12 ★ FINANCIAL TIMES Thursday 27 February 2020
Escape velocity is the speed needed to
escape gravitational pull. So said boss
Rupert Soames— with typical brio —
describing Serco’s 2019 progress
yesterday. It has overcome the drag of
previous mis-steps and started
increasing revenues, profits and cash
flows. The Hampshire-based
outsourcing company declared a
symbolic 1p dividend.
Mr Soames’ dash of bravura is
justified, after a long and painful
turnround. Not that the company he
pilots will ever enter orbit. It is weighed
down by the efforts of cash-strapped
governments to nickel-and-dime
contractors. Nor can it break free of
controversies. With 55,000 employees
worldwide, blunders are inevitable.
Critics queue to give it a kicking.
When Mr Soames stepped in to run
the business in 2014, some suggested
he had inherited the public service
ethos from his grandfather Winston
Churchill. Investors who bought at that
point have also needed grit. The value
of their shares has halved.
Recent buyers have more reason to
be grateful. The shares, up by two-
thirds over the past two years, trade on
21 times forward earnings. That is
more than twice the multiple
commanded by rivals Capita, Mitie and
G4S, even though their operating
margins are equal or higher. Serco’s
reached 3.7 per cent last year, up from
a nadir of 2.3 per cent. Management is
targeting 5 per cent.
Acquisitions could help. Mr Soames
promises an opportunistic, cost-
conscious approach. He subscribes to
the “drunken man” model of M&A. If
you lean up against lots of doors,
eventually one opens. The opposite
approach — fixing on a narrow group of
potential candidates — increases the
chances of overpaying.
Investors should also beware of
overpaying. Serco’s rich valuation is not
sufficiently justified by the healthy
order book nor its management’sSerco:
rocket manprowess. Outsourcing is a tough
business. The force of gravity is still too
strong to merit a buy.Danone has often undershot its own
earnings guidance. The French food
and drink group finally appears to have
got the message, easing its expectations
for this year. Like-for-like sales of its
infant formula, bottled water and other
comestibles will grow 2-4 per cent, it
said this week.
Achievable? The company has
scratched out an earlier 4-5 per cent
range and lopped a percentage point
off its previously targeted 16 per centDanone:
bottling itoperating margin. By focusing on like-
for-like sales, Danone has taken itself
off the hook for newer ventures. Smart.
These have a habit of disappointing.
In the past two years alone it wrote
off €1.5bn resulting from investments
in Moroccan and Chinese dairy, and
organic salads. Still, much of its core
portfolio, as with peer Nestlé, sits on
the wrong side of dietary history.
Global yoghurt sales began slowing
from 2016, Euromonitor says. Water is
healthier than Coke, but plastic bottles
miss the environmentally aware
zeitgeist. Water sales, accounting for
nearly a fifth of Danone’s revenues,
edged up just 1.5 per cent last year.
Chinese consumers do not appear to
be vibing the “strong emotional bond”
promised by vitamin drink Mizone:
sales slumped. Profits are in hock tocost cutting, and Danone’s form here is
poor.
One — admittedly crude — measure
of flabbiness: each employee brings in
roughly one-fifth less revenue than
their opposite number at Nestlé.
Danone is not a loved stock. Whether
measured over the past one, three or
five years, it has underperformed its
peers — apart from the horror that is
Kraft Heinz — and the MSCI World
index. Shares are down 16 per cent
since their October peak. A chunky
discount to Nestlé is amply deserved.
Danone calls this year a “pivotal” one
that will set the next cycle through to
2030.Quel dommage! It is also a year
that has kicked off with coronavirus-
hit factories and stunted consumer
demand. Good job that those new
targets are softer than panna cotta.Weir struck out into America’s oilfields
in 2007, scenting promise and profits.
It turned out to be a fool’s errand:
yesterday’s £546m impairment paves
the way for the UK engineering group
to quit its fraught Western adventure.
One wonders what took it so long.
Weir’s oil and gas odyssey began with
buying SPM Flow Control in 2007,
following that with another US
purchase in 2011. Altogether, the unit’s
operating earnings made up almost
half of group profits by the end of 2014,
but two years later it was in loss. Before
yesterday’s 10 per cent bounce, Weir
had fallen to near four-year lows.
