Mark Kleinman: Challenging times for challenger banks
Mark Kleinman is Sky News’ City Editor and is the man who gets the Square Mile talking in his weekly CityAM column. Today, he looks at challenger banks, Carlsberg’s Britvic play and office space woes
Is it checkout time for challenger banks?
Unexpected M&A opportunity in the bagging area.
Last week’s confirmation from J Sainsbury that it is offloading the bulk of its remaining banking operations to NatWest Group underlines an uncomfortable truth for policymakers and regulators: the challenger banking experiment of the last 15 years has largely failed.
When Sainsbury’s and Tesco foraged their way into the personal financial services industry two decades ago, the opportunity looked ripe. Two giant retailers with a goldmine of customer data generated by their respective loyalty schemes, and more branches in the form of their supermarkets and convenience stores than most of their mainstream banking rivals.
Alas, Tesco’s sale of its banking arm to Barclays last year, and Sainsbury’s announcement about its NatWest deal underline the frustrating experience that owning a retail bank turned into for both. Sainsbury’s is even paying NatWest for the privilege of getting out.
The wheel has turned full-circle at Sainsbury’s, which bought out its banking joint venture partner, Lloyds Banking Group, in 2013. Since then, it has embarked on at least three concerted attempts to sell it.
Most other challenger banks have fared little better. The price at which Virgin Money is being sold – just 0.6 times book value – reflects a malaise in bank valuations which has persisted since the financial crisis, a trend which the new breed of industry entrants has failed to address.
Only at Monzo and Starling Bank, digitally enabled platforms whose technology-led propositions have given them a genuine edge among younger consumers, has the term challenger bank acquired enduring resonance.
The blame for that belongs partly in the laps of regulators – global and British – which have made scaling up in the banking industry harder to achieve because of capital adequacy rules.
A Labour government, if elected next week, would have an early opportunity to demonstrate whether it is committed to challenger banks. With the annual City set-piece possible taking place as previously scheduled on July 11, it could offer an early indication from a Reeves chancellorship as to whether she wants a new breed of credible banking providers, or is simply content to see challengers absorbed back into the UK’s giant high street lenders.
Carlsberg looks for the right price to crack open Britvic
Well that put the fizz back into Britvic. For the 86 year-old soft drinks producer, the arrival of a bid from Carlsberg, the Danish brewer, has provided a welcome tonic for a lacklustre share price.
After rejecting the second of two offers – pitched at £12.50-a-share – Britvic’s board resorted to conventional takeover language, declaring that it “significantly undervalued” the business.
There are plenty of reasons to think this is far from a hostile rejection, though. One leading shareholder described the latest offer as “a credible bid” while backing the board’s decision to reject it.
The approval of Pepsico, the American consumer goods giant with which Britvic has a bottling contract that comprises almost half of its business, is a huge tonic for Carlsberg, which also has a number of Pepsi bottling contracts.
In addition, the Danish company is also said to have several bottling relationships with PepsiCo’s bitter rival, the Coca-Cola Company, but even if these were ultimately to be lost or not renewed, it is unlikely to offset the more than £100m in synergies analysts expect Carlsberg to generate from a deal.
Nor should the 8 per cent fall in Carlsberg’s stock price on the morning of confirmation of the approaches be interpreted as a serious blow to its ambitions. The company is 30p per cent-owned by its eponymous Foundation, which also controls 76 per cent of its voting rights, so its independent shareholders carry less influence than expected.
One Britvic shareholder tells me that an offer of just over 1300p should be enough to lever its board into opening formal talks, Excuse the pun, but it would be a major surprise now if Carlsberg bottled it.
If commercial property is a melting ice cube, it’s time to brace for the flood
A melting ice cube: that’s the view of Britain’s office market expressed by Andrew Jones, chief executive of the London-listed REIT LondonMetric. There are plenty who agree with him, given the pace at which office occupancy has been reshaped since the pandemic.
Research from Kitt, the hybrid working start-up, suggests that office leases have shortened by over a third in five years, down 35 per cent from an average of eight years in 2019 to five years in 2023.
Moreover, it says that a majority of its clients now have more than 50 employees, a sharp rise since the pre-Covid era, driving the emergence of a new asset sub-class, the managed office.
Kitt, whose newest tenants include Omoda, a Chinese car manufacturer which plans to launch into the UK market next year, and Flo Health, the AI-driven women’s health company, has raised millions of pounds from investors including Hoxton Ventures in a bet that this trend will accelerate.
In the listed markets, IWG has seen its shares rise by a fifth during the last 12 months, partly as a result of its presence in parts of the shared-office market that are demonstrating the most significant growth prospects.
The ice cube is melting, though, and the shakeout in commercial property is going to be brutal.