TheChek News Flow

Selfridges Enters Consultation Period, Looking to Save Cash and Reorganize Head Office

The business has more than 1.7 billion pounds in debt as a result of rising interest rates.

LONDON — Staff at Selfridges are undergoing a summer reshuffle as the luxury department store tries to reduce costs.

Its new owners, Thailand’s Central Group and the Austrian property company Signa, bought Selfridges in 2021 for 4 billion pounds from the Weston family, but have since loaded up the business with more than 1.7 billion pounds in debt as a result of rising interest rates.

“We are in the process of reviewing how best to structure our head office to best deliver for customers. We will work through the details of this with our teams through the consultation process,” a spokesperson from Selfridges told WWD over email.

“Specifically, we’ve been reviewing how [our] head office, including some small teams in retail who support our stores, are organized to best deliver for our customers. Our store and restaurant team members are not part of this review,” the spokesperson added.

Store staff are understood to be unaffected by the consultation period, which is expected to run for 45 days. Jobs cuts are expected to happen in the coming weeks. Usdaw, a trade union, said it would be getting in touch with Selfridges.

At the end of 2022, the business had filled around 2,800 jobs across its office and stores.

According to figures filed on Companies House in August last year, Selfridges was provided with a 1.7 billion pound loan from the London branch of Bangkok Bank.

The department store also received another loan from EFG Bank, a Swiss-registered bank, for an undisclosed amount.

For the year ending in January 2022, Selfridges revenue sat at 653.4 million pounds, an increase of 28 percent from 2021, which was at 508.5 million pounds despite the stores being closed at the beginning of 2021.

The operating loss was 38.1 million pounds, lower than the previous year. The company cited the closure of stores for the loss.

Central and Signa have a 50-50 partnership.

As part of the deal, they purchased Selfridges’ Oxford Street flagship and its stores in Manchester and Birmingham, England; de Bijenkorf in the Netherlands; Brown Thomas and Arnotts in Ireland, and their associated e-commerce platforms and the properties in London, Manchester and Ireland.

Central and Signa’s combined existing portfolio includes 22 luxury department stores and two stores under construction in Düsseldorf and Vienna. They are the owners of KaDeWe, Oberpollinger, and Alsterhaus in Germany, and Globus in Switzerland. Central wholly owns Rinascente in Italy, and Illum in Denmark.

As reported, by 2030 the partners are targeting 9 billion euros in total sales from their overall retail portfolio. Over the past 10 years they’ve plugged 1 billion euros into the stores in their portfolio, and will invest a similar amount in the next few years.

Selfridges may be the biggest group in the joint portfolio, but the partners’ plan is to treat it like the rest of the properties in its portfolio, as the pride of the city.

Fund managers grow more gloomy over outlook for European stocks

Bank of America survey finds investors nervous about high valuations after second-quarter earnings season

Large institutional investors are growing increasingly worried about the outlook for European stock markets, following a disappointing round of second-quarter results.

Bank of America’s monthly survey showed that a net 71 per cent of global fund managers expect stock markets in Europe to weaken in the coming months, up from 66 per cent in July.

Meanwhile, concerns about equity valuations have risen to their highest level for three years, with a net 29 per cent of fund managers describing stocks in the region as overvalued.

The region-wide Stoxx 600 index has risen about 7 per cent so far this year, although it hit a five-week low on Tuesday amid a global sell-off in stocks as investors fret over the health of the Chinese economy and concerns that US interest rates may stay higher for longer to curb inflation.

European equities are trading on a 12-month forward price-to-earnings ratio multiple of about 12.6 times, just below the long-term average.

Underwhelming earnings reports for the second quarter by European companies have contributed to the downbeat mood among fund managers. While 44 per cent of European companies exceeded analysts’ earnings forecasts for the second quarter, misses were reported by 30 per cent of companies, according Morgan Stanley.

Giorgio Magagnotti, an equity strategist at Morgan Stanley, noted that the average one-day share price reaction to a company beating earnings per share forecasts in the second quarter was a rise of 0.81 percentage points, compared to a decline of 1.65 percentage points for missing forecasts.

“Share prices continue to underperform more when a company misses expectations than outperform when it beats [analysts’ forecasts],” he noted.

Earnings per share for listed European companies in aggregate are expected to decline 1.8 per cent this year, according to the consensus forecast among financial analysts. Earnings for the energy and material sectors are predicted to drop by 29.7 per cent and 33.2 per cent, respectively, in 2023, offsetting an increase of 13.8 per cent for tech companies.

