There goes £1bn from easyJet’s stock market value. At the close of trading last Friday, the airline was valued at roughly £6bn. After Monday’s 16.7% fall amid investors’ alarm about coronavirus – and, in particular, Italy’s extreme measures to contain the spread – easyJet is now worth £5bn.
EasyJet’s tumble is just an illustration of how, until Monday, investors had been extraordinarily unconcerned about the potential economic impact of coronavirus. At the start of this month, City analysts were proclaiming confidently that, since world stock markets recovered quickly from the Sars crisis of 2002-03, there was little need to adjust portfolios. The disruption, the theory ran, would be temporary and economic activity would merely be deferred.
That thesis felt woefully superficial for several reasons. First, stock market pundits tend to have no expertise in epidemiology. Second, unlike in 2003, stock market valuations are already high by traditional yardsticks. Third, China, where the effect on economic activity will clearly be severe in the first quarter of this year, now accounts for almost a fifth of global GDP, versus about 6% at the time of Sars.
Monday’s market wobble, then, marks the moment when investors collided with reality and had to start to price specific risks. While it is possible to believe that Apple, for example, will recover from the “iPhone supply shortages” in its Chinese factories that it warned about last week, a drop-off in travel within Europe would clearly hurt almost every tourism-related venture. Journeys wouldn’t be deferred; some just wouldn’t happen. And the effect on profits could be exaggerated since ticket prices tend to be set by the level of marginal demand.
We have yet to see hard evidence of that impact, but the City is now braced for profit warnings from European travel firms unless the news on containment improves rapidly. The unknowns are piling up; what matters is not simply the rate of infection, it’s also the behaviour of fearful consumers, which is even harder to predict. Stock markets were too complacent.
Countrywide fightback comes a decade too late
Reinvigorating Countrywide, the debt-laden estate agency group that owns Hamptons International and Bairstow Eves, would take three years, declared executive chairman Peter Long in 2018. After completing half the allotted span, Long seems to have decided the task is near impossible, at least in standalone form.
That’s the message implied by the decision to enter merger talks with LSL Property Services. Countrywide, which in its heyday used to be described as the UK’s biggest estate agent, will be the junior partner if the £460m-ish tie-up proceeds.
The move will feel desperate to those investors who backed a £140m rescue refinancing in August 2018. They paid the equivalent (after a share consolidation) of 500p a pop, but the share price is still a miserable 340p.
Maybe Long can discover some deal-making magic during the talks, but his negotiating hand looks weak. Countrywide was carrying £90m of debt at last count, or more than three times top-line earnings – too much for an estate agency.
One can blame a sluggish property market or the rise of online-only rivals, but the basic problem is simple: there are too many estate agents in the UK and most are obliged to pass vast chunks of their marketing budgets to Rightmove and its imitators.
A Countrywide/LSL merger would allow hefty cost-cutting within a combined entity with 14,000 employees and 1,000 branches, but the Rightmove obstacle looks large and immovable. The FTSE 100 website is worth £6bn these days and has transformed the house-hunting game. If Countrywide et al wanted to mount a serious fightback, their best opportunity was a decade ago.
That’s the problem with demergers: once you’ve done one, the activist brigade will want another
Prudential, having spun off UK-based fund manager M&G last year, probably suspected this moment would arrive, and now it has: Third Point, an aggressive US hedge fund run by Daniel Loeb, wants a full break-up, meaning a split between the fast-growing PruAsia business and the plodding Jackson National Life operation in the US. Loeb’s crew has bought a 5%, or $2bn stake, to lobby its case.
Pru will need to provide a full answer, but one defence of the current set-up is obvious: if nobody wants to buy Jackson for a fat price, which is probably the case, there isn’t much hidden value to be released.
Still, it will be fun to hear Pru’s top brass explain why they still deserve to earn their big bucks in pleasant surroundings in London to run operations on two different continents.