10 ★ FINANCIAL TIMES Thursday12 March 2020
Mike Wells ay raise cattle on hism
American ranch, but that is a cake
walk compared with the day job.
Shareholders ofPrudential lc, the UKP
insurer that he leads, want a break-up.
Bowing to tough activistDan Loeb fo
Third Point, Mr Wells has agreed to list
a minority stake of its US insurance
unit,Jackson. Shareholders like Mr
Loeb say that Jackson is a black box
and want it sold. They also want more
clarity on the Asian business, either a
sale or more focus.
After last year’s M&G demerger, Pru’s
acreage has already begun to shrink. A
Jackson listing will not happen any
time soon. Mr Wells provided no detail
on either timing or size. Precedent set
by Axa , which took over a year to sell
its own US unit two years ago, suggests
the Pru will not seal anything this year.
Third Point may have pulled the
trigger, but the Pru has long wanted to
raise capital to plough back into
Jackson. Yet there may not be quite so
much as the UK insurer would like.
Jackson deals in variable annuities
linked to stock market movements.
Shares of its US peers such as
Equitable Holdings, Brighthouse nda
Lincoln ave all crashed and areh
trading at just 3 times forward
earnings. Even allowing for some
growth on Jackson’s historical net
profits and a re-rating, selling a third
raises maybe £3bn. Even that looks
generous and above the amount priced
into the Pru’s market valuation.
More fundamentally, a Jackson IPO
fails to address shareholders’ bigger
question: what will happen with Pru’s
Asia division, which generates 40 per
cent of operating profit. Without it, Pru
becomes a low-growth UK insurer
struggling to achieve a high single-digit
earnings multiple. Its previous
valuation premium over local peer
Aviva ould close permanently.w
Mr Wells has saddled up for a long
ride. Breaking up the ranch will take
years and provide fat fees for thePrudential/US IPO:
Jackson out to pasturebankers conducting it. Shareholders
will probably be left with crumbs,
whichever way they cut it.For years, the construction sector has
been a danger zone. Now plucky
investors are piling back in. On
Wednesday shares in UK infrastructure
contractorBalfour Beatty haress
jumped 20 per cent. Budget plans for n
infrastructural spending added to
better than expected 2019 results.
BossLeo Quinn, who has led a
turnround afterseven profit warnings,
deserves credit. He has shrunk
overheads by over 40 per cent sinceBalfour Beatty:
a constructive attitude- The business puts less money
aside for lossmaking contracts.
Operating cash flow rose last year by
two-thirds to £213m.
Balfour has one of the strongest
balance sheets in the sector, with
average monthly net cash of £325m.
That is a competitive advantage and
gives ample room for a touted £200m
share buyback, due once the impact of
Covid-19 is clearer. RivalCostain, by
contrast, announced a £100m rights
issue yesterday.
It is also a beneficiary of government
spending. If the HS2 rail project goes
ahead that will add over £3bn to its
order book in the first half of 2020,
more than doubling the UK tally.
All told, Balfour’s shares look
inexpensive at around 13 times
forward earnings. But UK construction
is a tough sector with dynamics few can
escape for long. Competition has
whittled margins to the floor.
Mr Quinn says he would like to see
industry margins double to at least
4 per cent, to allow it to invest in skills,
research and technology. That puts its
2019 achievements in perspective. This
is an industry that gets paid upfront
then tries to turn a profit from those
lump sums. Whatever credit Balfour
deserves for margin improvement so
far, up to 2.1 per cent in the UK and a
bit more than half that in its US unit,
its own wriggle room remains limited.
Should the UK government deliver
its promises, infrastructure contractors
will be in for a revenue bonanza. But
the sector’s underlying challenges
remain. Investors should keep their
hard hats at the ready.Americans are thirsty for energy
drinks. So are big beverage companies.
PepsiCo s splashing outi $3.85bn o buyt
Rockstar Energy Beverages. The
$182bn packaged food and drink giant
is hoping the acquisition will help it
compete better in a fast-growth
category that is particularly popular
with millennial consumers.
Buying a distant number three
player is not the obvious way for
PepsiCo to get its energy drink buzz.
