10 ★ FINANCIAL TIMES Wednesday28 August 2019Emmanuel Macron has had some
burning issues to deal with. From the
gilets jaunesmovement at home to
championing the Brazilian rainforest.
Another smouldering issue for the
Frenchleader is ramshackle
governance of listed companies, such
as Lagardère, the media group. If Mr
Macronwants to lure London’s
financiers away after Brexit, he should
start by curtailing the clubby relations
of the French corporate elite.
The laxity ofstandards is apparent at
Lagardère, whereArnaud Lagardère,
the chief executive, has used his
shareholding as a piggy bank. A private
holding companyLagardère Capital &
Management, controlled by him, has
borrowed more than €200m against
Lagardère shares, which have
performed poorly since he took over
fromfather Jean-Luc in 2003, trailing
the broad French market (including
dividends) by 187 percentage points.
Franceoffers dubious examples of
governance such asGroupe Casino,
which hasdumped assets to paydebts.
Most CEOs would have left— not Mr
Lagardère. His company has a
partnership-like structure uncommon
in France.He has extraordinary
control despite owning just 7 per cent
of the outstanding shares. General
partners cannot be easily removed by
other shareholders.
It may help to havea chairmanof the
supervisory board, such as Lagardère
has withXavier de Sarrau. Hehas been
in the role for more than nine years.He
collects a salary of nearly €100,000,
and has received an extra €240,000 for
services “above and beyond his remit”
since 2010.Activistinvestors raising
the alarm get little support fromthe
government. Finance ministerBruno
Le Mairewants their efforts halted.
Mr Lagardère may ignore the heat
for a while longer. But his holding
company has pledged its7 per cent
shareholding against the debts. A clear
conflict of interest exists and as generalLagardère:
no, no Arnaudpartner, he has unlimited liability. That
is bad for Lagardère and bad for the
reputation of the Paris bourse.“Are you familiar with genetic editing?”
asks the scientist. Shortly afterwards,
havoc is unleashed by an albino gorilla
created with Crispr technology. The
scriptwriters of the 2018 filmRampage
are not alone in thinking gene editing
could be the stuff of nightmares. The
public is worried. The industry has set
out its firstcollective responseto some
of those fears. It is right to step in. A
backlash could choke off life-saving
advances. The declaration, signed by 13Gene editing:
even Crisprcompanies engaged in gene-editing
research, insists DNA must not be
altered in a way that passes genetic
changes on. That channels a near-
universal consensus about safety and
ethics — reflected in anoutcryafter a
Chinese scientist claimed to have
genetically editedtwo babies. The
industry also argued against extra
“arbitrary” oversight. That might hurt
patients by delaying research, it said.
That argument could be validated by
progress from 31 gene-editing clinical
trials that are under way. In July,Crispr
Therapeuticshinted the approach
might be working for beta thalassae-
mia, or blood disorders. Its Nasdaq-
listed shares have more than tripled
since theirIPO. Editasis also breaking
new ground. This month, the US group
said it was on the cusp of makinghistory. It hopes to launch the first
treatment dependent on genome
editing inside the patient’s body. Its
shares are up 50 per cent since itsIPO.
The evil corporation inRampage
avoided pesky red tape by undertaking
research in space. But even if rogue
operators try to sidestep rules, nations
should agree what practices are un-
acceptable. That might not be easy. In
the related area of genetically modified
crops, Europe and North America took
different approaches 20 years ago.
Tighter regulation is inevitable. The
only question is what form it will take.
The biotech industry has good, self-
interested reasons for steering the
debate away from restrictions. It
cannot rely on Dwayne “the Rock”
Johnson to sort everything out, as the
actor did inRampage.Hedge fund managerTalal Shakerchiis
a successful poker player. His
investment in struggling retailer
Carpetrightis one of his riskier wagers.
The UK floor-covering retailer, once
an entrepreneurial success story, has
fallen on hard times.
Mr Shakerchi’s vehicleMeditor
yesterday did a deal that left it with the
bulk of Carpetright’s secured lending.
The retailer’s survival is now more
likely. Minority shareholders still have
reason to be nervous.
Lossmaking Carpetright’s problems
encapsulatethe story of UK high
streets. Before the 2008 financial crisis,
it was worth almost £900m, compared
with less than £50m today. Last year, a
rights issue, which raised £60m from
existing shareholders, was needed.
In addition to the debt, Meditor owns
a third of Carpetright’s sharesand it
has lent the company £17.25m in
unsecured funds. Interest rates of 18
per cent a year compounding monthly
and £2.3m in arrangement fees showed
howdesperately it needed the cash.
A large,expensive property portfolio
has been a bigger problem than online
competitors. Bricks and mortar rivalry
has added to its woes, however.
