AstraZeneca success should prompt review of takeover rules

It’s perhaps not surprising that the worth of healthcare companies should emerge during a global pandemic, but we should offer thanks for the UK’s big pharma twins – AstraZeneca and GlaxoSmithKline.

The former, with its share price at all-time high, is now jostling with Shell and Unilever for the title of biggest company in the FTSE 100 index. Successful research bets, especially on cancer drugs, have transformed Astra.

GlaxoSmithKline, in share price terms, isn’t there yet, but seems to have turned a corner – its own first-quarter figures on Wednesday continued a recent encouraging trend. But Glaxo is also at the heart of the global response to Covid-19, throwing resources at vaccine development via multiple collaborations, notably with French group Sanofi. If the long-term solution to Covid involves vaccines, it will probably also involve Glaxo, the world’s biggest producer.

If the value of the two firms now seem obvious, remember recent history could have been different. In 2014, Astra almost fell to a hostile bid from US group Pfizer at a price (one can now say confidently) that would have been a steal. It was a close-run thing; David Cameron’s government flapped ineffectually and it was the stout resistance of Astra’s own board that made the difference.

Would the UK’s life science industry have suffered if Astra had been bought? Almost certainly. Pfizer’s pledges about investment in the UK looked watery and unenforceable. Astra operates around the globe but independence, complete with enormous Cambridge HQ, is the surest guarantee of commitment to the UK.

Takeover rules, despite talk at the time, were never changed to include a firm public interest test for critical 21st century industries such as life sciences. Now would be a good moment to re-think, while the risk of predatory takeovers is low. Look around the FTSE 100 and you’ll struggle to find two more important companies for the UK’s post-Brexit, post-pandemic future.

Barclays must take successful quarter with pinch of salt

A vindication of Barclays universal – meaning retail and commercial plus investment banking – model? Well, up to a point, it was.

Uncertainty is terrific for generating volatility in bonds, equities and currencies, and the traders in Barclays’ investment bank enjoyed their best quarter in years. That’s a useful point for chief executive Jes Staley (or his successor) to trumpet when activist agitator Edward Bramson next demands that the investment bank be shrunk.

The problem, though, is a single quarter’s boom in trading fixed-income products offers only modest compensation for the expected pain elsewhere. Impairment charges of £2.1bn clobbered the overall numbers for the group, resulting in a 38% fall in pre-tax profits to £913m.

It’s wishful thinking to believe Barclays was engaged in an artful game of “kitchen sinking” its provisions. The whack looks more like a clear-headed assessment of how recession will sour a lot of loans.

Barclaycard, which enjoys stellar returns when the sun is shining, is most exposed since defaults on unsecured credit card debt always rise in a downturn. As for the UK retail bank, in addition to bad loans, it can expect to be squeezed by ultra-low interest rates and enforced generosity to borrowers via mortgage holidays, fee waivers and suchlike.

On the plus side, Barclays capital ratio, though down from 13.8% from 13.1%, remains well above regulatory minimums. Add it all up, though, and the day when the group makes its longer-for double-digit returns on equity has become more distant. The figure was 5.1% in the first quarter.

Bramson, who needed a share price twice the current 110p to make money on his 5% stake, chose the wrong target at the wrong time.

Next is exception, not the rule

It was quite a boast by Next. Even if full-price sales plunge 40% this year, the clothing retailer still expects to pay off £300m of debt this year. The mechanics are actually easy to follow: suspend dividends and share buy-back; mortgage a few warehouses; cancel £1bn of stock; don’t refit stores and so on.

But here’s the bad news: the central “scenario” (please don’t call it a forecast) of a 35% decline in sales imagines zero profit versus the mighty £734m that was envisaged in January. On balance, shareholders should be sanguine. Next is plainly a survivor and is well-placed to bounce back in 2021.

The read-across for the rest of the clothing retail sector looks horrible, however. Not everyone has dividends to cancel, let alone spare cash to pull from buy-backs. Nor do most competitors, in a normal year, make half their revenues online. As ever, Next is likely to be exceptional.

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