America’s oil industry struggles. US
shareholders refuse to finance willy-
nilly drilling there. Capital spending
expectations have collapsed. Twelve
months ago the industry expected to
grow capex by a tenth in 2020. Today
the figure is negative 15 per cent, notes
UBS. Although the impairment pushed
Weir into loss, a sale of its unit should
recover some of that. US rival Denver
Gardner trades on 21 times forward
enterprise value to operating earnings
ratio. Even assuming it finds a buyer,
Weir getting half that ratio, say £250m,
would be a decent result.
Rump Weir is ticking along nicely.
Profits from its two mining businesses
rose a tenth. It won its largest mining
equipment order late last year in
Australia. Prices of iron ore, gold and
nickel — the minerals that Weir
customers mine in Australia and
elsewhere — have held up much better
than those of crude and natural gas.
Miners, unlike the shale drillers, are
steady spenders when it comes to
capex. Better still, Weir’s after-market
business, servicing the excavators and
grinding mills, is far more lucrative
than simply selling the kit. Margins are
triple those in straight sales.
Returning to its basics will leave Weir
more dependent on mining but far less
volatile. It still has work to do,
including slashing net debt from
double its ebitda.
Weir has done the right thing, but
shouts of “yee-ha” are premature.Weir Group:
mines for keepsThe magic kingdom has a new ruler.
Bob Iger’s unexpected decision to step
down early as chief executive of Disney
clears the way for head of theme parks,
Bob Chapek, to take over. The
transition from one Bob to the next will
probably be smooth but Mr Iger’s exit
means Disney’s era of dauntless
dealmaking may be coming to a close.
Mr Chapek’s near 30 years at the
group leaves him well placed to preside
over its mix of businesses. Choosing the
head of parks over, say,Kevin Mayer,
head of the direct-to-consumer unit,
runs counter to the fuss made about
the importance of Disney’s new $7 per
month streaming service. But
streaming is a long-term bet designed
to neutralise the fall in cable. Tourism
is what pulls group profits forward.
Plastic castles, rollercoasters and
parades attract about 160m visitors a
year according to Themed
Entertainment Association, making
Disney the world’s largest theme-park
operator. Parks sprawl across
thousands of acres in the US, France,
Hong Kong, Japan and China. More
locations have been hinted at.
Even after a decline in attendance at
some parks last year, rising prices kept
operating profits up. Single-day peak
tickets at Disneyland in California rose
$10 in the past year to more than $200.
Parks and Resorts is both the biggest
unit by sales and profit growth. In the
past fiscal year, operating income rose
11 per cent to $6.8bn. There was an 11
per cent fall at Studio Entertainment.
Parks are vulnerable to economic
downturns. The closure of theme parks
in Shanghai and Hong Kong amid the
coronavirus outbreak will hit growth.
But Disney fans are a devoted bunch.
Further ticket price rises in US parks in
2020 are not out of the question.
Mr Iger will remain as executive
chairman until next year. His exit
coincides with news of two other
departing bosses: Salesforce co-CEO
Keith Blockand head of Uber Eats
Jason Droege. There is no question who
deserves the most plaudits.
Mr Iger put Disney’s cash and rising
stock value to good use over the years,
making successful acquisitions that
peaked with the $71bn purchase of
Fox’s entertainment assets last year.
When he took over in late 2005,
Disney:
park life
Disney’s equity value was less than
$50bn. It is now stands at more than
$230bn.