Founder LordHarrisof Peckham left
in 2014. That did not stop a land grab
by his son Martin.His company,Tapi,
has opened 100 stores. It has a 4 per
cent market share. Carpetright’s share
has fallen to 18 per cent, from 20 per
cent a year ago.Shoppers have
benefited, and Mr Shakerchi was able
to buy the debt more cheaply. They are
the only winners from this fight so far.
Tapi’s latest accounts show an £11m
operating loss, just under half that of
Carpetright in the latest full year.
Meditor’s next step will be to
renegotiate Carpetright’s lending
agreements. Whether that benefits or
hurts shareholders lies largely in Mr
Shakerchi’s hands.
Store closures and steps to reduce
rents will help stem outflows. Minority
shareholders, however, are now little
more than onlookers in a game whose
odds they no longer fancy.Carpetright/Meditor:
floor exerciseSmokers bond by huddling together
against the cold and discussing how to
quit. It is the same with tobacco
companies such asPhilip Morris
International andAltria, corporate
pariahs in a health-conscious world.
Yesterday, the groups said that they
were in talks to create a tobacco giant
with a market value of more than
$210bn. The merger proposal has
merits for both sides.
The case for reunification — little
more than 10 years after the two
companies separated — lies in the push
for tobacco alternatives. Pooling
resources to develop and market new
products make sense.
Philip Morris is known for its heat-
not-burn product Iqos. These cigarette-
like devices produce fewer harmful
chemicals than cigarette smoke. They
have sold well in some markets, such as
Japan. Meanwhile, Marlboro cigarette
maker Altria owns a 35 per cent stake
in vaping start-upJuul, bought for
$12.8bn in December. In June it also
acquired a majority stake in a Swiss
maker of nicotine pouches. By joining
forces, the combined company could
benefit from marketing the full range
of products globally.
Altria spun off its international wing,
bearing the name Philip Morris, more
than a decade ago, partly as a response
to shares trading at a discount to the
sum of the company’s parts. That
gambit was a damp squib. The two
companies have a market value of
nearly $220bn, more than a third
higher than at the announcement of
the split back in 2007. But that is less
than the combined growth in operating
earnings over the same period.
Even so, recombining carries risks to
Philip Morris’s valuation, which might
explain why its share price fell
yesterday. Since the 2008 split, it has
outperformed, benefiting from its
international growth potential. The
valuation gap may also have been
widened by Altria's purchase of Juul,
whose popularity with young people
heightens regulatory risks.
At the end of 2016 the two traded at
a similar price to forward earnings
multiple of about 14 times. By the
middle of this month, before rumours
of a merger, Philip Morris traded at a
multiple half again as high. WhilePhilip Morris/Altria:
smokin’regulatory risk and lower growth
potential have depressed Altria’s
valuation, they have also created a
buying opportunity. For Philip Morris,
rewards and risks are stacked more
evenly than they are for smokers.CROSSWORD
No. 16,257 Set by JULIUS
JOTTER PAD
ACROSS
9 It’s exasperating getting hold of
operator when flying (9)
10 O icer to harm little woman in
custody (5)
11 Pacify ace German mathematician
returning to base (7)
12 Bush to stop Arab travelling west
(7)
13 Cat starts to torment old Macavity
(3)
14 Body knight buried in old north-
east French citadel (11)
17 Tobias returned, missing one shoe
(5)
18 Blimey, hotel runs out of clarified
butter (3)
19 Criticise Sunday lunch? (5)
21 Cue Aggers – I’m broadcasting
score from the West Indies (6,5)
23 Mike left a fortune for another
bloke (3)
25 Besiege Kray following rumour of
jealousy (7)
27 Agent Gerald stripped of military
rank (7)
28 Standard American opera (5)
29 Commercial vehicle time after
time making a profit (9)
DOWN
1 Horrified – part of Reichstag has
termites! (6)
2 Ad hoc social media group: “keep
it quiet; Farah’s putting on weight”
(5,3)
3 Vacations at sea taking in
Ontario’s premier island (4,6)
4 Constant sport, to put the icing on
the cake! (4)5 Whisks o Best, 21, missing the
second part (10)
6 Germany and Spain failing to
respect Arab ruler (4)
7 Amateur Jack Rooney announced
as a seed (6)
8 Mail intended reporting weapons
(8)
15 Kray, with terrible ailment relating
to military manouevres (10)
16 Featured in Australian commonly,
Syd Cohen’s regularly taken
poison (10)
17 Copper despatched to seize
criminal gear (8)
20 Aero Bar melted, left in sylvan
setting (8)
22 Direct navy to support Tory
minister (6)
24 Explosive device found in Kabul
letterbomb (6)
26 Allegedly pulled a blade in the
street (4)
27 Donated 26 grand upfront (4)(1)$177(55,%/(
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x = 55.
