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Thursday, 28 November 2013

Royal Mail major shareholders to be asked if shares were too cheap

Commons business committee plans to write to large investors as part of bid to find out if state-owned postal service was undervalued

Royal Mail investors who bought large stakes in the postal service following its £3.3bn privatisation last month are to be asked by MPs why they have staked hundreds of millions of pounds on the view that the government sold the firm on the cheap.

The news emerged after the Commons business committee investigating the Royal Mail flotation questioned the business secretary, Vince Cable, and his ministerial colleague Michael Fallon how the offer was valued, prompting an assertion from Cable that there was no need for an independent inquiry into the process.

Committee chairman Adrian Bailey said he will be writing to the The Children's Investment Fund (TCI) and GIC, Singapore's sovereign wealth fund, which have built up their Royal Mail stakes since its listing to more than 6% and 4%, respectively – having decided the shares would rise far above their 330p flotation price.

He said: "Yes, we might well want to [write to major new shareholders to ask why they value Royal Mail so highly]. We are reviewing the transcript [of evidence] to identify areas to follow up."

The committee has been investigating whether the taxpayer has been shortchanged by the Royal Mail flotation, in which 60% of the shares were sold to outside investors last month. The share price has since soared by about 70%, prompting criticisms that the government could have demanded a higher price. The Bow Group, a thinktank led by former prime minister Sir John Major, has called for an independent inquiry into the privatisation.

When asked if he thought an inquiry was required, Cable replied: "Absolutely not. We think this is a good process for the taxpayer."

He added that the valuation was only one criteria in deciding whether or not the taxpayer had received value for money, as the company could have withered – and its services put at risk – without access to private capital to invest in its future.

"Bearing in mind the set of objectives which we set at the very beginning ... the value for money is partly dependent on the offer price, it's partly dependent on the continuing value of the state's [30%] share, and it's partly dependent on what happens to the company. If the company isn't able to invest successfully [in its business], you could be left with a serious casualty. When we take all those things together, I think the conclusion will be, when people have settled down, that this has been a very professional well-managed and successful operation."

Royal Mail floated at 330p a share when the government sold 600m shares last month. Once the shares began trading on the stock exchange, they quickly soared. The shares were up 5% on Wednesday afternoon following the group's first results statement as a public company, changing hands at around 563p.

Also being questioned alongside Cable and Fallon were Mark Russell, the chief executive of Shareholder Executive which holds state stakes in businesses, and William Rucker, the chief executive of the government's main financial adviser, Lazard.

Russell said the government had been taken by surprise by the surge in the share price, telling the committee: "We did not anticipate the share price to move to the extent that it did."

He added, however, it had been anticipated that the shares would rise following privatisation, which was part of the reason why the government had retained a 30% Royal Mail stake. Typically, the City hopes the shares rise by around 10% on the first few days of trading following a flotation.

Bailey also asked the witnesses if it was predictable that Royal Mail shares would surge so strongly, with the offer was 20 times oversubscribed by investors.

Lazard's Rucker claimed not: "A lot of the orders [for shares] that go into the books ... there is a heavy element of gaming. The three biggest orders were $1bn each. That would have represented 20% of the company. Those institutions had no expectations of ever receiving anything like that quantity of the stock."

Article Source : http://www.guardian.co.uk
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Tesco planning same-day delivery as it battles rivals

Move would see the UK's biggest online grocer competing with Ocado and Asda

Tesco is preparing to offer same-day delivery for online groceries as it fights to shore up its struggling UK business and take on rival services by Waitrose, Morrisons and Asda.

The move would see the UK's biggest online grocer competing with Ocado, the company which delivers Waitrose groceries and is set to offer the same service for Morrisons shoppers in Warwickshire early next year. Bigger rival Asda is also planning to introduce same-day grocery deliveries next year.

Tesco is already trialling same-day deliveries of food in Mansfield, Nottinghamshire, under which shoppers can order goods by midday for delivery by 6pm. Simon Belsham, managing director of grocery home shopping, said: "The trial is working successfully and we are looking to roll that out further."

The news emerged as Tesco opened a 120,000 sq ft centre near Erith, south east London, its sixth dedicated online distribution centre for food. The supermarket uses the "dark stores" – so called because they are not open to the public – in addition to picking groceries for online shoppers from 300 stores. Belsham said Tesco, which controls 47.5% of all online grocery sales in the UK, needed to build capacity because online sales were growing faster in London than elsewhere.

Tesco continues to increase market share online, despite losing ground in its stores. A flurry of notes from City analysts earlier this week suggested the supermarket was set to reveal another set of poor underlying sales next week, putting pressure on boss Phil Clarke, who is trying to turn the business around.

The Erith centre, which will be able to process up to 4,000 orders a day when it is running at full capacity, uses hi-tech warehouse technology to enable it to offer 30,000 different items, 50% more than the average store and 16% more than the five other dark stores.