However, the survey also showed a net 31 per cent of global fund managers do not expect the global economy to shrink into recession over the next 18 months. That is more than double the 14 per cent that held that view as recently as June, but it still leaves a majority — a net 60 per cent — of fund managers expecting a global recession before the end of next year.

Meanwhile, the UK stock market has started to attract more attention from fund managers as confidence in the outlook for continental equities has weakened.

Sentiment towards the UK improved markedly in August with a net 24 per cent of managers running with an overweight position early this month, a sharp reversal from July when the net underweight stood at minus 8 per cent. The FTSE 100 has underperformed continental peers this year, down 0.9 per cent.

“Investors have become more positive about the outlook for energy stocks, a key sector for the UK equity market, on the back of rising oil prices and renewed weakness for sterling which provides a boost for UK-listed oil majors,” said Andreas Bruckner, a BofA investment strategist in London.

The bank is forecasting that the price of Brent crude will average $90 a barrel in 2014, up from $80 this year.

UK to fall behind in growth of low-carbon power output, study finds

Britain last out of eight biggest economies in adding further clean electricity generation

Growth in the UK’s low-carbon power generating capacity is set to fall behind all the other big global economies for the rest of the decade, according to new study.

Electricity output from renewables and nuclear in the UK is set to grow by an average 2.9 per cent per year between 2023 and 2030, research by the consultancy Oxford Economics found.

This is the slowest rate among the world’s eight largest economies, with India set to grow the fastest at 10.6 per cent, followed by China at 7.2 per cent, the US at 6.4 per cent, and Germany at 5.8 per cent.

Energy UK, the trade group that commissioned the research, said the findings underlined why the UK government needed to do more to support the renewables sector. It said the “downbeat forecast” reflected “low levels of expected investment in the UK” as rival countries including the US and China boost incentives for investors. 

The release of the findings coincides with the first anniversary of US president Joe Biden signing into law the Inflation Reduction Act, which offers a $369bn package of support for US clean energy and climate projects.

The huge subsidy package has raised concerns in the UK renewables sector that it will be left behind as others, including China and the EU, respond with similar green investment programmes.

The UK government has also come under criticism from climate campaigners for signalling that it was prepared to water down its green commitments in the run-up to the next general election, which has to take place before January 2025.

“With growing global competition for private investment that can choose its location, a failure to respond will see us quickly fall behind and jeopardise ambitious targets for increasing our own sources of clean energy and decarbonising our whole economy,” said Emma Pinchbeck, chief executive of Energy UK.

The UK has long been one of the world leaders in removing fossil fuels from its power sector and is second only to France in terms of low carbon output from generation. Low carbon sources including wind, solar, biomass and nuclear accounted for 56.2 per cent of UK electricity generation last year.

Emily Gladstone, senior economist at Oxford Economics and one of the authors of the report, said this explained to some extent why the UK would fall behind as other economies catch up.

The study put France’s growth rate slightly ahead of the UK at 3.1 per cent, while Japan is forecast to grow at 3.2 per cent, and Italy at 5.2 per cent out to the end of the decade.

The UK government has set a target of 2035 to decarbonise the electricity system, as one step towards its net zero carbon emissions target by 2050.

Last month, Swedish wind developer Vattenfall halted plans for a new offshore wind farm off England’s east coast, saying rising costs meant it was no longer viable under the fixed electricity price it had agreed with the government.

Jess Ralston, head of energy at the Energy and Climate Intelligence Unit think-tank, warned that a “lack of clarity” from the government could see the UK fall behind in terms of green investment.

In a statement the government said: “We won’t apologise for moving faster and earlier on clean energy than many other countries,” adding: “We have already attracted around £120bn investment in renewables since 2010 . . . with a further £100 billion private sector investment across low carbon sectors expected by 2030.”

TPG approaches EY about buying stake in consulting arm

Deal with private equity group would allow Big Four firm to revive break-up plan

Private equity group TPG Capital has approached EY about buying a stake in its consulting arm in a deal that would herald a second attempt at breaking up the Big Four firm.

TPG outlined its plan for a debt-and-equity deal to separate the consulting arm from EY’s audit business in a letter sent to the firm’s global and US bosses. The consulting business could then be floated on the stock market at a later date, according to the letter, which was seen by the Financial Times.

The approach comes after the firm in April called off a plan, codenamed Everest, to spin off its consulting business via an immediate initial public offering that it hoped would bestow the new company with an enterprise value of about $100bn.

US-listed TPG, which manages about $137bn of assets, did not put a value on the consulting business in its letter.

A separation of EY’s consulting arm would mark the biggest overhaul in the accounting profession since the collapse of Enron auditor Arthur Andersen more than two decades, which reduced the Big Five to the Big Four.

