Economic review

From regulatory reform of bankers' bonuses to good trading figures on the high street, M&A looks at the UK economy by industry sector.

From regulatory reform of bankers’ bonuses to good trading figures on the high street, M&A looks at the UK economy by industry sector.

From regulatory reform of bankers’ bonuses to good trading figures on the high street, M&A looks at the UK economy by industry sector.


As banks on both sides of the Atlantic square up to legislative moves not only to tax bonuses but also to force the splitting off of retail banking from investment banking, some banking chiefs have broken ranks and admitted that their critics have a point. Stephen Green, chairman of HSBC, whose Far Eastern and international franchise helped insulate it from the worst of the sub-prime loan crisis, has hit out at the ‘inflated’ level of some bonuses.

On the eve of the World Economic Forum at Davos, Green attacked the ‘distortion’ created by bonuses ‘paid off gross income, first-day profits and without any capital charge’.  Wall Street giants Goldman Sachs and J.P. Morgan have bowed to public indignation in the UK by cutting the ratio of London pay to revenue from 50 per cent to between 30 and 40 per cent, with Goldman capping payments to its top London staff at £1 million each.

Among the insurers, acquisitive non-life run-off specialist Randall & Quilter Investments is buying JMD Specialist Insurance Services for £2 million. The AIM-quoted company is paying £1.3 million in cash and shares.


As the economy recovers, UK advertising budgets are set to grow this year. This is according to findings from the latest survey of 300 companies by the Institute of Practitioners in Advertising (IPA).

In a pronouncement welcomed by the legions of media companies that have been battered and bruised by the collapse in advertising spending, the IPA has revealed that while advertisers cut their budgets again in the final quarter of 2009, they did so at the slowest rate since the recession began.

Roughly a quarter of those firms surveyed conceded that they trimmed their advertising budgets in the final three months of 2009, while around 18 per cent indicated that they upped their advertising budgets. However, in a good omen for this year, the majority of the companies quizzed said they were planning budgetary increases in 2010.

Within the economically sensitive advertising sector, budgets are increasing for internet and direct marketing, which continue to outperform traditional but declining advertising forms such as radio, TV and newspapers.

Commenting on signs of a return of confidence to the market, Andy Viner, head of media at accountancy group BDO (which carried out the survey alongside the IPA), enthused that ‘after nine consecutive quarters of reduced marketing spend, it appears that the rate of decline is at its slowest in nearly two years’.

 Pharmaceuticals & Biotechnology

Not only are pharmaceutical sector valuations ‘still too low’, but the shifting spending patterns of the industry look set to benefit its smaller drug developers.

With many lucrative drugs coming to the end of their patent protection timeframes, and increasingly losing out to generic competitors, and management changes in research and development departments, investment bank Morgan Stanley now expects ‘material cuts to internal small research spend in 2010/11, after a decade of dismal internal R&D returns’.

As a result, the US finance house believes that pharma companies are going to ‘withdraw from most internal small molecule research and reallocate to in-licensing and other non-pharma assets’ to ‘yield three times the likely return’.

What’s more, Morgan Stanley’s analysts ‘expect industry fundamentals to improve’ and say that they see ‘material upside to return on invested capital, earnings and multiples’ in the sector. In particular, Roche and AstraZeneca are ‘favoured names’, with the former one of the expected leaders in outsourcing research as it reallocates at least $1 billion a year to in-licensed assets.

For smaller pharmaceuticals companies and biotechs, and, of course, their investors, this bodes extremely well, as many rely on ‘big pharma’ companies to in-license their drugs and generally receive hefty milestone payments, help with development costs and shares of any revenues that emerge if and when the products reach market.  


London is still attracting resource companies looking for funding. JKX Oil & Gas plans to raise £37.8 million at 265p to accelerate developments in Ukraine and Russia.

The fully listed company hopes to use the money to help meet projected capital expenditure this year of $230 million (£143.7 million). This includes procuring a rig for £14 million to develop reserves and appraise contingent resources at its Rudenkovskoye field, continuing a well work-over programme in Russia costing £17 million, building a liquefied petroleum gas facility in Ukraine for £7 million and carrying out an overall asset review.