Belsham said that would allow Tesco to offer more specialist ethnic foods and upmarket lines helping it to appeal to a broader range of shoppers in London.

Meanwhile Tesco is also piloting a collection service at its small Express stores for groceries ordered online. The service is run out of a Tesco delivery van parked behind stores in Datchet and Harrow. Belsham said that combining stores and online services was an important part of Tesco's future.

New RBS chief Ross McEwan denies 'systematic' profiteering

McEwan admits damaged reputation but says bailed-out bank did not wreck businesses to gain assets

Royal Bank of Scotland's new boss admitted on Wednesday night that the reputation of the bailed-out institution has been seriously damaged by allegations that it is deliberately wrecking small businesses in pursuit of profit.

But Ross McEwan, who started as chief executive last month, fought back against the claims made by Lawrence Tomlinson, an adviser to business secretary Vince Cable.

The allegations against the 81%-taxpayer owned bank, in a report published on Monday, have prompted the interest of City regulators and the Serious Fraud Office (SFO).

McEwan said the bank had not received any evidence of a systematic effort to make money from customers by pushing them into its turnaround division, known as the global restructuring group (GRG).

Pledging a full investigation by law firm Clifford Chance, McEwan said: "It is important to note that the most serious allegation that has been made is that RBS conducted a 'systematic' effort to profit on the back of our customers when they were in financial distress.

"We do not believe that this is the case, but it has nonetheless done serious damage to RBS's reputation. No evidence has been provided for that allegation to the bank."

Tomlinson makes allegations in his report – compiled from evidence he had received from businesses – that RBS was pushing businesses into its GRG division, which in turn was buying up properties through its specialist property arm West Register to make a profit.

Sir Philip Hampton, the chairman of RBS, called the allegations "unsubstantiated" and "anecdotal" in an interview with the BBC in which he said the bank had dealt with tens of thousands of customers in distress since the crisis. "If there are facts that show we have behaved in the wrong way then we will take appropriate action," said Hampton, who acknowledged the bank may have been "too heavy" in some instances.

RBS has not received the details of the individuals and businesses used by Tomlinson to compile his report, which Cable has already handed to City regulator the Financial Conduct Authority. The FCA is expected to conduct a detailed analysis of the allegations.

The SFO has not launched a formal investigation but said: "We are aware of the issue and monitoring developments."

The identities of individual customers are not contained in the Tomlinson report – in order to protect their relationship with RBS – but about 20 examples are thought to be attached to the report sent to regulators and the Department for Business.

In his report, Tomlinson, a Yorkshire-based entrepreneur who is also a customer of RBS, said he had "shocking examples of business owners being confronted with last minute demands for information and money" that have forced their businesses over the edge. Tomlinson also called on all banks to look at the way they handle businesses in distress and for the FCA and the government to consider if the current rules are robust enough to protect customers. Lloyds Banking Group is also named in the report but does not face the same criticism as RBS.

RBS was one of the biggest lenders before the 2008 banking crisis and at one stage was responsible for 50% of all property loans to small businesses. A report the bank commissioned into its own lending practices, also published on Monday, by former deputy Bank of England governor Sir Andrew Large, said it had contracted its lending after the crisis too quickly.

McEwan said: "RBS played a big role in the lending boom that led to the UK's economic crisis. After the crash, tens of thousands of our customers saw their asset values plummet and ended up in serious financial difficulty. This was an economic crisis for Britain, but it was also a very personal tragedy for many families and small businesses around the country."

Concerned that the allegations will undermine trust in the bank – already battered by a £390m Libor fine and a mounting bill to compensate small businesses missold interest rate swaps – McEwan insisted the Clifford Chance review would be independent. It would report back by 31 January after scrutinising the main findings of the Tomlinson report, interviewing bank staff and customers and reviewing samples of loans.

Clifford Chance would also advise RBS on whether the allegations appear to have substance and make recommendations about steps, if any, should be implemented as a result.

Wednesday, 27 November 2013

Law firm Clifford Chance analyses Royal Mail's property portfolio

Evaluation comes amid criticism that property portfolio may have been undervalued and Royal Mail sold off on the cheap

Clifford Chance, the "Magic Circle" City law firm with links to some of the leading investors in Royal Mail, has been privately analysing the newly floated company's portfolio of 2,000 UK properties.

News of the evaluation comes a week after MPs on the Department for Business, Innovation & Skills select committee probed bankers on the value of the newly privatised company's property portfolio, amid criticisms that it may have been undervalued and that Royal Mail sold off on the cheap. Vince Cable and Michael Fallon, the ministers who led the controversial flotation, are set to appear in front of the committee on Wednesday.