Global bosses have argued a separation would free EY from conflict of interest rules that prevent consultants working for audit clients. TPG echoed that argument, suggesting a deal could unlock tens of billions of dollars of value.

The previous transaction, known as Project Everest, was abandoned after months of infighting and dissent from some US executives. 

TPG’s approach raises the prospect of a revival of the plan and comes at a delicate time for EY, which has not yet chosen a replacement for global chief executive Carmine Di Sibio. He championed Everest and is stepping down next year after its failure.

It also threatens to reopen internal divisions that surfaced during talks over Everest, which leaders are now trying to heal. Any deal would need the backing of EY’s biggest national firms, which are separately owned by the partners in each country.

It is unclear whether EY has responded to TPG. But one person familiar with EY’s internal discussions said: “The expectation is that the organisation will not pursue this expression of interest.” EY and TPG declined to comment.

Under the plan, EY’s audit operations would continue to be owned entirely by the partners who run it, and TPG would make an equity investment into the standalone consulting arm. It said it was “highly confident” that it would be able to commit the sums required “from both TPG funds and our limited partners, without the participation of other financial sponsors”. 

The consulting arm would also raise debt and the transaction proceeds would be used for cash payouts to audit partners and to settle other liabilities, TPG said.

The structure mirrors Everest, which would have handed the average US audit partner a multimillion-dollar windfall for parting with their stake in the consulting arm. Consulting partners would have taken a cut in their cash compensation in return for shares in the standalone arm. 

The private equity group said its proposal would offer “transaction certainty” and came with “lower capital markets execution risk” than Everest. That plan was thwarted partly by falling equity market valuations that would have made it more difficult to raise funds to pay audit partners.

“The private nature of the transaction we are proposing affords us the ability to effect the separation with more leverage than would be available in a public setting,” TPG said. This would reduce the dilution of EY’s partners’ stakes in the business and create a “superior equity value opportunity for all parties”, it added.

Everest envisaged loading about $19bn of debt on to the consulting company, which would have had annual revenues of about $25bn. EY had total revenues of $45.4bn in the year to June 2022.

A private transaction would be “a first step” to taking the consulting business public “on a de-risked timeline”, TPG said. 

Project Everest would have moved most of EY’s tax practice to the standalone consulting business but some of EY’s US executives objected because they wanted the audit firm to retain a larger part of the tax division. TPG indicated it was open to redrawing the planned split of the tax business.

“We remain highly flexible with respect to the division of the tax business . . . and would be comfortable with [the audit firm] retaining a majority portion,” it said. 

The proposed deal had been reviewed by TPG’s investment committee, including the group’s chief executive Jon Winkelried and president Todd Sisitsky, it added. TPG has asked EY for a 90-day exclusivity period to negotiate a deal.

A weak currency offers an incentive to boost oil exports just when Saudi Arabia reduces supply

The rouble is a petrocurrency. Crude oil is a quarter of Russian exports, the largest component. Brent, still the international benchmark for oil, has risen by a fifth in the past two months. Despite that, Russia’s currency has sunk nearly as much against the dollar. On Monday alone it lost some 2 per cent. One might expect the two to move more in tandem.

Russia must be feeling increasingly desperate to lift exports of crude. But it has promised Opec+ to cut its output by 500,000 barrels a day from this month.

Do not blame the coalition of western states for its $60 a barrel price cap on Russia’s Urals blend. That clearly has not worked. The price of Urals has climbed to more than $73 in recent weeks, narrowing the discount with Brent. Indian buyers, for example, are willing to pay up for Russia’s crude from producers such as Lukoil and Rosneft, according to analysis by the Financial Times.

In rouble terms the international Urals price has soared 60 per cent since mid-June. The promise to Opec+ leaves Russia pressing its nose against the glass of a metaphorical sweet shop window.

It could use more export revenues. Its current account surplus has dwindled in parallel with falling energy export revenues and higher arms imports. Inflation may start rising. Producer price indices could increase by 20 per cent year on year in the second half, believes Capital Economics, a consultancy. Russia’s central bank president Elvira Nabiullina may soon raise interest rates.

No surprise, local share prices on the Moscow Exchange have soared as an inflation hedge. State-owned Rosneft’s stock is up more than 50% this year in rouble terms. Even global energy shares of a typically sedate kind have again found their mojo. The MSCI all-country world energy index has outrun its broader world market benchmark since the spring.

The weak rouble offers Russia an incentive to boost oil exports just when Saudi Arabia reduces supply, partly to support this fellow member of Opec+. That relationship is not sustainable.