Unintelligible. That's how Tesco chairman John Allan described the UK's business rates system to last year's CBI conference. It also describes his explanation on Wednesday for why Tesco has chosen now to refund its share of business rates relief.
Taking state aid was the right thing to do, but so is giving it back, says Mr Allan. Uninterrupted trading since March is offered both as a defence for accepting the tax break and as a justification for refusing it. He rationalises that Covid has cost Tesco more than £725m, versus the £585m it had dodged on business rates. That Tesco’s Covid costs mostly related to meeting unprecedented demand while its neighbours were forced to close is a nuance skipped over.
Tesco bosses are “conscious of our responsibilities to society”, says Mr Allen, though when this occurred is not made clear. The panic around collapsing supply chains that justified all supermarkets using state support had subsided within days of the first UK lockdown taking effect. The backlash began long before October, when Tesco's prospects were sufficiently robust to allow for a £314m interim dividend that Mr Allan pledged to “defend to the death”.
Yet restitution had to wait until the countdown to Christmas, just as the collapse of Debenhams and Philip Green’s Arcadia focuses minds on moribund high streets. Payback also helps clear the path towards a £5bn cash return on the pending sale of its Asia business. For all the good intentions on show, it's hard not to be cynical about the timing.
Then there’s the effect on peers, who will need to respond or face trial by public opinion. While Tesco has been the UK’s biggest beneficiary of rates relief, the support mattered more to J Sainsbury, whose Argos chain was classed as non-essential. Sainsbury’s £450m of savings equates to nearly 10 per cent of its market value, versus less than 3 per cent for Tesco.
Also feeling the heat are general retailers that kept trading through the pandemic. B&M, the Luxembourg-registered seller of cheap toys and toiletries, is among those looking exposed having banked around £100m via UK rates relief while paying out nearly £500m in ordinary and special dividends. B&M has been expanding rapidly into groceries. Perhaps Tesco's motivations have an element of game theory, where it has invited mutual harm from which it expects to suffer the least.
There’s no faulting Mr Allan’s criticisms of Britain’s arcane business rates system. Covid has made reform urgent. Successive governments have dragged their feet on promises for a review. Tesco chooses to play politics around the issue but has favoured opportunism over playing to its strengths. A threat to defer all refunds until reform is delivered might have effected the bigger social benefit.
Avon Rubber is looking stretched
It’s perhaps unsurprising that in a year where governments worldwide have been throwing money at personal protective equipment, Avon Rubber is one of the market’s best performers, writes Jamie Powell.
The shares of the Wiltshire-based supplier of military equipment, including respiratory masks and body armour to the US Department of Defence, have doubled in 2020. The FTSE 350, meanwhile, has lost 14 per cent. Yet, after a year of aggressive M&A, its full-year results published Wednesday morning take some unpacking. While revenues were up an impressive 30 per cent to £168m, its profit before tax came in at under a tenth of 2019’s because of a sizeable amount of one-offs and restructuring costs. The company was quick to point out, however, that its underlying ebitda margins remained resilient.
Avon Rubber has long been a company in transformation. Once a supplier of tyres, automotive parts and milk-extracting udder liners, under boss Paul McDonald it has focused on defence contracting. So far this year it has splashed £187m on US conglomerate 3M’s helmet and armour business and Ohio-based headgear purveyor Team Wendy. Sandwiched between these deals it divested of its dairy arm for almost the same amount.
It’s easy to understand the strategic rationale. Once won, military contracts provide guaranteed recurring revenues funded by the largesse of the sovereign bond market, which makes any worries about the negative effects of an economic downturn moot. In turn this should allow reinvestment in new products, whether through further acquisitions or research and development, without losing much sleep.
Yet recent acquisitions pose questions Avon Rubber has not had to answer before. Integrating the US-based companies will take a delicate balancing act between centralising costs and continuing to deliver mission-critical equipment to customers. It is fair to speculate the US military-industrial complex will not take kindly to any organisational snafus. Investors may also be cautious, particularly as restructuring costs have eaten into its operating profits over the past two years.
Avon Rubber’s market value is now a touch under £1.4bn, pricing its shares at 38 times 2021’s profits. For a business with a growing order book and recurring revenues, it may not seem too expensive in a world short of both yield and growth. But the valuation leaves little wriggle room should its transatlantic expansion not go to plan.
Avon Rubber: email@example.com
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