Best of Lex: your weekly round-up

Dear readers,

August is an odd month for business watchers. Financial centres are semi-deserted and companies avoid making scheduled announcements. Headlines are dominated by offbeat news, including stories companies would prefer were never written.

The quirk quotient was pumped up early this week when Great Wall said it was interested in buying Fiat Chrysler. Lex registered scepticism even before the Chinese automaker appeared to back away from its ambition. Great Wall’s market capitalisation of $15.5bn is about $1bn less than that of its Italian-American peer. Moreover, Fiat Chrysler has net debts of about €3.4bn and a €5bn pensions deficit.

China’s quasi-communist government — in whose omnipotence many western capitalists have a deep, if paradoxical, faith — might help finance such a marquee deal. One cannot imagine US president Donald Trump showering confetti over the nuptials.

Lex reckoned Fiat Chrysler chief executive Sergio Marchionne was more likely to bow out by breaking up the business. A flotation of Jeep and other rufty-tufty US SUV brands, accompanied by a share sale, ought to cover the liabilities of the rump runabouts business, we reckoned.

Three themes then vied for space across Lex’s column inches: property, profits warnings and investment prophets.

The Fiat Chrysler episode suggested Chinese bidders sometimes resemble the “time-wasters” who “need not apply” to old-fashion “items for sale” ads. But when Dalian Wanda backed away from buying a £470m stake in London property, two other Chinese developers stepped in. Chinese investment in UK commercial property remains brisk, despite the neuroses Brexit is inducing in the locals.

Tenanted skyscrapers are of particular interest. Lee Kum Kee, a Chinese foods group best known for its oyster sauce, recently bought a high-rise nicknamed the Walkie Talkie. It paid a price 13 per cent higher than the previous valuation.

We also delved into UK house prices. As the usual suspects published monthly estimates of slowing growth, we were struck by the divergence between the share prices of estate agents (down) and housebuilders (up). Despite their sharp suits and slick patter, estate agents have been hit by a vendors’ strike, particularly in the capital.

In contrast, housebuilders such as Barratt and Persimmon have been helped by buyer subsidies and a lag between prices for houses and the land they occupy. Exposure to the nation outside the overheated metropolis has been an advantage.

Provident Financial is reaping little benefit from poorer districts, however. The subprime lender was the first of three big UK companies to warn on profits or sales. On Tuesday, it admitted switching from self-employed to company-employed debt collectors had failed badly. On Wednesday, Martin Sorrell, boss of WPP, cut the sales outlook for the advertising giant. The next morning, gadget retailer Dixons Carphone slashed 2017-18 profits forecasts by 20 per cent.

Structural change looks like a problem in all three cases. Provident’s shift to staff debt collectors partly reflects the declining viability of door-to-door collection and growing regulatory risks. WPP’s traditional business of creating newspaper and TV adverts is being disrupted by the internet, albeit that Google and Facebook are among its clients. Dixons Carphone faces the mournful prospect of declining demand for new smartphones. These could become as commoditised as the toasters it also sells.

Our analyses prompted thoughtful responses from readers, either embracing the structural explanation or disputing it. Some of you were also exercised by poor recent returns from funds run by Neil Woodford, the closest thing the UK has to a rock star fund manager. He is heavily invested in Provident Financial, among other struggling businesses.

Lex reckoned some of the losses ought to reverse in a bear market — Mr Woodford is a contrarian with a taste for defensives. We think he is more likely to come a cropper with his Woodford Patient Capital Trust than his flagship income fund. Some retail investors may not understand the risks implicit in the illiquid tech investments it holds.

US investment legend Warren Buffett suffered a reversal too this week. Energy group Sempra topped his $9bn offer for power transmission company Oncor. Mr Buffett’s company Berkshire Hathaway does not do auctions. Better to walk away than overpay.

Have a pleasant weekend,

Jonathan Guthrie,
Head of Lex
Email the Lex team at

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