Well done, everyone, for keeping the stock market alive and kicking while I took a three-month sabbatical, mostly spent cruising round South America with little scope for panic selling.
The FTSE 100 index hit a new peak on New Year’s Eve 2016. The last time it did that, in 1999, a three-year bear market followed. History has not repeated itself thus far and more record highs have been set. UK equities continue to offer a fantastic hedge against the fall in the value of the pound.
I returned to confront the signing of Article 50, starting the Brexit process. I will not add to the reams written on the subject except to express astonishment that some commentators seem surprised that markets have not reacted much to the event. We’ve know about it for the past nine months, for heaven’s sake. If you are only just reacting, wake up at the back.
Brought to Booker
I was slightly disappointed with the trading update from cash-and-carry expert Booker (BOK). Normally I take little interest in updates from a company that is being taken over, as Booker is by supermarket giant Tesco (TSCO), because the target company’s share price, and therefore any decision whether to get out, is set by the bid terms.
There was admittedly a glitch this week when two major Tesco shareholders, holding 9% between them, raised objections to the deal, arguing that Tesco is overpaying. That is a sizeable combined stake but it is not enough to block the deal and it is notable that other large shareholders have not offered public support. I think the deal will go ahead and that shareholders in both companies should work on that basis.
Back to the Booker update. Once again sales are rising but two points bothered me. One was the decline in tobacco sales, which Booker blames on plain packaging and removing displays of tobacco products in retail outlets. Tobacco companies argued that these measures would not reduce consumption but would merely confuse smokers. There are serious implications here for all retailers and for the tobacco companies themselves.
The second point was that the growth in sales has slowed in the latest quarter. Tesco is paying a heavy premium for taking over a highly successful company with excellent prospects. The big fear is that, in order to recover those costs, Tesco will destroy the very thing that it so covets. What makes anyone think that Tesco management can run Booker better than Booker management? If, indeed, Booker’s growth is easing off already then the problem becomes all the greater.
Admittedly Sainsbury (SBRY) secured a great deal by buying Argos, which is currently doing better than the supermarket side. I fear that Tesco chief executive Dave Lewis feels obliged to attempt a similar coup just to show who’s boss. That’s not a valid reason.
Booker shares have slipped back from a peak of £2.12 immediately after the deal was announced in late January to below £2. Well done if you sold at the top. If you stayed in, you may as well continue to hold. This company is still on an upward trend even if the Tesco deal unexpectedly falls through and I do not believe that Tesco is in any position to try to negotiate cheaper terms for the takeover. The downside for Booker is limited.
Tesco shares were sliding even before the Booker deal was announced. I cannot see any case for buying them at this stage. I hold Sainsbury shares but if I were wanting to buy a supermarket now I would go for Morrison (MRW), although a lot of recovery is already factored into the share price.
