TheChek News Flow

Report from Office for Students warns ‘significant changes’ needed to ‘funding model’

Universities in England face a looming funding crisis as a result of a fall in student applications, with some requiring deep cuts to avoid closure, the sector’s regulator has found.

The warning will be issued in the Office for Students’ annual report on the financial health of the sector, which will be published on Thursday morning.

The report, extracts of which have been seen by the Financial Times, finds 40 per cent of England’s universities expect to be in deficit in the 2023-24 academic year, with an “increasing number” showing low levels of cash flow. 

“An increasing number of providers will need to make significant changes to their funding model in the near future to avoid facing a material risk of closure,” the report will say.

The findings come as the higher education sector battles with Rishi Sunak’s government over plans to restrict further the number of lucrative international graduate students who come and study in the UK.

The government removed the right of overseas graduate students from bringing family members, and increased the salary threshold for skilled workers from £26,200 to £38,700, contributing to a sharp drop-off in applications.

Last week the head of the Russell Group of top-tier universities warned any further reduction in overseas recruitment would lead to a “significant destabilisation of the sector, [and] result in less spending in local communities, fewer opportunities for domestic students and less UK research”.

The OFS annual statement notes a sharp deterioration in the financial outlook for the sector compared to last year’s report, which said “overall we are not currently concerned about the short-term viability of most providers”.

The report also finds current data on student applications indicates numbers have declined this year, which it said “contrasts starkly” with earlier aggregate forecasts that there would be a 35 per cent increase in international students and a 24 per cent rise in domestic ones.

The report will say: “Data on undergraduate applications and student sponsor visa applications indicates that there has been an overall decline in student entrance this year, including a significant decline in international students.”

More than 50 UK universities are making budget and job cuts as a result of the growing financial pressures caused by the drop-off in overseas students, and a decade-long freeze in the annual £9,250 tuition fees paid by domestic students.

The Russell Group of elite institutions estimates universities are losing £2,500 a year on average per student, a figure that is set to rise to £5,000 by the end of the decade.

The OFS said it was “concerned” about the decision some universities were making in response to mounting financial risk. “Across the sector as a whole this may over time reduce student choice: in some subject areas, or in some regions, or for some types of students,” it added.

Earlier this week the government’s independent adviser on migration concluded a 14-week investigation into the UK’s visa graduate programme with the finding that it was not being abused, and should remain in place.

Still, the government has indicated it is considering further restricting the route, because it believes too many overseas students are applying to lower-ranked universities.

Professor Brian Bell, chair of the Migration Advisory Committee, told MPs there was limited “compelling evidence” that the graduate route was essential to raise the skills level of the UK’s domestic workforce, but remains vital for universities’ finances.

The department for education did not immediately reply to a request for comment.

Glencore chief backs South Africa as Anglo takeover battle rages

Gary Nagle’s praise came hours after the country’s storied miner announced it would break itself up

Glencore chief executive Gary Nagle issued a robust defence of South Africa’s mining sector as speculation continued that the Swiss commodity house could yet mount a rival bid for all or part of Anglo American.

In a rare statement of support for South Africa’s mining industry from a chief executive, Nagle praised the tax regime and said infrastructure and power problems in the country were manageable.

“If you look around the world, we have seen changes in royalties across the board — except for South Africa. They have not touched royalties and taxes,” he told a conference in Miami on Tuesday. “Yes, it has issues on infrastructure and power, but the industry can work together to deal with that.”

Nagle added that there had been “recent strong improvements” at state-owned rail operator Transnet. “We think Transnet will go to a public-private partnership and will continue to improve.”

His comments came hours after Anglo, one of South Africa’s most storied companies, announced that it would break itself up to thwart a £34bn bid by its Australian rival BHP.

Mining has long been a bedrock of the South African economy but in more recent years the sector has struggled, beset by electricity outages, crumbling infrastructure and labour disputes.

In response, several foreign mining companies have reduced or exited South African operations, and BHP’s offer — including improved terms on Monday — excludes Anglo’s iron ore and platinum businesses in the country.