Rockstar, with its distinctive black and
gold logo, has less than 6 per cent of the
market in the US, according to Nielsen
data. That lags well behind market
leaderMonster Beverage’s 42 per cent
and Red Bull’s 35 per cent. Worse,
Rockstar’s market share has declined
in each of the past three years.
The challenges are reflected in the
price. PepsiCo is paying just a little over
three times revenues, compared to the
8.5 times publicly listed Monster is
valued at. With its deep pockets and
drinks expertise, PepsiCo can add
value. One example: Rockstar has a
notably weak presence on the US east
coast and outside the US. That is
something PepsiCo can remedy
through a ramp up in marketing spend.
There is a more granular reason for
PepsiCo to buy Rockstar. The two
companies currently have a
distribution agreement that limits what
PepsiCo can do in energy drinks.
Owning Rockstar outright would allow
PepsiCo to sidestep the kind of legal
issues that have afflictedCoca-Cola.
They wrangled with partner Monster
over plans for a Coke-branded energy
drink. A rollout of more caffeinated
versions of PepsiCo’s existing Mountain
Dew Kickstart energy drink seems
likely once the Rockstar deal closes.
Energy drinks continue to post
steady growth. Manufacturers are
substituting low-sugar versions of
their drinks, as consumers turn away
from fattening sodas. It is also an
increasingly crowded space.
Rockstar is a fixer-upper. With a bit
of hard work, the purchase could end
up being a well-timed bargain.PepsiCo/Rockstar:
an acquired tasteImposters — Martin Guerre, Tom
Ripley, whoever — always give
themselves away. That moment came
early for Rishi Sunak. Someone who
splurgespublic cash so blithely cannot
be a Conservative chancellor. He must
have locked the miserly real McCoy in
a Westminster broom cupboard.
Britons must decide whether they
like Mr Sunak enough to turn a blind
eye. Yesterday’s enterprise-friendly,
virus-bashing Budget suggests they
should. His plan to stimulate an
economy slowed by an epidemic
surpasses what Labour came up with in
the wake of the financial crisis. It is
timelier and bigger. The headline figure
of £30bn may be quibbled over. But
there is real value to workers and
proprietors in many measures. They
include an increase in the national
insurance threshold and a pledge to
cover a fortnight’s sick pay for every
employee of a small venture.
Mr Sunak otted up the benefit tot
small businesses at £7bn. That includes
temporarily exempting many of them
from rates, an anachronistic property
tax. He will claw costs back by cutting
tax relief for entrepreneurs on business
sales. Politicians are no longer relaxed
about people becoming filthy rich.
Nor do Conservatives still regard
dragging corporation tax closer to zero
as proof of fiscal potency. It will stall at
19 per cent, which is low enough.
Two points should be noted in
fairness to previous chancellors. First,
Mr Sunak has the wherewithal to jack
up spending only because George
Osborne cut it so hard. Second, Alistair
Darling’s attempts to invigorate
consumers ooked feeble because hisl
focus was on rescuing banking.
The government, the Bank of
England and high-street lenders look
set to re-enact a slice of the latter
narrative. Credit is supposed to gain a
boost from a base rate cut to 0.25 per
cent and removal of a countercyclical
buffer within bank capital. That sets
the stage for politicians to lambast
banks for failing to lend. Banks will
blame a perplexing reluctance by
business to borrow during a downturn.
