation and the demand is increasing all the time – not just domestically, but abroad too. There’s still plenty of growth to be had here IMHO.

Things weren’t quite so rosy in Ryanair warns of possible job and flight cuts (Wall Street Journal, Doug Cameron) shows that the continued grounding of Boeing’s 737 MAX could lead to job cuts and fewer flights in next year’s peak summer season. Ryanair had been due to get delivery of its first 135MAX jets that it ordered last April, but it hasn’t happened because of the grounding. * SO WHAT? * Tough times for Ryanair, but even tougher for Boeing as it has the ever-present threat of Airbus breathing down its neck.

Then in Fortnite developer to launch gaming league worth ‘millions’ (Daily Telegraph, Tom Hoggins) we see that Epic Games is to introduce a new competitive esports league called the Fortnite Championship Series, full details to be disclosed at a later point. It is due, however, to start during Fortnite Season 10 and will “bring together the world’s best players”. * SO WHAT? * A great idea and something I expect to catch on in a VERY big way.



And finally, in other news…

I thought I’d leave you today with Man becomes World Stinging Nettle champion after devouring 58ft of the plant (The Mirror, https://tinyurl.com/y2o8cre2). A pointless way of spending time IMO, but maybe it’s something quirky to put on his CV 😜 The women’s winner said “I am thrilled to have won. My tongue is black today but I feel fine”. Can’t argue with that!

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Some of today’s market, commodity & currency moves (as at 0838hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq**DAX *CAC-40 *Nikkei **Shanghai **
7,687 (+1.82%)27,221 (+0.11%)3,021 (-0.16%)8,29312,417 (-0.02%)5,601 (-0.16%)21,709 (+0.43%)2,952 (+0.39%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)