Commercial Awareness Update – W/C 11th November 2019

British Steel to be sold to Chinese firm for £50 million

The government has announced that British Steel, which has been in liquidation since May, has entered into a contract with Chinese steel-maker Jingye Steel.  The contract, which is still conditional on several points, will see Jingye purchase British Steel for £50 million in a move that could save 4,000 jobs in the Scunthorpe and Teeside area where it has its manufacturing operations.

British Steel, which is responsible for about a third of the UK’s steel production, went into liquidation in May and has been kept running by the “Official Receiver”, a civil servant appointed by the court.  When a company goes into liquidation, the liquidator must decide whether to wind the company up or, as in this case, keep the company going and find a third party to buy it out.  The Official Receiver was previously in discussions with a Turkish company called Ataer Holding about acquiring British Steel, but these discussions fell through.

Jingye, which is based in Shijiazhuang south of Beijing, has 23,500 employees and also has interests in tourism, hotels and real estate.  It has announced that it plans to invest £1.2 billion in British Steel over the next ten years and to increase the company’s international presence.  Two of the products that British Steel makes – railway tracks and girders used in construction – are not currently produced by Jingye, so this can be seen as a strategic acquisition.

However, there has been concern about selling such a major UK company to a Chinese buyer.  In recent years, China has been accused of “dumping” its steel products – a practice whereby a country will export its products at below their market value in order to gain a foothold in international markets.  The cheap price of Chinese steel was in fact one of the major factors that led to British Steel’s financial troubles.  The many employees of British Steel will hope that the acquisition represents a turning point in the company’s fortunes.

Find out more here and here.

Walgreens Boots Alliance may be heading for largest leveraged buyout in history

The struggling drugstore conglomerate, Walgreens Boots Alliance, may be heading for the largest leverage buyout in private equity history, according to recent reports.  Walgreens Boots Alliance is the company behind Boots pharmacies in the UK and Walgreens pharmacies in the US.  The company, which has a market value of $56 billion, has reportedly received an offer from private equity firm KKR.

A leveraged buyout occurs when an outside company – usually a private equity firm – purchases a company using largely debt.  The debt is secured against the assets of the company being purchased.  The expectation is that the purchased company will be transformed under its new ownership and will be able to pay off the debt.  However, if this does not happen and the company continues to underperform, there is less risk for the purchaser than in a traditional acquisition.  The purchaser will have only put in a small portion of the purchase price (often as little as 10%) and will not be responsible for the debt itself.

You can think of it like a mortgage on a house – you put down a small downpayment on the house, which is largely paid for by the loan from your bank.  You hope that the house will go up in value so that when you sell it and pay off your mortgage, there will be some profit left over.

Walgreens Boots Alliance has been struggling like most other highstreet chains with competition from online retailers.  Boots recently announced it could be forced to shut 200 of its stores over the next two years, as consumers look to shop online for the household essentials that make up a large portion of its income.  There has also been a growing trend in consumers purchasing pharmaceuticals from e-pharmacies.

Few details of the proposed deal have been released so far, so we will continue to monitor the situation.

Find out more here and here.

Major coal producer goes bankrupt despite Trump Administration’s best efforts

Article by Mared Davies

Murray Energy Corp., the largest privately held coal company in the U.S, filed for bankruptcy yesterday – citing reduced demand, competition from cheaper exports, and the expeditive growth of renewables. Murray follows in the footsteps of more than half a dozen of America’s large coal companies who have also filed for bankruptcy in the past year – a sure sign that the one-time king of American energy is fading in the face of increased worry regarding the rapidly declining ability of our planet to recover from human activity.

The numbers are promising: 10 of the 12 worst environmental justice offending plants have retired or proposed retirement, energy efficiency programs employ nearly 2 million people (nearly twice as many as the oil and gas industry), and without forgetting the impact on our health – coal retirements have saved more than 7,000 lives, $3.4bn in health care costs and prevented more than 81,000 asthma attacks.

President Trump’s Administration is unlikely to be joining in with the celebrations, however,  Murray was a major donor to the Trump campaign, donating $300,000 to his inauguration alone. Consequently, Trump’s environmental policies could be argued to be an exact copy of Murray’s wishlist – with environmentalists complaining that Mr.Trump was following a blueprint from the coal industry.

“I give President Trump and his administration credit for being bold, being passionate and being correct in addressing a lot of these issues that were on my list here,” Mr. Murray said in an interview Tuesday. Such issues include pulling out of the Paris climate accord and rolling back Obama-era clean energy rules.

Despite bringing the President’s attention to coal workers, Murray has admitted that the vast majority of jobs lost in recent years aren’t coming back. This is largely due to the fact that in 2008, coal accounted for almost half of U.S. electricity generation, according to the EIA. 11 years later, it’s fallen to approximately 25%, with predictions that it’s expected to fall further.

This seemingly leaves the energy sector with two options: continue with natural gas or make the switch to renewables. Natural gas has historically been favoured for its reliability and low prices, but renewables are on a steady climb and in 2018 provided almost 18% of U.S. electricity generation.

You can read more here.