But the UK’s other main package tours operator, First Choice, this week set out a bullish case the sector. It says demand for holidays over the crucial summer period has surged, after taking a dip during the Iraq war. And even though the absolute level of booking is down, that too is being presented as a positive, because the industry has suffered from a history of over-capacity and profit-destroying price wars. First Choice says it average selling price has improved. Good news this may be, but the industry still faces a number of challenges. The internet has made it easier for consumers to compare prices, which should increase competitive pressure. Moreover, the advent of low-priced airlines like Ryanair has made it easier for people to put together their own holidays, reducing some of package holidays’ traditional pricing advantage. First Choice is undeniably the sectors quality outfit, but its shares have had a good run and look high enough for now.
Two of the UK’s best known insurance brands have come together after the same roof. Royal Banks of Scotland, which already owns Direct Line, has bought Churchill Insurance for £1.1bn. That price represents a pricey 18 times Churchill’s 2002 earnings, or a thin 5.5% return on initial investment, but analysts think that £1.1bn will prove to be well spent if the bank can improve profits through combining the back-office activities of the two insurers. At the same time RBS issued a positive trading update saying credit quality remained strong as did income growth, reinforcing the banks status as one of the most attractive investments in the sector.
In a startling display of self-belief – or arrogance – second-tier supermarket chain Somerfield has rejected the 120p per share offer from John Lovering, saying it substantially undervalues the business. That will come as news to most investors, considering the market had priced the shares at 44p before the takeover bid emerged. Most analysts think Somerfield should have accepted the offer. The pressure is now on management to prove they made the right decision. Taking steps to realise the value of the chain’s property portfolio could bridge the gap. Meanwhile Tesco, at the other end of the supermarket pile, has made a move into Japan, buying a chain of conveniences stores called C Two Network, for £139m. Japan is the world’s second largest food market, after the USA, but is seen as a difficult market to get into. Analysts say Tesco has taken a cautious approach, but that’s a good thing.
The iconic London development Canary Wharf should have new owners before long. Morgan Stanley has kicked off a bidding war, which has already seen Canary Wharf shares rise 49%, and other bidders are expected to make themselves known soon. Candidates are Brascan Corporation, GE Capital, Land Securities and British Land. Even if a price in excess of 300p per share is eventually realised, long term investors might feel justifiably short changed. Canary Wharf would be selling out right at the bottom of the property cycle, whilst everybody is expected a miserable immediate future for commercial property owners. There’s still a lot of land at Canary Wharf still to be developed, and a buyer would be getting that potential for a song.