If markets were unmoved, it is
because more depends on the
unpredictable impact of the epidemic
on the UK economy. Investors,
UK Budget:
the talented Mr Sunak
absorbing the nasty party’s conversion
to Keynesianism, were probably also
wondering, “Is he for real?” One day,
perhaps, he will make history rhyme,
leaving a Labour successor a note
saying: “I’m afraid there is no money.”CROSSWORD
No. 16,423 Set by NEO
JOTTER PAD
ACROSS
1 Game society girl round Sussex
town given drink (5-9)
10 Hekmatyar mediates to provide
with weapon (5)
11 Not giving in, knocked back
beer with staff endlessly (9)
12 Buddhist figure – bloke a boy
follows around (7)
13 Still incorrect – become equal
(4,3)
14 That is chump catching ball
(2,3)
16 Such a person is male and
flirtatious (6,3)
19 Incredibly low fare with my old
transport (9)
20 Around noon, what Roman put
on vehicle (5)
22 Secretary coming in recognised
writer’s block (7)
25 Flyer sees V1 in two areas
approaching hill (7)
27 Force rips off part of dress (9)
28 To be hesitant is not entirely
modest (5)
29 Yank consortium designed
skyscrapers there? (5,9)
DOWN
2 Author sees ambassador on
road touring China (9)
3 Old duke regularly seen in V&A
shows spirit (5)
4 One might succeed with a real
burst (4-2-3)
5 Superior pork pie on case of
Grenache (5)6 Scheme shortly to secure job
assignment (9)
7 Explosive beginning in which
one appears late (5)
8 Mexican state feline found in
Chinese capital (7)
9 Two males mounting Alpine
animal (6)
15 Record in contrived tale your
religious clairvoyance (9)
17 Silver given by relative to
support flash swordsman (9)
18 ICBM takes sixty seconds
reaching island (9)
19 Criminal endlessly tinkered with
small motor (7)
21 Gold in atmosphere and light in
sky (6)
23 199 finding remedy? (5)
24 Harsh legislator sending old
humorist to Heaven? (5)
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For notes on today’s breaking
stories go towww.ft.com/lexTwitter: FTLex@
Coronavirus has clipped the wings of
airlines. Bookings are cratering.
Carriers areslashing capacity
and suspending flights. In the US,
the NYSE Arca Airline stock index
has slumped more than 30 per
cent over the past two-and-a-half
weeks.
The oil price has also crashed. That
prompts a familiar refrain: “Sales
may be down, but if costs are too, so
what?” Unfortunately, the
equivalence is illusory. That is why
American Airlines, Delta Air Lines
and United ave pulled their 2020h
financial forecasts.
Fuel accounted on average for
about a fifth of operating costs at
the big four US carriers last
year. Based on Tuesday’s close,Brent priced at $38 a barrel will lower
the cost per gallon of jet fuel for US
airlines by as much as 55 cents, says
Moody’s. That would be a drop of a
quarter from the average cost of $2.
in 2019.
Lower oil prices can be a mixed
blessing for airlines even in normal
times, stoking overcapacity. And
airlines that use hedges to lock in fuel
costs cannot cash in on lower prices
immediately.
The problem for airlines this time
is that revenue falls look set to
outweigh fuel savings. Calculations
by Lex suggest cheaper kerosene
compensates for lower ticket sales
only if a small minority of travellers
cancel trips.
Deutsche Bank is forecasting a 6 percent — or $10.7bn — slide in revenue
for the top seven US airlines this year.
That seems conservative. As
coronavirus cases proliferate,
countries and corporations are
imposing travel bans. Consumers are
booking far fewer holidays.
US airlines are in better shape to
weather the turbulence than some
foreign peers. Since the financial
crisis, US carriers have consolidated.
Balance sheets are stronger than a
decade ago, with lower debts and big
cash reserves.
ividends and share buybacksD
may still have to be put on hold. For
the moment, the risks of bankruptcy
are low. All bets will be off if the
coronavirus scare extends late into
the year.FT graphic Source: IataSource: Airlines for AmericaSource: IATA EconomicsLower fuel prices tend to help airline profits... ...fuel costs account for one-fifth of US airlines’
operating costs...
Labour
Fuel
Transport-related
Professional services
Aircraft rent and ownership
Other...but the coronavirus hit for airlines will
be enormous
Passenger revenue decline if the virus spreads extensivelyUS and
CanadaMiddle East
(UAE, Iran
Europe
(UK, Italy,
Asia-Pacific Germany
(China, Japan,ForecastAirlines: cancellations outweigh cheap fuel
Lower oil prices tend to help reduce costs for airlines, which spend about a fifth on fuel. Airlines will not
benefit immediately from the crude price collapse because reduced passenger footfall will outweigh gains
from lower fuel costs. US airlines are in a strong financial position to survive the decline in demand.MARCH 12 2020 Section:FrontBack Time: 11/3/2020- 18:31 User:nick.miller Page Name:1BACK, Part,Page,Edition:EUR, 10, 1