It is not clear which client has engaged the law firm, but Clifford Chance has previously represented organisations including the Children's Investment Fund and GIC, Singapore's sovereign wealth fund, who are two of Royal Mail's largest shareholders.

The Guardian understands that Clifford Chance has received a report containing details of around 800 properties held by the Royal Mail subsidiary Royal Mail Estates which are registered with the Land Registry in England and Wales.

The portfolio includes a string of sorting offices and plots of land – such as the Mount Pleasant and Nine Elms sites in central London which are part of three property redevelopment plans already predicted to make Royal Mail around £300m. Around 95% of the portfolio is freehold property.

As a large proportion of the portfolio consists of sorting offices, investors are unlikely to be able to dispose of them for a quick profit as the business needs the sites to operate. However, analysts have estimated that there could be around £100m of Royal Mail properties that are surplus to requirements, while the fact that the group owns so many freeholds was always likely to attract certain sections of the property industry, at a time when businesses selling their properties for cash and then leasing them back appears to be coming back into fashion.

A spokesman for Royal Mail said the company had "pursued" sale and leaseback in the past, but it was not currently "a key part of our strategy".

However, the UK supermarket group Morrisons announced in September that it would review its £9bn property portfolio with a view to doing such a deal.

The Morrisons announcement came only five years after Sir Ken Morrison, the chairman who led the company for 50 years, said that sale and leaseback was anathema to the grocer.

Aside from the 800 properties registered to Royal Mail Estates, there are further sites in Scotland and Northern Ireland, while the remainder that take the total to 2,000 are largely made up of leasehold sites that Royal Mail has occupied for less than 10 years.

Royal Mail floated last month at an initial value of £3.3bn, but the shares quickly soared prompting criticisms that the taxpayer may have been shortchanged. When the stock exchange closed on Tuesday evening, the company was worth £5.3bn.

Ofgem not a 'toothless tiger' in fight against rising energy prices, insists boss

Andrew Wright tells MPs he agrees with consumers who think the retail energy market is not working well

Ofgem boss Andrew Wright says he understands public anger at rising energy prices but has denied his organisation is guilty of "feeble regulation".

Wright acknowledged "deep distrust" of the big six energy companies – British Gas, npower, SSE, Scottish Power, E.ON and EDF – as some customers face price rises of more than 10% as winter kicks in.

Addressing MPs on the Commons energy and climate change committee, Wright said rising prices, years of aggressive doorstep selling, confusing tariffs and complexity when consumers wanted to switch providers had all created negative perceptions of the industry.

"I completely understand why people feel frustrated and angry about rising energy bills. Prices have more than doubled over the last 10 years at a time when incomes have been squeezed, and consumers are not convinced that price increases that they see are either fair or justified," he said.

"Consumers have a perception that the market is not working well and that's something that we agree with. We think the retail market is not working as well as it should do."

When asked whether Ofgem was a "toothless tiger", failing to address rising prices and accusations of unfair profit taking among companies, he said it was acting within its statutory regulatory framework and rejected the idea he was supportive of the rises.

"I never said it was OK. I have not said this level of profit is right or acceptable. If companies imply we think 5% is right, we've never said that."

He said that politicians were right to debate the issue of rising energy price rises but when questioned about Labour leader Ed Miliband's promise to freeze prices he did not appear to be enthusiastic.

"The sort of things we would consider are, does it have an adverse impact on consumers and on the investment that's needed?

"It is obviously necessary to allow companies to recover the revenues that they need to be able to run their businesses effectively. They should have no guarantee of profits but an efficient business serving customers should be able to recover the costs that they incur. So any arrangement that doesn't allow them to do that potentially puts at risk investment in the industry."

His comments came a day after Ofgem published a report which found that profits per customer rose by 77% last year, from £30 to £53, driven by higher prices and increased demand for heating during last year's cold weather.

The average profit margin for supplying energy to households in 2012 was 4.3%, up from 2.8% in 2011, with total profits from supplying energy to households and businesses rising from £1.25bn to £1.6bn last year.

Local government cuts unfair to north-east, say councils

The average council in the north-east will lose £665 per person against £305 in the south-east by 2017-18

Councils in the north-east of England will lose more than twice as much funding per person as those in the south-east over the next five years, according to a local government lobby group which says government cuts are widening England's economic divide.

A group of mainly urban councils says its calculations, based on cuts already pushed through and changes in local funding to come, suggest the average council in the north-east will lose £665 per person, compared with £305 in the south-east, by 2017-18.

Sigoma, the Special Interest Group of Municipal Authorities, representing large towns and cities in the northern, Midlands and south coast regions of England, accused the government of pushing some councils to breaking point and warned: "Any economic recovery may bypass parts of the UK."

But the government rejected the calculations and pointed to other figures suggesting some northern councils have considerably more spending power than the national average.

