The TV network is bringing easyJet’s chief, Carolyn McCall, on board. What will that mean for the two firms? Alice Gråhns reports.
“With the airline industry in perpetual revolution, not to say crisis, there was never going to be a good time for Dame Carolyn McCall to quit easyJet,” says Robert Lea in The Times. Just a couple of months ago, she unveiled a “miserable set of 2016 numbers, hit by a cocktail of the impact of terrorist attacks, air-traffic-control strikes and the devaluation of the pound that meant travel for its British costumers, its key market, immediately became 15% more expensive”.
Despite that, her departure to run media company ITV comes at a time when easyJet’s shares are up 50% in the past six months and they trade at a higher multiple of earnings compared with its rivals Ryanair, Wizz Air and Norwegian. The question now is where easyJet should look for her successor.
The good news for anybody who wants the job is “that the incumbent will take care of the most immediate challenge”, says the Financial Times’ Lex column – McCall will stay in charge until the end of this year. “The bad news is that bigger, less wieldy risks lie over the horizon.” EasyJet is expanding its capacity over the next couple of years, mostly by adding larger aeroplanes to existing routes.
But as low fuel costs may encourage rivals to add capacity, yields could come under pressure. Unlike Ryanair, easyJet pays regular dividends, which partly reflects the priorities of its founder and major shareholder Stelios Haji-Ioannou. McCall’s successor will also have to navigate the challenges of Brexit. All told, “it is enough to make running a free-to-air broadcaster look easy”.
Not so fast, says Jim Armitage in the Evening Standard. McCall will have a tough job in her new role. “The media and advertising world has shifted so dramatically against free-to-air broadcasters, only the brave would see ITV as a growth prospect.” Much of the support for ITV’s shares this year has been the hope that it’s a bid target, so hiring McCall “could actually be bad in the medium term”.
Whether she can convince investors that ITV “is more than a declining legacy business remains to be seen”, says Leila Abboud in Bloomberg. ITV’s net advertising revenue fell last year for the first time since 2012. Her best bet is to finish the diversification job started by her predecessor Adam Crozier, by beefing up ITV’s production business. In fact, she “should go further”: such deals make ITV itself more attractive as a takeover target. “McCall’s best line of attack is surely taking the Crozier approach, but ratcheting things up a notch on the production push.”
Reckitt‘s special sauce for profits
Consumer-goods giant Reckitt Benckiser has sold its food business to McCormick, the US owner of Schwartz spices, for $4.2bn. The deal includes the French’s mustard and Frank’s RedHot sauce brands.
“On any conventional yardstick, Reckitt has secured a supersized price,” says Chris Hughes on Bloomberg Gadfly. The valuation amounts to seven times the unit’s estimated sales and 25 times its forecast operating profit for 2017. Still, the business was a scarce asset with strong brands delivering good organic growth. “When such rare morsels come up for sale, buyers are willing to stretch.” At the same time, Reckitt was keen to sell to pay down debt in the wake of its $18bn purchase of baby-formula giant Mead Johnson, and “arguably, the unit is worth more to another food company”. Hence both sides may be happy.
Still, McCormick will have its work cut out to make this pay off, says Carol Ryan on Breakingviews. Even factoring in the annual cost savings of $50m that the firm thinks it can make, it is paying handsomely. Margins are at 29%, meaning “fresh efficiencies will be hard won”, while 5% annual sales growth outstrips the wider US market.
“It’s not clear it can squeeze out anything that Reckitt hasn’t already.” Meanwhile, the deal throws down the gauntlet to peers such as Unilever, which also bid for the business, and Nestlé. Their comparable food operations have much lower margins. “If they can’t copy Reckitt’s special sauce for better profitability, they should learn its recipe for knowing when to sell.”
City talk
• The survival of John Fallon as chief executive of publisher Pearson “is one of the wonders of the City”, says Neil Collins in the Financial Times. “His policy of throwing everything overboard to prevent the ship marked USS Education sinking gives a rather different meaning to the company’s slogan of ‘always learning’.” Fallon’s focus on selling textbooks to American students looks like a “high-stakes gamble where the odds are stacked against him”. Students use the internet and those who prefer hard copies buy them second-hand. “The result is a share price at its worst since the financial crash and a dividend that is unsustainable.”
• Now we know how the City will be kept open for business after Brexit, says Nils Pratley in The Guardian. “If a foreign government, in this case Saudi Arabia’s royal family, doesn’t like the rules in London, the UK is happy to be flexible.” The Financial Conduct Authority (FCA) has proposed a rewrite of the listing rules to encourage state-backed firms to float in London. The target is to land the initial public offering of oil giant Saudi Aramco, “an enormous beast that will shower fees on bankers and lawyers”.
Whatever the FCA says about updating markets, “this exercise seems to be driven by short-term considerations: get Aramco through the door, and worry later about the long-term hit to London’s status as a high-class financial centre”.
• The 19% jump in the shares of construction firm Carillion after it won a £450m slice of the first bunch of HS2 rail contracts “is a little rich”, says Alex Brummer in The Daily Mail. The firm, now led by Richard Howson, is still short of ready cash and “that won’t start to flow from HS2 until 2019”. Still, “a show of faith by the government as accountants Ernst & Young and HSBC get to grips with the… group’s existential problems won’t go amiss”.