With the benefit of hindsight, one can say that the stock market got wildly overexcited a year ago about the recovery prospects of consumer-facing companies. When the restrictions came off, went the thinking, punters would enjoy themselves and lockdown’s corporate losers would be transformed into winners.
As happens often, an essentially sound idea was overdone. Shares in Mitchells & Butlers, the UK’s biggest pubs group, rallied from 120p in autumn 2020 all the way to 325p in spring 2021 in anticipation of good times ahead. Since then, they have fallen back to 211p. Rival Marston’s has followed a similar trajectory: from 40p to 100p and now back to 58p.
The famed short-seller Jim Chanos was right when, at the height of last year’s bullishness, he diagnosed too much wishful thinking on the part of investors. “The worst thing that can happen to reopening stocks is that we reopen,” he said cutely. Real life is hard, especially when reopening is followed by soaring energy costs, higher food prices, wage inflation and a brutal cost of living squeeze.
There is, though, a fair argument that investors, having overdosed on optimism, are now underestimating the ability of the likes of M&B and Marston’s – two well-run companies – to adapt to tough trading conditions.
Both companies in their half-year reports on Wednesday flagged cost pressures as “a significant challenge for the industry”, as the M&B chief executive, Phil Urban, put it. His group puts cost inflation at 11.5% this year versus 2019 levels, and is assuming 6% for the next year. But both firms also seemed encouraged by current consumer behaviour. “Trading remains stable and we look forward to an uninterrupted summer,” said Marston’s boss, Andrew Andrea.
It may just be the calm before the storm and there are limits to how far menus can be tweaked to mitigate the effects of food inflation. Meanwhile, energy prices – a huge variable in cost bases – can always get worse. Yet it is probably also true that pub companies, when their balance sheets are sound, remain defensive assets with “proven resilience in previous times of economic challenge”, as Andrea argued. The sight of inflation at 9% already doesn’t help, but it’s also possible that much of the current uncertainty is already priced in.
‘Material change’ bar should be set high
Not for the first time in the great Elon Musk/Twitter saga, one can observe that life would be simpler if the scrap were conducted under UK takeover rules.
At the outset, we would have been spared the Twitter board’s flirtation with a “poison pill” defence, a mechanism that would be deemed a “frustrating action” under the UK code and ruled offside. It is also safe to assume that Musk would now be told not to be silly if he tried to argue that a “material adverse change” has taken place because Twitter can’t offer cast-iron proof of the number of fake accounts on its platform.
Back in 2001, WPP tried to escape its offer for the advertising group Tempus on the grounds that the 9/11 terrorist attacks were a material change. It was ordered by the Takeover Panel to go ahead anyway, the thinking being that the value of Tempus could be recovered over time. Similarly, the consortium bidders for Moss Bros were not allowed to pull their offer when the Covid pandemic arrived in 2020.
The point is that the bar for a material change should be set high, otherwise chancers will try their luck. A bit of bother about bots shouldn’t get remotely near the threshold. Musk’s approach is shabby, as argued here on Tuesday.
The US system is more legalistic and its regulators seem all over the place, and so it falls to Twitter’s board to try to force through the deal on the agreed terms. The fact that there’s even a debate, however, is absurd – at least to UK eyes. Under a sensible set-up, Musk would know he’s on the hook with no prospect of wriggling off.
Shareholders have no right to be offensive
Amanda Blanc, the chief executive of Aviva, the target of shockingly sexist remarks at the insurer’s annual meeting last week, fairly wonders if the incident will provoke a rethink on how boards interact with shareholders in future. One hopes it does. Turn off the offenders’ microphone at the earliest moment, tell them to leave the meeting and ban them from next year’s event. Owning a share does not bestow a right to be offensive.