Sigoma, which is part of the Local Government Association, said its report took into account new funding structures and welfare changes. It argued that the changes meant councils suffering the largest cuts were often those facing the highest costs.

Its report, timed to coincide with an opposition day debate on the cost of living, said: "The government has failed to consider the cumulative impact of their reforms on councils, only assessing one change at a time. The large number of changes means that the same councils are being hit again and again with cuts in funding. Following years of disproportionate funding cuts councils have had to find significant savings so far; with opportunities for further savings now harder to find and given the rising cost of adult social care, some services are now at breaking point."

The councils are calling on the chancellor, George Osborne, to heed their warning that services will suffer as he prepares to present his autumn statement next week, when he will outline government tax and spending plans.

Steve Houghton, Sigoma chair and leader of Barnsley council, said his group's assessment "shows the government's complete disregard for the mounting pressure faced by certain councils and the pain it is causing their residents".

He added: "The government must make fair funding a key priority to allow councils to provide essential services without the growing distraction of a service failure."

However, local government minister Brandon Lewis rejected the report. "This crude lobbying exercise is based on made-up extrapolations designed to scaremonger rather than inform public debate. Council funding is fair to north, south, rural and urban areas. It is distributed to ensure the smallest reductions for the councils most reliant on government support," he said.

He referred to documents from the House of Commons library that showed that north of England councils have more spending power per household than their southern counterparts. "This year Newcastle has a spending power per household which is £300 more than the national average and £700 more than Wokingham, for example," Lewis added.

Labour says it will use its opposition day – when opposition parties can choose a topic for debate – to highlight a "growing cost of living crisis" across Britain caused by prices rising faster than wages. The party says London, Yorkshire and the Humber, the North West, Wales and the East of England have seen the biggest falls in real wages since 2010.

A separate report warns of a growing north-south divide in the jobs market as a southern construction boom fuels demand for workers in the south.

The focus on homebuilding and infrastructure projects like Crossrail in the South has seen almost half of the 55,663 construction vacancies advertised in October fall in London and the South East, according to a monthly labour market report from jobs search website Adzuna. Only 6% of advertised vacancies were in the North West and 3% were in the North East.

Across all sectors of the economy nine of the top ten cities to find a job are in the South, where there are twice as many vacancies as jobseekers, Adzuna said. Nine of the worst ten cities to find a job are in the North, with more than 20 jobseekers for each vacancy in Salford, the Wirral, Sunderland, and Hull

Tesco's grim trading update will prompt questions about chief's strategy

Tesco is expected to unveil another grim trading update next week which is likely to prompt new questions about whether the turnaround strategy of chief executive Phil Clarke is working.

A flurry of City analyst research notes out yesterday predicted disappointing sales data when the UK's biggest grocer reveals its third quarter sales update. Barclays, Shore Capital and Deutsche Bank all expect no progress in the grocer's crucial UK market - which still accounts for 70% of group profits - after flat sales at the time of the last update.

Retail analyst James Collins at Deutsche Bank, Tesco's joint house broker, is forecasting a 1.5% decline in the most recent like-for-like UK sales.

He said: "We expect third-quarter like-for-like trends to have deteriorated in most markets versus the second quarter, most notably in the UK, Thailand, Ireland and Korea."

Barclays' James Anstead is predicting a 1.8% drop. He said: "It seems unlikely that Tesco's third quarter trading statement will be the turning point that the market is looking for."

Shore Capital's Clive Black is expecting a sales decline of 1-2%.

Tesco was one of the biggest FTSE-100 fallers. The shares lost more than 2.5% to close at 345p. Two years ago they were changing hands at 405p. JP Morgan yesterday cut its price target from 335p to 315p, Deutsche Bank reduced its target from 405p to 386p.

Tesco's main problems are in the UK, where it is losing business to upmarket rivals like Waitrose and the hard discounters, especially Aldi and Lidl. It is also struggling to catch up with a move away from big weekly shopping trips to out-of-town hypermarkets and a shift to online shopping.

Last week research group Kantar reported that all four of the big UKsupermarkets were losing market share, for the first time in more than a decade.

Clarke is 18 months into a £1bn transformation plan for Tesco's UK stores, which ranges from employing more store staff to revamping tired hypermarkets, improving the food on the shelves and trying to make faster headway in online shopping.

In an interview with the Sunday Times last weekend, Tesco's chairman Sir Richard Broadbent admitted the grocer had become too inward-looking over recent years and "had lost touch with the outside world". He said that a turnaround would not be rapid and that innovation - such as Tesco's new Hudl tablet computer - was key to the retailer's revival.

But at Tesco's last financial results it became clear that the grocer also has substantial problems overseas. Clarke, who led the international business before he took over the top job, reported declining like-for-like sales in every one of its international markets, which spread from Turkey to Thailand. Profits in Europe were down more than 70%.