Meanwhile, veteran Aussie entrepreneur Ian Gowrie-Smith plans to float Kea Petroleum with a £6 million AIM funding. Gowrie-Smith, a sometimes controversial but usually successful corporate player, chairs Kea, whose three exploration permits in New Zealand’s well-established Taranaki and Northlands basins hold an estimated 686 billion cubic feet of gas and 36.5 million barrels of oil. Serial investor Nigel Wray and Mark Knopfler of the band Dire Straits are among pre-float investors.


According to the British Retail Consortium (BRC), shoppers went to town at London stores in the run-up to Christmas, ensuring that the capital’s retailers enjoyed their best December for at least seven years. In its latest retail report, the BRC said like-for-like sales in the five weeks to 2 January grew by 12 per cent year-on-year, representing the largest percentage hike since the survey began back in 2002, with London significantly outperforming the rest of the country.

Intriguingly, the freakish cold snap, allied to less discounting by retailers, meant fewer people actually made it to the high street. However, those shoppers who did arrive in the capital more than compensated by splashing out more cash. London retailers also received a boost from the depleted pound, with well-heeled tourists arriving from Western Europe, China and the Middle East.

Stephen Robertson, director general at the BRC, described the performance as ‘dazzling’, adding that while ‘the result is boosted because the comparison is with terrible figures a year ago, when financial turmoil hit London consumers especially hard, this is outstanding growth by any interpretation’.

Another influential commentator, Howard Archer, chief UK economist at HIS Global Insight, characterised the performance as ‘extremely impressive’, though he remarked that the upside for consumer spending is likely to be limited in 2010, given employment, tax and debt concerns.


A recent decision by the Office of Fair Trading (OFT) to refer local bus services to the Competition Commission (CC) has caused uproar among bus businesses.

The OFT, whose recent market study concluded that low levels of competition in bus markets is a bad deal for passengers and taxpayers alike, worries about a tendency towards monopolies or near-monopolies on local and regional routes, as well as overly high entry barriers into local markets.

It also alleges that operators with a strong market position can charge 9 per cent more than companies that are up against a well-financed local rival, and expressed concerns that certain bus operators have been boosting income by manipulating the concessionary fares regime.

All local services in the UK, except those in London and Northern Ireland, will now be subjected to a more detailed public investigation by the more powerful CC, with its investigation covering large quoted operators such as FTSE 250-traded First Group and Stagecoach, as well as services run by local authorities.

‘One of the concerns that we think the Competition Commission should take a look at is the tendency for local areas to become dominated by a single operator,’ warned OFT senior director Heather Clayton. ‘We do think large bus operators should face a healthy level of competitive constraints.’

In response, irked bus operators criticised the decision to refer local service operators to the CC as ‘pointless’ and a waste of taxpayers’ money.

A Stagecoach spokesperson described the inquest as an ‘unnecessary distraction for the bus industry at a time when we should be free to get on with trying to improve bus services for passengers’.
The mood was equally fiery at First, which complained about the timing of the referral, saying that it could become ‘an unnecessary and costly distraction from the objective of improving traffic congestion in our towns and cities’.


In exciting news for the utilities sector, Ofgem has unveiled funding proposals that mark a significant step towards facilitating the government’s 2020 carbon emission reductions target.

Ofgem, the energy sector regulator, has published final proposals for £319 million worth of funding to help three transmission companies – National Grid Electricity Transmission, Scottish Power Transmission and Scottish Hydro-Electric Transmission – overcome delays to critical investments and help connect Britain’s burgeoning amount of renewable electricity generation.

The industry body’s Transmission Access Review sets out its plans for construction funding for a range of reinforcement projects due to begin before the end of the current transmission price control. Those aforementioned firms are subject to controls on their revenue, which are reviewed every five years and are designed to limit investment so that the sky-high costs are not passed on to customers.

The UK’s three electricity transmission giants, including National Grid, expect to invest £5 billion in transmission projects over the next ten years, but Ofgem was worried they could delay investments required to connect wind farms and other clean energy projects until current controls on their spending run out in 2012. With this in mind, the regulatory watchdog is prepared to allow up to an extra £1 billion to be spent on new projects over the next two years and will approve another £764 million if the grid companies support the investment cases.

Encouragingly, the proposed £319 million funding boost would amount to the first tranche of projects to benefit from a potential £1 billion package of extra investment in the UK’s high-voltage networks. And what’s more, the entire £1 billion package represents 20 per cent of the transmission firms’ overall ten-year investment plan to upgrade the energy network.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics

Early Stage Funding