David Prosser: JJB presents its landlords with animpossible decision
There is no pretending landlords can be pleased with what has happened at JJB and they will be more cautious in the future
Friday 04 March 2011
Outlook It is not the most appetising of choices. The proposal presented by JJB to the landlords of around 90 of its shops is pretty brutal: let us halve our rent payments over the next two years or we'll have to put the company into administration, in which case you'll get nothing.
Presented with this sort of choice, many of us would be tempted to tell JJB where to stick its company voluntary agreement (CVA). If it can't pay its rent at the agreed rate, why don't landlords get someone in who can?
The answer lies in the fact that the commercial property market is stacked against landlords. Almost one in seven of Britain's shops stands empty, rising to one in three in the most blighted towns (and you can assume JJB is talking about its most underperforming locations with this CVA). So even if landlords were able to find a tenant to replace JJB, they would expect to face a tough negotiation – probably one generating less rent than JJB is offering to pay. Here's the good news. Though many analysts are sceptical, JJB's new management team appears to believe genuinely that if it can get this restructuring away, a new business model focused on specialist sports retailing makes it a viable business. The handful of stores that have already been converted to this sort of format are performing strongly, it argues.
Moreover, the structure of this CVA is a new departure for the insolvency industry. It offers creditors who accept the deal an additional payment in 2013 if the company has proved able to put its troubles behind it.
In other words, JJB is offering some jam tomorrow while asking landlords to accept pain today. This is the first time a retailer has offered a share of the upside in a CVA. Nevertheless, there is nopretending that landlords can be pleased with what has come to pass at JJB – and it is likely to make them even more cautious in their future dealings with retailers.
The pioneers of the CVA model say that such restructurings, for the first time, offer a way for businesses to right themselves that stops short of full insolvency – and that this is in the interests of everyone, including their creditors. Maybe so, but the fine print from KPMG, JJB's adviser, reveals that the deal is the equivalent of offering landlords around 29p for every £1 they are owed.
That's 28p more than KPMG reckons they'd get back from an insolvency, but it is still 71p gone begging.
What will News Corp have to pay for Sky?
So, just how much is BSkyB worth to Rupert Murdoch's News Corp? A great deal, clearly, given the high stakes poker game it has been playing for the past three months – and winning, judging by yesterday's announcement from the Culture Secretary.
There is certainly no chance of BSkyB's board reconsidering its view last year that 700p, News Corp's opening offer for the shares it does not own, was at least 100p short of a fair price. The question is how much they will hold out for.
Mr Murdoch can blame his son James for the high price that is being demanded. Eight years ago, when the media mogul appointed his then 31-year-old son chief executive of Sky, there was a revolt from shareholders concerned that nepotism had ruled over good business practise.
In fact, Mr Murdoch proved to be a transformational boss for the company, turning it into the growth stock that Sky has become. His achievement was to recognise that Sky's loyal subscriber base was hugely under-exploited: TV packages were poorly cross-sold and the possibility of selling telephone and broadband services had not been explored.
Having addressed that, Mr Murdoch moved to a bigger job at News Corp, leaving a business that is hugely attractive just in terms of the cash it generates, even leaving aside the strategic opportunities the merger now offers. Sky's board knows its value and is legally obliged to ensure its shareholders do not miss out.
A specific valuation is very difficult to arrive at – there has not been a comparable deal anywhere in the world, which might provide a yardstick.
For what it's worth, the stockbroker Charles Stanley reckons that on this year's forecasts, a bid of 800p would value Sky at around 20 times' earnings – and that this would be pretty undemanding for a company where earnings growth shows no sign of slowing.
The market agrees, pricing Sky at around 820p yesterday. The Murdochs are going to have to play another shrewd hand to get this business at a price closer to 800p than 900p.
There's life in the banking sector yet
All is not lost for those who worry about the lack of competition in Britain's banking industry. We wait with interest to see what Sir John Vickers' independent review of the sector comes up with later this year – and competition is likely to prove a more fruitful line of inquiry for him than structural risk – but in the meantime, some new entrants are emerging at last.
Take Metro Bank, which got its banking licence a year ago on Saturday and has since opened five branches (another seven will follow in 2011). It's a South-east-only venture for now and it is early days, but so far the model has been much more successful than almost anyone – its backers included – were expecting.
Then there is Aldermore, the new banking venture that makes loans to business: its funding of small and medium enterprises had climbed to £410m by the end of last year, it said this week, double the total at 2009.
These banks remain small players, but in a competitive environment in which KPMG predicted yesterday that the big banks would all begin charging for current accounts within five years, their emergence is welcome. Over to you, Sir John.
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