BHP, which demerged its own South African operations in 2015, has said the deal structure does not reflect a negative view of the country as an investment declaration. The South African government, however, has criticised the decision to exclude the South African assets.

Glencore has extensive operations in the country and strong relations with the government. Nagle is a South African national who rose up through Glencore’s South African coal business, as is former chief executive Ivan Glasenberg, who remains the company’s biggest shareholder.

Those connections and other potential synergies between parts of Glencore and Anglo have led some investors to suggest Glencore would be a better potential buyer than BHP.

Glencore has not commented on whether it is considering an approach. It is the most naturally acquisitive of the mining majors, having been built by Glasenberg, who favoured buying existing assets over developing new mines.

Mining analysts at Berenberg on Tuesday wrote that they still expected Glencore to make a move. “We would also expect, at some point, Glencore to show its hand and likely submit its own proposal to merge with Anglo American.”

In South Africa, it is unlikely Glencore would want to acquire Anglo’s platinum operations. Glencore does not produce the metal and when it merged with Xstrata in 2013 it inherited a stake in South African platinum producer Lonmin, which it later sold.

In contrast, Anglo’s South African iron ore business, Kumba, would be attractive to Glencore, shareholders and analysts have said.

Glencore does not produce iron ore but trades about 100mn tons a year and is keen to grow.

“It’s a great business that provides value for customers,” Nagle said at the conference.

When Glencore sells iron ore to a client it can often sell them other steelmaking ingredients at the same time, like nickel, metallurgical coal and manganese, he added. “The benefit of having iron ore in the portfolio is not just from making money, but providing those customers with the commodities they need.”

Brussels scrambles to avoid being dragged into trade war between Washington and Beijing

New US tariffs on Chinese goods are set to redirect shipments to Europe and put increased pressure on Brussels, which is scrambling to avoid being caught in the trade war between Washington and Beijing.

President Joe Biden on Tuesday slapped tariffs of 100 per cent on Chinese electric vehicles and tripled the rate on steel and aluminium. He increased tariffs on solar cells to 50 per cent and said the rate on semiconductors would be doubled from 2025.  

“The US has sent a very clear message that it wants minimum Chinese participation in its green transition,” said Yanmei Xie, a geopolitics analyst at Gavekal Research. “The EU being the remaining large developed market with green ambitions and generous subsidies will be a must-have market for Chinese exporters of clean-energy products.”

The US move came as the European Commission is struggling to protect domestic green technology industries from cheap Chinese competitors, with EU officials stressing that Brussels lacks the powers to compete with Washington and Beijing in a global trade war.

They predicted that the US measures would likely increase an already uncomfortably large European trade deficit with China — €290bn in 2023, and that Brussels was actively looking to deploy its available “powers” to address that imbalance.

“The EU cannot stay idle since it will be the key target for Chinese products. This means more pressure to impose countervailing duties,” said Alicia García-Herrero, the chief economist for Asia-Pacific at French investment bank Natixis.

She said Chinese President Xi Jinping appeared to ignore requests by EU leaders to address overcapacities during a trip to Europe this month. 

“The EU cannot do much but lift tariffs. I think we are heading for a trade war.”

A senior EU official said Brussels was attempting to co-ordinate with western allies such as the US to avoid “taking different action” on Chinese overproduction and the “flooding” of products on the single market “which is really problematic for us”.

But the EU is hamstrung by an insistence that all its trade measures are WTO compliant, another official said, adding that breaching those rules would create a far worse situation that would negatively affect all sides.

Xie played down the impact of WTO-compliant trade protections the EU is able to roll out, saying that they will be “no match to Chinese manufacturers’ proven ability to scale up, cut cost, and devise workarounds”.

Investigators for the commission must painstakingly gather evidence that could survive a legal challenge, and tariffs can only be set at levels commensurate with the distortion.

Analysts expect such tariffs to reach 25 per cent when a probe into subsidies for Chinese EVs finishes within weeks, far below the US level of 100 per cent. 

Rhodium Group, a US consultancy, has calculated that such a level would still leave EU sales more profitable for Chinese companies than domestic ones, and therefore have little impact. 

