There were two important statements from the CBI on Thursday. One, as you’d expect, was a view on the new UK-EU withdrawal agreement. In short, the employer’s body welcomes anything that lessens the chances of a damaging no-deal Brexit but it warned that “big questions remain about the feasibility of negotiating a new trade agreement deep enough in a 14-month transition period.” Yes, entirely fair.
The other statement was an attempt to end the ridiculous row with Labour over the cost of the party’s nationalisation plans. This one was slippery, to put it kindly.
To recap: the CBI on Monday claimed that a programme of taking energy, water, rail and the Royal Mail into public ownership would cost £196bn. Labour challenged the figure and, as this paper revealed, had good grounds to do so.
The CBI had inflated its number by including the cost of nationalising the existing trains and carriages on Britain’s railways, even though Labour’s policy is importantly different. The shadow chancellor, John McDonnell, merely wants to ensure that new rolling stock, not the current stuff, is publicly owned.
The CBI squirmed for a bit, dodged Labour’s demand for an apology and now comes its considered response. Carolyn Fairbairn, director-general, says “we stand by our analysis of the potential costs” and Labour should publish its own calculations and costings.
The first part of that statement is nonsensical. How can you “stand by” an analysis when your own economists have conceded that the current rolling stock should not have been included? Indeed, the CBI has now provided the sector-by-sector break-down that it should have published in the first place. The rolling stock is put at £13.9bn. So the original £196bn figure should have been £182bn, within a few million.
The CBI can still call that sum “eye watering” if it wishes, even if it’s overlooking the obvious fact that Labour has no intention of paying the assumed takeover premiums and, as importantly, water and energy companies generate oodles of cash that would cover the acquisition interest costs with room to spare.
Fairbairn’s second point – the demand that Labour show its own workings and plans – is much stronger. There are legitimate questions to answer about how to calculate “fair” nationalisation prices, how to overcome inevitable challenges in the courts and how to keep capital flowing into other infrastructure projects, such as windfarms. Labour has been too vague in those areas.
But the CBI, if it’s interested in having a fruitful discussion with the opposition, should start by apologising for its original £196bn figure. It was wrong. One element should have been excluded. So just say so.
US purchase looks odd
The US is known as the graveyard of British retailers. And it’s a rare day when a private equity owner offers a bargain, as shareholders in Aston Martin, the AA, Saga and others can testify. WH Smith seems undeterred on both fronts. It is paying $400m (£312m) to buy Las Vegas-based Marshall Retail Group, a bits-and-bobs US “travel” retailer that has been owned for the past five years by Brentwood Associates, a mid-sized private equity house.
On day one, WH Smith’s shareholders overcame any doubts and applauded management’s pitch about “a compelling opportunity” to get bigger in travel, meaning the market for flogging overpriced bottled water and souvenir key-rings to semi-captive customers in airports and, in Marshall’s case, tourist resorts. A £155m placing of new shares to part-fund the cash purchase received strong support.
This response wasn’t unreasonable because travel outlets around the world have been the making of modern WH Smith. In investment terms, the stock has been a sensation for a decade. The share price was 500p in 2009; now it’s £22. Even greater concentration in travel, as opposed to the tired (but still very cash-generative) UK high street shops, sounds like a bigger push behind the same winning formula.
Life may indeed work out happily since one should never underestimate WH Smith’s talent for forensic control of costs. Yet this purchase still looks slightly odd. Private equity tends to leave little fat to cut. Marshall, having expanded at a net rate of only three stores a year under Brentwood’s ownership, now suddenly has 36 new stores in the pipeline. And WH Smith is getting bigger in the US at a moment when the talk there is about imminent recession.
This deal is “on strategy”, as they say, but it’s not without risk.
