Yearly Archives: 2016

Brexit, sterling and InterContinental Hotels Group (LN:IHG)

August 3, 2016 By in Brexit, currency effects, Lodging, Uncategorized Tags: , , , , , , , 1 Comment

Early indicators after the UK vote to “Leave” the EU are already showing the country is dipping into recession.  Nevertheless, large-cap stocks in the UK have held up surprisingly well.

This can clearly be seen in the results just announced yesterday by IHG.  The fear of markets before Brexit about hotels had been that the post-recession cyclical upsurge in vacationing had just about run its course–and that, as a result, hotel profits were just about to peak/had already peaked.  But the figures from IHG were good and the stock rose by about 3% on the news.

To see how this can be, it’s important to note    that the post-Brexit decline in the fortunes of the UK has been expressed almost entirely in a 10%+ decline in the British currency.  This is an unexpected boon for British-based multinationals.

As Richard Solomons, the CEO of IHG, put it in yesterday’s report to shareholders:

“Note that whilst the UK comprises around 5% of our group revenues,

approximately 50% of our gross central overhead and

40% of Europe regional overhead are in sterling.

At 30 June 2016 exchange rates, approximately 70% of our debt is denominated in sterling.”

All of these figures are now 10% less in purchasing power terms than they were pre-Brexit.  Without any price changes, revenues will be 0.5% lower in dollar terms than they would have been.  But overheads will be down by much more.  In addition, the dollar value of the company’s debt is sliced by about $128 million.

This situation has two positive effects in the minds of UK investors:

–profits will likely be higher than anticipated, making the stock more attractive, and

–to the extent that a company like IHG, which has the lion’s share of revenues outside the UK, is affected by Brexit, the influence is likely to be positive.  This means that it can act as a way for British residents to preserve the purchasing power of their savings.

 

the Tesla (TSLA)/SolarCity (SCTY) merger

August 2, 2016 By in mergers and acquisitions, Uncategorized Tags: , , , , 1 Comment

Yesterday, TSLA and SCTY announced the two firms had reached agreement for TSLA to acquire SCTY in an all stock deal.  TSLA will exchange .11 shares of its stock for each share of SCTY, with closing sometime before yearend.  SCTY has 45 days to shop for a better offer.

Most commentaries I’ve read seem to miss two things:

–the original TSLA proposal said it anticipated an exchange ratio of between .122 and .131 to one, subject to closer examination of SCTY’s books.  The purpose of the range, as I see it, was to put a ceiling on what TSLA would pay for SCTY, no matter what good things it found on closer inspection.

Well, the opposite has happened.  The actual offer falls 10% below the lower bound, suggesting that SCTY looks considerably less great on the inside than its public financials would suggest.

–the combined entity, despite anticipated administrative/marketing savings of $150 million a year, assumes it will need to make an equity financing next year.

 

Overall, however, I think this is a good deal for SCTY.  Although I have traded the stock from time to time, the one thing that has always bothered me about SCTY is its stepchild status in the Elon Musk empire.  I say stepchild because TSLA, not SCTY, owns the Gigafactory, which will supply state-of-the-art batteries to SCTY.  To me, this signaled that TSLA was in the heart of the Elon Musk empire and that SCTY was on the periphery.  The merger changes that.

the Dollar Shave Club and Unilever

July 29, 2016 By in internet, Uncategorized Tags: , , Leave a comment

Unilever has made a $1 billion offer to buy the Dollar Shave Club, an online razor blade (and other grooming accessories) business started from scratch in 2011.

Media reaction to the deal is that this is a story about the power of the internet   …which it partly is.  The big traditional makers of razors and blades, Gillette and Schick, ignored the possibility of alternate distribution channels despite almost two decades of strong evidence of the “creative destruction” power of the internet.

But that’s not the whole story.  Two other, more traditional factors are involved:

–over the past ten years or more, razors and blades from Gillette and other manufacturers have become more complex and much more expensive.  “New and improved” (read: higher-priced) models have been introduced with greater frequency.  This has also been happening at a time when the overall market is stagnating as fewer men are shaving every day.  I can’t help believing that this behavior is at least in part as a way to justify the $54 billion Procter and Gamble paid to acquire Gillette in 2005.