The bloc remains split on taking more muscular action against Chinese companies, also for fear of possible retaliation against European businesses.

Chancellor Olaf Scholz warned against tariffs on Chinese cars this week — given the exposure of many German carmakers to Beijing’s retaliation. Scholz was joined by Sweden’s premier Ulf Kristersson, whose national carmaker Volvo is owned by China’s Geely.

Still, the EU has recently taken more aggressive steps against Chinese companies, with commission officials last month raiding Nuctech, a maker of scanning equipment, in an anti-subsidy probe.

Brussels has also used newly acquired powers to force Chinese bidders to pull out of solar park and train contracts and to warn Beijing of restricting its access to the EU’s medical device market unless it opened up to EU manufacturers.    

One official pointed out that the US imported far fewer Chinese EVs than Europe.

A commission spokesperson said Brussels shared the “US concerns on overcapacity and unfair trading practices . . . and is addressing them via its own instruments and in line with WTO rules.”

EU policymakers are also concerned about the precedent the US measures set for a potential return to the White House by Donald Trump, who imposed 25 per cent tariffs on steel and 10 per cent on aluminium imports from the EU, and has signalled that he would expand such measures if he wins the election in November.

“Biden has just handed a blueprint to Trump and given him the all clear,” said one EU diplomat in response to the measures. “If [Trump] wins in November, we can expect similar treatment.” 

Eurostar plans up to 50 new trains and more services to tap ‘huge’ demand

Operator wants to open new routes from London and increase fleet by a third

Eurostar plans to buy up to 50 new trains and is considering launching more international routes from London to take advantage of “huge demand” for rail travel across Europe.

Gwendoline Cazenave, chief executive of the train operator, told the Financial Times the company was in “a race” to increase capacity and that this would require more space at some stations. 

“There is huge demand for our services,” she said. 

Eurostar merged with Thalys, a train company serving France, Belgium, the Netherlands and Germany, to form Eurostar Group in 2022. It is one of Europe’s biggest high-speed rail operators.

The enlarged company is in talks with train manufacturers for an order for up to 50 new trains, Cazenave said, adding that these would replace older rolling stock and increase the size of the fleet by a third from 51 to 67 trains. 

Cazenave said Eurostar was “definitely” considering opening new routes from London to Europe, adding to its current services between London, Paris, Amsterdam and Brussels.

“With a new fleet we will study new routes, new European routes . . . I think by the end of the year or early 2025 we will be able to say more.” 

Eurostar’s cross-Channel service was having significant problems getting passengers through some of its stations, including St Pancras in London, largely because of passport checks that were introduced in 2021 after Brexit.

But Cazenave said these snags had been resolved, with average queueing times back to pre-Brexit levels, thanks to new passport gates and governments providing more border control officers. 

Eurostar’s terminal in Amsterdam is being expanded, while Cazenave said she expected St Pancras and Paris Gare du Nord to be redesigned to make more space over the next five years. “At the stage of the new fleet [arriving], we will have bigger stations,” she said.

Still, Eurostar faces a potential headache from new EU biometric border checks, due to be introduced this year.

Cazenave said she was confident passengers would not face big queues, and that the owners of St Pancras plan to redesign parts of the station to make more space for travellers going through the extra border checks.

Eurostar also faces potential competition on the cross-channel route.

The operator of the Channel Tunnel told the FT this month that five companies — including Virgin Group, a consortium backed by the largest shareholders in Mobico, formerly known as National Express, and Dutch start-up Heuro — were “seriously” interested in launching train services between the UK and Europe. 

About 400 trains a day use the tunnel, including freight and car-carrying services. It has capacity for 1,000. 

During the pandemic, Eurostar was forced to shrink to avert bankruptcy and stopped using two stations — Ebbsfleet and Ashford — in south-east England.

Cazenave said that while Eurostar had no plans to reopen these stations, it is focusing on growth following a strong performance in 2023. “When I see people say Eurostar is shrinking it drives me crazy, because it’s really not true,” she added.