Mr Iger is leaving Disney a more
complex and more successful business
than the one he joined.CROSSWORD
No. 16,411 Set by NEO
JOTTER PAD
ACROSS
1 Possible Venetian spy
misunderstood subject (5,4)
6 Fielder caught six balls (5)
9 Writer remains active having
released book (7)
10 Attacked having paid to trap
snow leopard (7)
11 Scorer required in the
Johannesburg game? (5)
12 Sailor may snatch rum (9)
14 Stole pig that has no tail (3)
15 As in the lane perhaps where
Napoleon last walked (5,6)
17 Green Man? Here one finds
whiskey! (7,4)
19 Dorothy starts with dripping on
toast (3)
20 Two similar animals for
Spooner? Here’s another! (5,4)
22 Far side in cooling tower is dark
(5)
24 Shake and strive to restrain
unruly youngster (7)
26 Unevenly coloured baked dish,
no cover on top (7)
27 Can’t do without Tyneside
newsmen? (5)
28 We initial changes to prepare
ambush (3,2,4)
DOWN
1 Be grateful for B minus (5)
2 Finer arts bias essentially
causing stagnation (7)
3 Heartburn, said Pepys, should
be treated (9)
4 Daring type out to throttle
Liberal supporter (5,6)5 Upper surface found in vessel
capsized (3)
6 Ring found in sharp suit pressed
here (5)
7 Nobleman failing to grasp bon
mots regularly (7)
8 Communist and German worker
not needed (9)
13 Toaster chap fixed brings
disaster (11)
14 Composer put plant on hot
cooker (9)
16 Laurel for one remaining fresh
and vital (9)
18 Dignify East German city
overthrown by the French (7)
19 Miniature scene from play in
which moon appears (7)
21 Support given over including
English poet (5)
23 Thick fog covers centre of
Reading (5)
25 Slippery character getting in
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For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
The shared experience that concerts
aim to deliver is celebration, not
contagion. As coronavirus goes
global the live music industry faces
an earnings risk. Acts such as Korean
pop phenomenon BTS have cancelled
shows, urging fans to avoid their
promotional appearances. The huge
Mercedes-Benz Arena in Shanghai is
shuttered. Investors should follow
fans out of the stadiums.
The epidemic is terrible news for
the music industry. This pivoted into
live performance for its earnings
after the internet gave fans free or
low-cost access to recordings.
Promoters in China have cancelled
20,000 concerts as authorities
scramble to contain the virus. To put
that into perspective, Live NationEntertainment — the world’s largest
concert promoter — made most of its
income from about 26,000 concerts in
the first three quarters last year.
Once mostly a US business, Live
Nation’s revenue base has become
increasingly global. It now makes its
revenue from concerts in 40 countries.
Revenues hit a record $11bn in 2018
and should exceed that when 2019
results are announced.
Keeping that winning sales streak
going will be difficult. Live Nation’s
reliance on fans who buy tickets
outside North America has grown to 36
per cent. A share price that has
doubled over three years has dropped
nearly a fifth in the past week. Concerts
and ticketing account for 95 per cent of
revenues. The remaining sliver of sales,from advertising and sponsorship,
also depend on live events. Margins
are perilously thin.
Asian music companies generally
have more income streams, with side
businesses and promotional fees. But
they too will suffer. In China, Huayi
Brothers Media Corp shares are off
nearly a quarter since early January.
It is a mercy that winter in the
northern hemisphere is the slow
season for a live music industry.
Summer festivals have become big
money spinners. But with the
outbreak yet to peak, cancellations
will continue. Concerts take months
of advance preparations. The Beatles
could switch from live performance
to a studio recording career. Today’s
top acts do not have that luxury.Revenue (’000) Operating incomeFT graphic Sources: Ovum; PwCRevenue from live music for entertainment companies is on the rise Concert revenues have helped drive
operating income for Live NationBut coronavirus has hit the shares
of live entertainment companies
RebasedSource: Live NationSource: Refinitiv$mGlobal total live music revenue
$bnYear-on-year
%0100200300400024681012200910 11 12 13 14 15 16 17 18 194.3.3.2.2.1.1.0.03029282726252423222120
2012 14 16 18 20 Jan Jan Feb Live Nation JYP Entertainment
SM Entertainment Huayi Brothers Coronavirus/concerts: show-stopping number
The spread of the coronavirus is forcing the cancellation of concerts, with a hit to promoters’ share prices.
Live performance has become an ever more important source of revenue for the music industry. That is
demonstrated by strong profits growth at California-based Live Nation Entertainment, the industry leader.FEBRUARY 27 2020 Section:FrontBack Time: 26/2/2020 - 18: 47 User: nick.miller Page Name: 1BACK, Part,Page,Edition: ASI, 12, 1