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It’s a pretty good interest rate and it tastes a lot better than all the others…

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One of my weaknesses is that I just love chocolate.

Hotel Chocolat is a top end chocolate company with nearly 50 stores in the UK, the US and the Middle East. I must admit that I probably spend a bit too much time in their shops than I should but everyone has got their weakness.

As an accountant with a love of chocolate I was pleased to see Hotel Chocolat take a rather unusual approach to raising money to fund their expansion.  They are looking to raise cash to increase the number of Hotel Chocolat stores as well as invest in their plantation in St Lucia.

They are raising money by way of issuing bonds. This in itself doesn’t sound particularly unusual but what is different about this bond issue is that whilst they are genuine bonds with interest being paid on them, the actual interest paid is in the form of chocolate rather than money.

Two values of Chocolate Bonds will be issued. Holders of the £2,000 bonds will receive six chocolate tasting boxes with a value of £107 which represents a gross interest rate of 6.72% whilst holders of the £4,000 bonds will receive a higher interest rate of 7.29% via chocolates to the value of £233.

The bonds are fully redeemable after 3 years and on every anniversary after that so lovers of chocolate will be able to recover their full investment whilst at the same time enjoying some fantastic chocolates.

The interest rates on the chocolate bonds are pretty impressive when compared to what you would receive on a typical bank account so I’m sure that there will be many chocolate loving investors that will literally be licking their lips in anticipation of the interest that will be received (and eaten pretty soon afterwards….)

So, what does the Eyjafjallajoekull volcano eruption in Iceland have to do with your exams?

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This is our 100th blog posting and a big thank you to all of you for following this blog and for all your kind comments. They’re much appreciated!

Please do contact us with any thoughts or suggestions on what you’d like to see on this blog going forward.

The news over the weekend has been full of the flight disruptions over Europe. The cloud of volcanic dust from the eruption of the Eyjafjallajoekull volcano in Iceland has resulted in airspace in nearly 20 European countries being closed with thousands of flights cancelled.

This is unprecedented in recent history but what does this have to do with your exams? There are some nice links to some of your papers.

Certain businesses are obviously impacted more than others (a nice topical link to a short term environment issue within PESTEL analysis). Airlines for example are estimated to be losing £130 million a day as a result of their planes being grounded. The courier companies such as TNT and DHL are also facing pressures as their planes cannot take off.

The ash cloud has also had some other less direct consequences. Just in time stock control methods are used by supermarkets for a number of their perishable products. Whilst supermarkets source a lot of their products from within the UK where delivery is made by road, there are a number of “exotic” goods that have to be shipped by air into the UK.

Heavier, lower value items that do not have a particularly short perishable life are generally shipped to the UK by road or sea freight. Items such as bananas are shipped by boat rather than plane although as mentioned in a previous blog entry they have their own issues to look at!

It’s likely however that the supermarket shelves will soon be empty of perishable items such as exotic fruits and flowers that are prepared and packed overseas and then shipped to the UK by air freight.

Whilst customers will miss out on their purchases of these exotic items, it’s less clear what the impact will be on the supermarkets. The reports are that whilst less than 1% of British imports by quantity are transported by air freight, this figure increases to approximately 25% when looking at it as a percentage of British imports by value.

Will the customers switch to less exotic but available alternatives? From a personal point of view, my favourite fruit is a banana so I’m lucky!

Manchester Utd and Leveraged Buy Outs. What’s all the interest about?

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There was a meeting yesterday attended by various financial heavy hitters including renowned deal maker Keith Harris and Goldman Sachs chief economist Jim O’Neill.

What were they meeting for? Well, if press reports are anything to go by they were meeting to discuss proposals to buy one of the most famous football clubs in the world, Manchester United.

Back in 2005 Manchester United was a public company. The Glazer family then used a Leveraged Buy Out (LBO) to take the football club private (i.e. move it from a public company which was quoted on the stock exchange to become a private company).

There has been a lot of bad feeling amongst the Manchester United fans who feel that following the LBO the clubs finances are now causing real problems. Before the LBO the finances were healthy whereas now there is a huge debt obligation to fund which some feel is preventing them from buying players on the transfer market. The meeting yesterday was in connection with acquiring the club from the Glazers and restructuring the finances.

