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Tesco’s tax payback piles the pressure on its high street rivals

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Unintelligible. That’s how Tesco chairman John Allan described the UK’s business rates system to last year’s CBI conference. It also describes his explanation on Wednesday for why Tesco has chosen now to refund its share of business rates relief.

Taking state aid was the right thing to do, but so is giving it back, says Mr Allan. Uninterrupted trading since March is offered both as a defence for accepting the tax break and as a justification for refusing it. He rationalises that Covid has cost Tesco more than £725m, versus the £585m it had dodged on business rates. That Tesco’s Covid costs mostly related to meeting unprecedented demand while its neighbours were forced to close is a nuance skipped over. 

Tesco bosses are “conscious of our responsibilities to society”, says Mr Allen, though when this occurred is not made clear. The panic around collapsing supply chains that justified all supermarkets using state support had subsided within days of the first UK lockdown taking effect. The backlash began long before October, when Tesco’s prospects were sufficiently robust to allow for a £314m interim dividend that Mr Allan pledged to “defend to the death”. 

Yet restitution had to wait until the countdown to Christmas, just as the collapse of Debenhams and Philip Green’s Arcadia focuses minds on moribund high streets. Payback also helps clear the path towards a £5bn cash return on the pending sale of its Asia business. For all the good intentions on show, it’s hard not to be cynical about the timing.

Then there’s the effect on peers, who will need to respond or face trial by public opinion. While Tesco has been the UK’s biggest beneficiary of rates relief, the support mattered more to J Sainsbury, whose Argos chain was classed as non-essential. Sainsbury’s £450m of savings equates to nearly 10 per cent of its market value, versus less than 3 per cent for Tesco. 

Also feeling the heat are general retailers that kept trading through the pandemic. B&M, the Luxembourg-registered seller of cheap toys and toiletries, is among those looking exposed having banked around £100m via UK rates relief while paying out nearly £500m in ordinary and special dividends. B&M has been expanding rapidly into groceries. Perhaps Tesco’s motivations have an element of game theory, where it has invited mutual harm from which it expects to suffer the least.

There’s no faulting Mr Allan’s criticisms of Britain’s arcane business rates system. Covid has made reform urgent. Successive governments have dragged their feet on promises for a review. Tesco chooses to play politics around the issue but has favoured opportunism over playing to its strengths. A threat to defer all refunds until reform is delivered might have effected the bigger social benefit.

Avon Rubber is looking stretched

It’s perhaps unsurprising that in a year where governments worldwide have been throwing money at personal protective equipment, Avon Rubber is one of the market’s best performers, writes Jamie Powell.

The shares of the Wiltshire-based supplier of military equipment, including respiratory masks and body armour to the US Department of Defence, have doubled in 2020. The FTSE 350, meanwhile, has lost 14 per cent. Yet, after a year of aggressive M&A, its full-year results published Wednesday morning take some unpacking. While revenues were up an impressive 30 per cent to £168m, its profit before tax came in at under a tenth of 2019’s because of a sizeable amount of one-offs and restructuring costs. The company was quick to point out, however, that its underlying ebitda margins remained resilient.

Avon Rubber has long been a company in transformation. Once a supplier of tyres, automotive parts and milk-extracting udder liners, under boss Paul McDonald it has focused on defence contracting. So far this year it has splashed £187m on US conglomerate 3M’s helmet and armour business and Ohio-based headgear purveyor Team Wendy. Sandwiched between these deals it divested of its dairy arm for almost the same amount.

It’s easy to understand the strategic rationale. Once won, military contracts provide guaranteed recurring revenues funded by the largesse of the sovereign bond market, which makes any worries about the negative effects of an economic downturn moot. In turn this should allow reinvestment in new products, whether through further acquisitions or research and development, without losing much sleep.

Yet recent acquisitions pose questions Avon Rubber has not had to answer before. Integrating the US-based companies will take a delicate balancing act between centralising costs and continuing to deliver mission-critical equipment to customers. It is fair to speculate the US military-industrial complex will not take kindly to any organisational snafus. Investors may also be cautious, particularly as restructuring costs have eaten into its operating profits over the past two years.

Avon Rubber’s market value is now a touch under £1.4bn, pricing its shares at 38 times 2021’s profits. For a business with a growing order book and recurring revenues, it may not seem too expensive in a world short of both yield and growth. But the valuation leaves little wriggle room should its transatlantic expansion not go to plan.

Tesco: bryce.elder@ft.com
Avon Rubber: jamie.powell@ft.com



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ExxonMobil proposes carbon storage plan for Texas port

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ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

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Where climate change meets business, markets and politics. Explore the FT’s coverage here 



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European stocks hit record after strong US earnings and economic data

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European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.



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EU split over delay to decision on classing gas as green investment

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The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy under its landmark classification system for investors.

Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week. The document is designed to guide those who want to direct their money into environmentally friendly investments, and help stamp out the misreporting of companies’ environmental impact, known as greenwashing. 

The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be explicitly recognised as a low-emission technology that can help the EU meet its goal of becoming a net-zero polluter by 2050. 

Now the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse. According to a draft of the text seen by the Financial Times, the commission proposed to delay the decision in order to carry out a separate assessment of how gas and nuclear “contribute to decarbonisation” to allow for a more “transparent” debate about the technologies.

But officials told the FT that some commissioners were pushing for gas to be awarded the green label now, rather than delaying the decision until later this year. 

“There are a sizeable number of voices in the commission who want gas to be included in the taxonomy,” said one official. A final decision on whether to approve the current text or delay it again for further redrafting is likely to be made on Monday.

The EU’s taxonomy is being closely watched by investors as the first big attempt by a leading regulatory body to create a labelling scheme that will help guide billions of euros of investment into green financial products.

But the process has proved divisive, as several EU governments have demanded recognition for lower-emissions energy sources such as gas. 

Coal-reliant countries such as Poland, Hungary, Romania and others that are banking on gas to help reduce their emissions do not want the labelling system to discriminate against them. France and the Czech Republic, meanwhile, are also pushing for the recognition of nuclear as a “transitional” technology in the taxonomy.

A leaked legal text seen by the FT earlier this month paved the way for gas to be considered green in some limited circumstances. That has since been removed along with other sensitive topics such as how best to classify the agricultural sector, according to the latest draft the FT has seen.

EU governments and the European Parliament have the power to block the draft if they can muster a qualified majority of countries and MEPs against it. 

Environmental groups have hailed the exercise, and urged Brussels to stick to science-based criteria in defining the thresholds for sustainable economic activity.

Luca Bonaccorsi from the Transport & Environment NGO said delaying decisions on gas and nuclear risked allowing pro-nuclear countries like France and the Czech Republic to join up with pro-gas member states “to forge an alliance that will obtain the greening and inclusion of both energy sources”.

“Should they ally, it will be impossible to resist the greenwashing of these two unsustainable energy sources,” said Bonaccorsi. 

The delays in agreeing the taxonomy have forced Brussels to abandon an attempt to use it as the basis for EU green bonds that will be issued as part of the bloc’s €800bn recovery and resilience fund. About €250bn of debt will be issued in the form of sustainable bonds over the next few years, which will make the commission one of the world’s biggest issuers of sustainable debt.



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