COLUMNISTS Stock market overreactions do not come much bigger than Wednesday’s euphoria at Enterprise Inns becoming the first pub company to receive the green light to adopt the tax-efficient structure used by many property companies.
Its shares rose 29 per cent, in spite of the news being flagged last month, and dragged the rest of the sector higher almost indiscriminately. The pub sector has been short of good tidings lately so who can blame investors for getting carried away. But it cannot be long before they are suffering a hangover.
Enterprise can become a real estate investment trust (Reit). These enjoy a tax shelter if they pay 90 per cent of earnings in dividends, among other conditions.
The whole sector stands to gain from the government’s favourable disposition towards pubs becoming Reits. Even those that do not convert stand to benefit, assuming that their valuations give more credit to their property portfolios.
But the industry is in uncharted territory and it is too simplistic to say all pub companies that convert to Reits are good, while those that do not are bad.
For some, conversion will involve costly restructuring. Above all, it remains to be seen precisely how the market will value these businesses over the long term. As income stocks, Reits are likely to command different ratings to conventional pub businesses. Reits pay less corporation tax, but the tax burden is shifted to investors who are taxed on their dividend income.
The market will eventually come to a view on how to value pub companies that convert to Reits, as well as those that do not. But it would be wrong to assume that the view expressed in pub share prices on Wednesday is the market’s final say on the matter.
Rank loser
No one swallowed Rank’s claim on Wednesday that the gaming group was having “a degree of success” in managing the impact of the smoking ban on its bingo halls and casinos. It is not hard to see why. Underlying sales have fallen 8 per cent so far this year. If that is a degree of success, one dreads to imagine where the shares would have settled had Rank admitted to an element of failure.
Rank is the single largest owner of gambling space in the UK. In spite of this advantageous position, it is struggling to make money. The smoking ban and moves by the government to curb access to slot machines led to a profit warning in September that wiped about 40 per cent off its value.
But the bigger picture is that Rank has been paying the price for unimaginative and tame management. It was complacent about the challenges it faced last year.
There were fears that Rank might go bust a few months ago. Much of its debt was bought up by hedge funds betting on making a profit in a restructuring. At least that nightmare scenario looks less likely now, and Rank’s financial position has become less precarious following the sale of its pension scheme in February.
The snag is that it is hard to see things getting much better any time soon. The concentration of competing interests at the top of Rank’s shareholder register is an obstacle to a bid. A takeover by an overseas gaming group is surely Rank’s destiny. But destiny can be a long time coming.
BT’s mobile fightback
Slightly more than six years after BT spun off its mobile phone business, the UK’s dominant fixed-line telecom group is attempting a wireless comeback.
BT plans to offer broadband customers a BlackBerry-style smartphone, which operates through Wi-Fi where possible, and the rest of the time relies on conventional mobile coverage. It does not look like a killer app.
The established mobile operators started offering smartphones years ago. This is a sensible move by BT to tap potential incremental revenues from its captive broadband customer base, but it is unlikely to be much more than that. It is hard to see BT taking any sizeable market share in the mobile market this way, nor does that seem to be the company’s ambition. The service is certainly not going to compensate for the challenges facing the group’s core business, where BT is losing revenues to rivals exploiting the deregulation of the so-called local loop.
None of this should have BT shareholders fondly reminiscing for the days when it owned the Cellnet mobile business, or asking why the company ever got out of mobile in the first place.
Cellnet became mmO2, and then O2, which was bought by Spain’s Telefónica. BT shareholders who kept their mmO2 shares upon its demerger got a brilliant price for them in the O2 takeover. They should remember that fact if BT’s latest mobile comeback ends up making only a modest impact on the group’s bottom line.