No matter what the cause, however, the result has been to make the ground-level mistake of creating a pricing umbrella under which an online competitor–which, after all, will have higher unit production and distribution costs–could prosper.

–A fundamental rule of marketing is that self-cannibalization of a product market is always preferable to having an outsider grab market share from you.  Gillette et al. should have responded to the emergence of services like DSC by aggressively creating similar online products.  Yes, this may mean that total profits may end up being only 75% of what they once were.  And it means abandoning the illusion that the prior market structure will magically be restored.  But having the 75 for yourself is better than you having 50 and a new entrant having 25.

Pretended that this new competition doesn’t exist won’t make it go away.  Nevertheless, the sad fact is that the first strategy of the status quo is almost always denial.  In the short term, this protects bonuses and perks.  But allowing new competition to flourish is invariably a long-term disaster.

Amusingly, DSC investor David Pakman’s blog offers this strategy tidbit:

  • Choose categories where the CEOs of the incumbents are professional CEOs, not founders (thus are far less-likely to cannibalize existing businesses and adopt new business models).

That says it all.

Nintendo’s press release on Pokemon Go

July 28, 2016 By in Nintendo, Uncategorized Tags: , , 1 Comment

Having the information from yesterday’s post, we can take a closer look at what Nintendo said in its press release from last Friday.  (In what follows, I’m assuming that the English version of the release from the Nintendo website is an accurate rendering of the Japanese.)

The heart of the release is this:

“The Company owns 32% of the voting power of The Pokémon Company. The Pokémon Company is the Company’s affiliated company, accounted for by using the equity method. Because of this accounting scheme, the income reflected on the Company’s consolidated business results is limited.

…Taking the current situation into consideration, the Company is not modifying the consolidated financial forecast for now.”

paragraph 1

True as far as it goes.  Because of equity accounting, Pokemon Company results will have, by definition, no impact on Nintendo’s consolidated gross, operating or pre-tax income.  But the paragraph actually says nothing.

In addition, significant information is left out. Nintendo benefits from Pokemon Go in two ways that don’t appear on the income statement at all.

–Nintendo owns about 10% of Creatures, one of its two 32% partners in controlling The Pokemon Company.  That interest, 3.2% of The Pokemon Company, is accounted for using the cost method, so the portion of Pokemon’s profits that this represents appears nowhere in Nintendo’s income statement

–Nintendo owns about 12% of Niantic, the developer and distributor of Pokemon Go.  If we figure that payments to The Pokemon Company represent 25% of Niantic’s profits, then that firm keeps 75%.  12% of that equals 9% of the total.  In other words, if these figures are approximately correct (I think they are), they indicate that Nintendo profits from Pokemon Go through its Niantic holding by about the same amount that it does through its The Pokemon Company interests.  The Niantic interest is accounted for by the cost method, so none of this appears on the Nintendo income statement.

–some analysts maintain that Niantic also makes direct payments to Nintendo for its use of Pokemon characters.  I’m not sure this is correct, particularly since this money would likely appear on Nintendo’s income statement–but is not mentioned in the press release.

paragraph 2

This is simply Nintendo saying, “we haven’t gotten any money in yet, so we’re not going to speculate.”

 

why nothing more elaborate   ….and potentially more useful in the press release?

Two reasons:

–the release is, I think, a report to the public of a formal reply to a stock exchange query, which was something like, “Given the sharp recent rise in your company’s stock, do you have any reason to raise your estimate of March 2017 consolidated profit results?”

Nintendo is simply answering the question, and in its mind avoiding possible future trouble by saying nothing more.

–many companies, and Nintendo is one of them, are intentionally closed-mouthed.  In conversation with someone they don’t know well, they may start out saying something anodyne, or even intentionally misleading.  They want to see if their interviewer has enough professional knowledge, and has studied their company in enough depth, to be able to challenge them.  Only after an analyst has passed one or more of these “tests” will the company begin to answer questions in a fuller way.  If the analyst flunks, the host is insulted and the analyst is written off as a waste of time.   The interview may still last, say, an hour but the conversation will remain on a superficial level.  This press release is part of the same mindset.