An LBO is something which some students find hard to grasp as it involves a company changing ownership with the funding mainly being secured on the assets of the company being acquired.

In simple terms it involves the acquiring company using significant amounts of borrowed money to fund the acquisition. In most cases the assets of the company being acquired are used as guarantees for the loans. This enables acquiring companies to fund the acquisition by way of debt as opposed to equity. The real problem though lies in the fact that interest has to be paid on these loans and on a number of occasions the interest payments on these loans have been so large that the company could not meet the payment obligations.

Whilst the workings of LBOs are interesting to students studying for their professional exams, I’m sure that the focus of most Manchester United supporters is getting ownership of their club back into the hands of what they consider to be real supporters of the club.

The figures though are quite staggering. For example, in the last three years Manchester United have paid £130 million in interest payments which to put it in perspective is more than five times what they sold David Beckham to Real Madrid for.

Perpetual bonds, the mexican restaurant and two crazy people?

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I had a lovely dinner last night at a nice Mexican restaurant with a good friend who is also an accountant. We’ve known each other for years and unfortunately always have a habit of talking about finance and business together. This is fine when we are by ourselves but if our “other halves” are with us then it can get a bit boring for them.

Last night we were determined not to keep on talking about finance and all was going well until some nice tortillas arrived. Within a couple of minutes the talk had switched to perpetual bonds.

Were we crazy or was it a logical step to go from tortillas arriving to perpetual bonds?

Well, in our defense the logic behind the switch was that Gruma, Mexico’s leading tortilla maker issued some perpetual bonds a few years ago. Some students have to think hard about whether a bond without a maturity (redemption) date has a (market) value. To remove any doubt, Gruma issued USD 300 million worth of perpetual bonds.

The appetite for perpetuals is starting to spread to Asia, especially among investors in search of high-yield investments.  Last year for example, the Union Bank of India (UBI) announced an issuance of such an instrument.

Back to my point of whether we were crazy or it was a logical step to go from tortillas to perpetual bonds. At the table last night two of us thought it was logical whilst the other two thought we were crazy…

CIMA results and performance with a smile…

First of all congratulations to all CIMA students that received their exam results yesterday and were successful. Your hard work paid off so very well done! We’ve heard from a number of you that were successful and those are always the best type of emails to receive from students!

If your results weren’t as expected though and you didn’t pass then better luck next time.

Various papers have performance management within the syllabus. A rather unusual method of managing performance was recently reported by the press.

Japan’s Keihin Express Railway Co., in an effort to promote a friendlier customer service, has implemented something called “smile scanners” at its stations to assess the smiles of their employees!

Employees have to look into a camera every day and have their smiles scored by a computer that analyses their facial features and gives feedback. The quality of the smile is reportedly rated on a scale ranging from 100 to zero.

Is it effective? Can the scanner distinguish between an artificial and a genuine smile? The jury is still out.

While we at ExP love technology, we’re not sure we would submit to such assessment, at least not before our morning coffee!

Remember the short term and long term

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One item that people should be aware of is that management accounting and financial management are similar to the extent that they are both concerned with resource usage. But there are differences.

I was lucky enough to have recently flown on the new Airbus A380 super jumbo and that got me thinking about some of the financial management issues that Airbus face. Designing and producing the A380 must have been a phenomenal exercise and a real testament to man’s engineering skills. It’s capable of carrying over 800 passengers and has a range of nearly 15,000 km. It’s a fantastic machine.

But what has this all got to do with the difference between management accounting and financial management? One difference is that management accounting tends to deal in short-term timescales whereas financial management is generally more concerned with the longer term. Whilst the longer term is generally considered to be more than one year be aware that certain industries and companies have a distinctly longer “long-term”.

From inception to delivery the A380 took nearly 10 years and the long term view taken by Airbus is certainly longer than some businesses in for example the IT or fashion industries. Some of the businesses in these industries have distinctly shorter “long-terms”.

Anyway, despite the millions spent on design and development of the A380 there was one disappointing thing about my flight and that was I fell asleep during the film and missed the ending…

The Biggest Rights Issue in UK history

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F9 and P4 students should be aware that there are a variety of ways to raise finance (see chapter 4 of our free F9 ExPress notes. One method is by way of a rights issue where a company issues new shares and sells them to existing shareholders. Shareholders are not obliged to buy them but merely have the “right” to buy them. By being given the “right” they have the security of knowing that their shareholding won’t be diluted by shares being issued to other shareholders without first being offered them.