Passenger numbers rose from 14.8mn in 2022 to just under 19mn last year, driving a 26 per cent increase in revenues to €2bn. Earnings before interest, taxes, depreciation and amortisation climbed 8 per cent to €423mn.

The company has reorganised and cut its debt from €964mn to €650mn over the past year.

Cazenave said one of the most important factors in choosing a manufacturer would be how quickly the new trains could be delivered.

“It’s a race. The sooner the better. The market is pushing so hard, that we really need to see which manufacturer is going to be able to be ready as quick as possible.”

Comments come after watchdog said he supported new rules that could increase capital requirements

UBS chief executive Sergio Ermotti has lambasted Swiss authorities for allowing Credit Suisse to fail, as his bank fights back against growing calls within the country to increase UBS’s capital requirements.

Ermotti, who was brought back to UBS just days after its state-orchestrated rescue of Credit Suisse last March, criticised the oversight of the fallen bank in a speech on Wednesday.

“It’s especially confusing, if not extraordinary, to see many of the people who were in charge over the years saying they did everything correctly in relation to the management and supervision of Credit Suisse,” he said at the University of Zurich.

“Everyone who was involved needs to critically analyse the role they played and face up to their responsibilities. It takes courage to own up to shortcomings. But we must learn from past mistakes.”

His salvo comes a day after the new head of Finma, the Swiss financial regulator with supervisory responsibility over the country’s banks, said he supported new rules proposed by the finance ministry that could significantly increase UBS’s capital requirements. Analysts have predicted that the rule change could lead to between $15bn and $25bn of additional capital for UBS.

“Fourteen months after the Credit Suisse rescue, we are in the midst of an intense and often superficial debate over whether UBS is too big for Switzerland,” Ermotti said on Wednesday. 

“To be honest, it’s quite surprising how quickly UBS went from being perceived as a saviour to a potential future problem for the country.”

Much of the growing animosity stems from a report published by the finance ministry last month, which included a proposal that banks with international businesses should be forced to hold higher amounts of capital.

Ermotti told analysts at the bank’s first-quarter results last week that UBS had not been consulted on the proposals, even though as the country’s most global lender, it would be hit the hardest.

While the report did not contain any details about what the requirements could look like — and they are not due to be put forward to the Swiss parliament until next year — finance minister Karin Keller-Sutter has indicated that analyst estimates of $15bn and $25bn of additional capital is “plausible”.

On Tuesday, Stefan Walter, the new head of Finma, told a banking conference in Switzerland that he supported UBS increasing its capital on foreign subsidiaries.

“The more difficult it is to resolve a bank, the higher the precautionary capital buffers need to be,” he said. “We will keep a very close eye on this.” 

Also commenting on the capital rules this week, IMF managing director Kristalina Georgieva told Swiss media outlet SFR that the agency had concerns about supervision of the Swiss finance industry as far back as 2019.

She added that she expected other countries to follow Switzerland’s lead and propose increasing the capital requirements on their banks in response to the failure of Credit Suisse and several US lenders last year.

The Munich-based luxury website transcends a struggling, highly promotional sector.

Mytheresa continues to shine in a consolidating sector.

The Munich-based luxury website reported a 17.6 percent gain in net sales growth to 233 million euros in its fiscal third quarter ended March 31, from 198.9 euros in the year-ago period. Gross merchandise value rose to 252.2 million euros, from 219.8 million euros in the year-ago quarter.

Adjusted net income rose to 4.1 million euros in the latest quarter, from 1.4 million euros in the year-ago period.

Mytheresa narrowed its bottom-line net loss to 3 million euros from 5.1 million euros in the year-ago period. Two significant costs — the ramp-up of the distribution center at the Halle/Leipzig Airport in Germany, which began operating last fall, and share-based compensation — impacted the bottom line and were excluded from the adjusted figure.

The gross margin slippage further decreased, from 740 basis points in the first quarter and 490 basis points in the second quarter to 220 basis points in the third quarter, suggesting Mytheresa was able to navigate the severe promotional environment in luxury. Also, Mytheresa’s inventory levels are starting to come down and “normalize,” according to company executives. While inventories were up 11.9 percent last quarter, that’s well below the revenue gains and lower inventory growth than in previous periods.