y = 50.HIGHHIGHHIGHLOWLOWLOWLOWLOWOCCLUDED FRONT LINEWARM FRONT LINECOLD FRONT LINEISOBAR BRUSH FRONT SYMBOLSPRESSURE LABELS1040 10401030 10301020 1020102010201010101010101010100010001000990 990980 980970 970960 960950 950940 940xxNAMExxMalta Sun 31
Manila Thunder 30
Miami Cloudy 33
Milan Fair 30
Montreal Rain 22
Moscow Sun 22
Mumbai Cloudy 30
Munich Sun 29
Naples Sun 30
New York Thunder 26
Nice Fair 29
Nicosia Sun 38
Oslo Thunder 21
Paris Thunder 31
Prague Sun 29
Reykjavik Shower 13
Riga Sun 26
Rio Fair 24
Rome Sun 28
San Francisco Fair 25
Singapore Fair 31
Stockholm Fair 27
Strasbourg Fair 31
Sydney Sun 19
To k y o Thunder^28
Toronto Fair 27
Vancouver Sun 23
Vienna Sun 32
Warsaw Sun 26
Washington Cloudy 31
Zagreb Fair 33
Zurich Fair 29Amsterdam Fair 27
Ankara Sun 30
Athens Sun 31
Bahrain Sun 39
Barcelona Sun 28
Beijing Sun 32
Belfast Rain 17
Belgrade Sun 34
Berlin Sun 29
Brussels Fair 29
Budapest Sun 30
Cairo Sun 36
Cardiff Rain 20
Chicago Fair 24
Cologne Fair 32
Copenhagen Thunder 24
Delhi Fair 36
Doha Sun 40
Dubai Sun 43
Dublin Drizzle 18
Edinburgh Rain 18
Frankfurt Sun 32
Geneva Sun 28
Hamburg Sun 30
Helsinki Sun 21
Hong Kong Sun 34
Istanbul Sun 30
Lisbon Sun 27
London Fair 27
Los Angeles Fair 27
Luxembourg Sun 29
Madrid Sun 30Today’s temperaturesForecasts by
Wind speed
in KPH840
16192027(^2730)
34
31
31
32
31
29
27
24
19
21
22
24
30
29
30
28
32
29
28
29 26
30
31
(^2731)
38
30
32
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lex
Twitter:@FTLex
Every so often, America wins foreign
hearts and minds with a slick
consumer proposition. One thinks of
Russia’s first McDonald’s and
Selfridges, the UK’s first US-style big
store. ShouldCostcoShanghai join
the roll of honour? The first Chinese
outlet of the discount retailer is no
glitzier than stores back home.Huge
crowdsstill forced the shop to shut
early.
Mass-retailing models generally
travel no better than fresh
vegetables.Walmartand Best Buy
failed to revolutionise UK shopping.
Tesco’s Fresh & Easy flopped in the
US. Why should Costco Wholesale do
any better in China? Price is the
reason Costco could thrive.
Consumerism is unchained in
China. But average wages remain
modest. Costco has low group gross
margins — the difference between the
cost of goods and selling prices — of 13
per cent. That compares with US
supermarket chainKrogerat 22 per
cent and general retailerTargetat 29
per cent, according to S&P CIQ.
Costco stores in the US are bright,
cheerless barns, where newbies risk a
skittling from trolleysladen with heavy
bulk purchases. These merit big
discounts, encouraging 90 per cent of
subscribers of the members-only
retailer to renew yearly.
Inhabitants of nominally Communist
countriesareinured to austerity. Costco
may fail other tests. First, where would
the typical Chinese shopper stash all
that stuff? In the US, Costco sells some
toilet rolls in packs of 30. No problem
in an average US dwelling of over
2,000 sq ft. It is trickier in a Chinese
apartment less than a third that size.
The second problem is the Chinese
mostly shop locally and often. Huge
destination stores are poorly adapted
to this preference. Japanese
“combinis” — convenience stores
such as FamilyMart — look better
positioned.
JPMorgan has prophesied that
Costco can double its store base
through global expansion. This is
optimistic, despite exuberant scenes
in Shanghai.
The chain has little presence
outside North America. Only one
thing is overpriced at Costco — shares
trading at 33 times forward earnings.
FT graphic Sources: Refinitiv; S&P Global
Costco has performed strongly ...
Share prices (rebased)
Aug
Jan
Jan
Jan
Aug
Costco
Walmart
S&P
... because it is cost conscious ...
of revenues, latest full year
Target Walmart Kroger Costco
Gross margin Operating margin
... but it is still dependent on the US
of revenues in home market, latest year
Costco
FamilyMart
Kroger
Walmart
Costco/China: flat contradictions
The no-frills approach of the US cash-and-carry business means lower operating margins than rivals but
makes it popular with customers on budgets. Its shares have outperformed since the start of the year. China
is the next part of Cosco’s plan, but few retailers are able to succeed abroad.
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