The Lloyds Banking Group has recently announced the UK’s largest ever rights issue and the bank hopes to raise over £13 billion. Press reports state that the main reason behind the rights issue is to raise sufficient funds to avoid the bank having to take part in the government’s banking insurance scheme that was set up after the recent banking troubles in the UK.

This is going to be an interesting one to watch. Lloyds has nearly 3 million shareholders with the majority being private shareholders. Whether or not these shareholders will be willing to take up these rights remains to be seen. They are due to meet to approve it this coming Thursday. In the run up to the exam though I’m sure students will have more to worry about than the outcome of this vote but make sure you’re aware of the various finance raising methods for the exam!

British Airways and Iberia – suitable, acceptable but is it feasible?

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In last week’s P3 ExPand video I talked about the recent announcement of the British Airways (BA) merger with the Spanish airline Iberia. Some form of merger had been discussed on and off since they held talks in the summer of 2008 but now it’s looking like there could be some movement on this.

Students of Paper P3 will be aware that Johnson & Scholes argue that when evaluating strategic options, 3 major areas should be considered. Namely, is it suitable, is it acceptable and is it feasible?

The aviation industry is extremely competitive. In the current economic environment it is safe to say that the merger would help both companies in terms of synergies and hence from a suitability point of view it appears to work.

This issue of acceptability would need to be examined in the context of the key stakeholders of the firms. BA is quoted on the London stock exchange so some key stakeholders would be some of the big shareholders. The share price rose by 7% following the announcement so the shareholders appeared to like the news.

The final area is that of feasibility. An important issue from the feasibility point of view is whether it would get regulatory approval from the European Commission.

It’s suitable, it’s acceptable but is it feasible? Let’s wait and see what develops.

Anyone got a spare £9.8bn ?

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Mergers & Acquisitions (M&A) are an important part of the ACCA P4 syllabus and are also featured in CIMA F3. Those of you that have read our free ExPress notes (/expand/17-p4_advanced_financial_management.html) will be aware that to minimize the risk of failure in the M&A process, acquiring companies should follow a systematic series of steps prior to launching a bid.

Namely:

1. Clarify strategic reasons for wanting to acquire a company;
2. Draw up a short list of possible takeover targets and select the preferred one;
3. Value the target based on publicly available information and to establish an opening bid;
4. Identify financing options for the transaction

There has been a lot of coverage recently about the attempt by the American food producer Kraft to acquire the British chocolate maker Cadbury.  After Kraft announced their intention to acquire Cadbury, another company (Hersey) announced their interest in acquiring Cadbury.

The sums of money involved are significant. Identifying financing options for the acquisition (point 4 above) is therefore going to be key. Kraft’s bid is £9.8bn and press reports indicate that a syndicate of 8 banks has been brought together to finance the approach. The interesting thing though is that it is reported that these 8 banks have been tied into a non-compete agreement. This means that Hersey cannot approach the same banks to finance their approach. As a result it is going to be more difficult for Hersey to raise such amounts of funds.

Whatever happens over the next few weeks this will be an interesting story to follow.

Do you know your cost of capital?

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The other day I was talking to a few local business owners and I asked them if they knew what their cost of capital was. I got a few blank stares.

When we discussed the issue further, people started to warm up to the idea that the cost of capital can be viewed in terms of opportunity costs:

1. One owner said his cost of capital was the interest rate on his bank loans. I suppose he was 100% debt financed and probably not planning to refinance any time soon! Good luck to him!

2. A second owner said he took out all his savings from the bank and put it into his business. Since the bank deposit rate was so low, he figured his opportunity cost was pretty low as well. He has a point, though he must realize that he has moved into a higher risk category by withdrawing his money from the bank and investing it in a start-up business.

3. Another business owner said he started his company by borrowing from his relatives. Since they haven’t asked for it back he assumes its cost is zero. But he does pay a price, I suppose: at family gatherings he gets dirty looks from his relatives and his wife gives him constant grief. He suspects that the relatives complain about him to his wife.

Since all three owners want to expand their businesses, they asked me if I could recommend new sources of finance. I thought of sending them to our P4 candidates (after the exam!).