With its momentum continuing, Mytheresa expects to ultimately generate annual volumes in the billions, but there is a ways to go considering that in fiscal 2023 Mytheresa generated 768.8 million euros.

Still, the company has been gaining market share in the struggling digital luxury sector. Saks, Neiman Marcus, Net-a-porter, Matches — which is in bankruptcy — and Farfetch, which was sold to South Korea’s Coupang earlier this year, have all been experiencing difficulties.

“Our focus remains on organic growth, but we may look at inorganic growth,” Michael Kliger, chief executive officer of the Munich-based Mytheresa, told WWD, commenting on the potential for an acquisition. “We’re not desperate. We don’t need a deal.”

Media reports have focused on Mytheresa exploring the possibility of purchasing Net-a-porter. Kliger would not comment on that or any other potential acquisition target.

By midday Wednesday, after Mytheresa posted its third-quarter results, its stock price was down 0.8 percent, or 4 cents, to $4.96.

Kliger told WWD that the U.S. and top-spending customers, which he defined as those spending six digits or more annually, were the two key growth drivers in the third quarter.

He said Mytheresa in the U.S. saw 41.6 percent GMV growth last quarter, and that the region represented 22.3 percent of the total business. The U.S. now represents Mytheresa’s largest market.

“The other major driver is our top customer growth,” Kliger added. “In the third quarter, the number of top customers grew 17 percent. Their average spend grew by 3.3 percent.”

Kliger also said the average order value in the quarter increased by 8 percent to $692. He acknowledged that some of the gain was due to inflation, particularly on bags.

He singled out fine jewelry as a highlight during the quarter. “We are adding more brands and moving the average price ticket to $20,000 and reaching up to $100,000.” Among the women’s fine jewelry brands added to the assortment since September are Kamyen, Bucherer Fine Jewellery, Ananya, Marina B, Anita Ko, Jennifer Fisher, Marie Lichtenberg, Lauren Rubinski and Roxanne First.

“We feel very well positioned with strong growth in the U.S. The macro is improving. Consumer sentiment is improving. U.S. consumers are spending more,” Kliger said, adding that Mytheresa’s “highly curated approach focused on the high end” attracts more spending. “Luxury consumers look for inspiration. They really want a curated presentation,” he said.

During his third-quarter conference call, Kliger said, “Our core customer base, which are the top spenders, is very healthy. The U.S. is the strongest region, Europe is stable, and in Asia we still see uncertainties.”

He also said that the aspirational customer is “coming back. We do observe green-shoots on the aspirational customer.” For several seasons, the aspirational side of the luxury business has been soft, while “true” luxury has performed well.

“The strongest brands are what you can characterize as quiet luxury,” Kliger said, citing Loro Piana and Brunello Cucinelli. “I do believe fashion will come back. It will be good for the sector and quiet luxury brands will continue, although the market has missed some of the more fashion-forward customers and that needs to come back.”

Earlier, in his prepared statement, Kliger said: “We see ourselves as one of the few winners in an otherwise still-tough market environment. We clearly gain market share with our above-average growth rates. We are benefiting from the consolidating landscape of luxury e-commerce players in a market that has huge growth prospects based on changing customer preferences favoring digital channels.”

In its third-quarter posting, Mytheresa listed several initiatives, among them:

• Exclusive capsule collections and pre-launches with Gucci, Bottega Veneta, Saint Laurent, Loewe, Givenchy and Brunello Cucinelli.

• “High-impact” top customer activations including a dinner with Khaite in Paris and three events with Courrèges at Shanghai Fashion Week, featuring an exhibition, designer talk and dinner.

• Improved net promoter score of 80.6 percent.

• Launch of Mytheresa Retail Media services to provide selected brand partners with paid media placements.

• Continued ramp-up of the distribution center in Leipzig, Germany, with more than 60 percent of all customer orders processed at the end of March.