Why does this keep happening? The simple answer is that bank creditors, trade creditors and bondholders are higher up the pecking order than equity shareholders when a company hits trouble. In theory at least, this is because their returns are lower, being confined to the interest on the loans they have extended. Equity shareholders are supposed, in return for assuming more risk, to get better returns. A pity it doesn’t always work out like that.
Investors have been busy digesting last week’s ruling that Morrisons may proceed with a bid for Safeway providing it sells off 50 or so stores in areas where there is a local overlap.
The immediate fear is that, since Morrisons competes on price, there will a fresh price war – bad news for food suppliers and for Sainsbury’s, which doesn’t compete on price because it can’t afford to. Barely any better off will be High Street stalwarts like WHSmith, Boots and Woolworths.
They’re being squeezed as supermarkets stock more non-food lines, and the theory goes that with further consolidation among supermarkets effectively ruled out, the four biggest players will turn their attention to the nation’s high streets. It seems fairly certain that, assuming the bid now goes ahead, it will not be the final act.
UK shareholders in Orange, the mobile phone operator, must soon decide whether to accept France Telecom’s offer for the company. The choice is not really whether to accept or not accept – the French giant already owns most of Orange, so it’s inconceivable it won’t get the rest – but whether to sell in the open market, or accept France Telecom shares in exchange.
We’d be inclined to sell in the market. Owning shares in foreign companies can be a lot of hassle, even if there’s a sterling-denominated trading facility, and if you’re accepting French Telecom shares, you need to own Orange shares in multiples of 25 or you’ll be left having to sell odd lots.
‘Execution-only’ brokers – ones that just do as you tell them rather than offering advice – heaved a sigh of relief as the European Parliament approved changes to a directive that would otherwise have spelt the end of cheap dealing. That’s the good news. The bad news is that the European Commission, which wants brokers to perform ‘suitability checks’ on each and every client, has already said it will oppose some of the Parliament’s decisions.