Tesco Profit Error: Could Something Be Amiss?

By Ian King, Business Presenter

Even from a lesser company, three profits warnings inside a year would be startling.

Coming from a blue-chip stalwart like Tesco, it is nothing short of astonishing.

In issuing a profits warning on top of a profits warning, Britain's biggest food retailer almost seems to be taking to an extreme the strategy so commonly seen in its stores, with three for the price of two.

So what exactly has Dave Lewis, the new chief executive, uncovered?

Well, in its own words, Tesco has identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.

In other words, the reporting of costs incurred in the first half of the year appears to have been delayed so they are pushed into the second half, while profits enjoyed during the second half of the year appear to have been brought forward into the first half.

Mr Lewis' response indicates there may be more to this mistake

It is unclear what kind of activities generated these profits but commercial income, with regard to supermarkets, could mean rebates from third-party suppliers or payments from those suppliers to incentivise Tesco to give their goods better positions when they are displayed in its stores.

This latter practice is common place in the supermarket sector and, having worked previously at Unilever, Mr Lewis will be familiar with it.

The overall effect of these two actions will have been to pretty up Tesco's first-half numbers.

Cynics will suggest Mr Lewis has every reason to restate the numbers lower - after all, the period, the six months to August 23, was when his predecessor, Philip Clarke, was at the helm.

Some would say it is in Mr Lewis's interests to ensure that period is painted in as bad a light as possible in order to make any subsequent turnaround under him look better.

Tesco shares have fallen over 40% in the last year

It's known as "kitchen sinking" in the City - where every possible bad bit of news, including the proverbial kitchen sink, is thrown into the accounts to make them look bad.

But the sheer size of this overstatement, £250m, would suggest this is a bit more serious.

So is Mr Lewis' response: the suspension of four of Tesco's UK executives, his recruitment of the top City lawyers Freshfields to investigate and his hiring of outside auditors from Deloitte - Tesco's regular auditor is PwC - to examine what has happened.

At this time, there is no suggestion that anything illegal has been happening. After all, all businesses occasionally recognise revenues early or take their time to recognise costs in the accounts.

Yet the sheer aggression of the accounting policy in this instance and Mr Lewis' response to discovering it rather suggests he thinks something may be amiss.

And, with plenty of American investors - who tend to be more litigious than their European counterparts - on Tesco's shareholder base,  he is doing the prudent thing in checking this out as thoroughly as possible.

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Tesco Suspends Bosses Over £250m Profit Error

Tesco Profit Error: Could Something Be Amiss?

Updated: 5:42pm UK, Monday 22 September 2014

By Ian King, Business Presenter

Even from a lesser company, three profits warnings inside a year would be startling.

Coming from a blue-chip stalwart like Tesco, it is nothing short of astonishing.

In issuing a profits warning on top of a profits warning, Britain's biggest food retailer almost seems to be taking to an extreme the strategy so commonly seen in its stores, with three for the price of two.

So what exactly has Dave Lewis, the new chief executive, uncovered?

Well, in its own words, Tesco has identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.

In other words, the reporting of costs incurred in the first half of the year appears to have been delayed so they are pushed into the second half, while profits enjoyed during the second half of the year appear to have been brought forward into the first half.

It is unclear what kind of activities generated these profits but commercial income, with regard to supermarkets, could mean rebates from third-party suppliers or payments from those suppliers to incentivise Tesco to give their goods better positions when they are displayed in its stores.

This latter practice is common place in the supermarket sector and, having worked previously at Unilever, Mr Lewis will be familiar with it.

The overall effect of these two actions will have been to pretty up Tesco's first-half numbers.

Cynics will suggest Mr Lewis has every reason to restate the numbers lower - after all, the period, the six months to August 23, was when his predecessor, Philip Clarke, was at the helm.

Some would say it is in Mr Lewis's interests to ensure that period is painted in as bad a light as possible in order to make any subsequent turnaround under him look better.

It's known as "kitchen sinking" in the City - where every possible bad bit of news, including the proverbial kitchen sink, is thrown into the accounts to make them look bad.

But the sheer size of this overstatement, £250m, would suggest this is a bit more serious.

So is Mr Lewis' response: the suspension of four of Tesco's UK executives, his recruitment of the top City lawyers Freshfields to investigate and his hiring of outside auditors from Deloitte - Tesco's regular auditor is PwC - to examine what has happened.

At this time, there is no suggestion that anything illegal has been happening. After all, all businesses occasionally recognise revenues early or take their time to recognise costs in the accounts.

Yet the sheer aggression of the accounting policy in this instance and Mr Lewis' response to discovering it rather suggests he thinks something may be amiss.

And, with plenty of American investors - who tend to be more litigious than their European counterparts - on Tesco's shareholder base,  he is doing the prudent thing in checking this out as thoroughly as possible.

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Miliband Sets Out Plan For £8 Minimum Wage

Labour leader Ed Miliband has pledged to raise the national minimum wage to at least £8 an hour if he becomes Prime Minister.

The minimum wage is due to rise from £6.31 an hour to £6.50 on October 1, but Mr Miliband plans to add £1.50 an hour on to that by 2020.

His increase would add around £60 a week, or £3,000 a year, to the pay packets of workers currently on the minimum wage.

And he said the rise would save the taxpayer "hundreds of millions of pounds" in welfare payments.

One in five UK workers - more than five million people - are categorised as being on low pay, defined as wages of less than £7.71 an hour.

Speaking to the Sunday Mirror, Mr Miliband said: "Too many working people have made big sacrifices but in this recovery they're not seeing the rewards for their hard work because, under the Tories' failing plan, the recovery is benefiting a privileged few far more than most families.

"One in five of the men and women employed in Britain today do the hours, make their contribution, but find themselves on low pay.

"But if you work hard, you should be able to bring up your family with dignity."

A Burger King worker was the inspiration for Labour's latest policy

Mr Miliband added: "This week Labour's Plan for Britain's Future will show how we can change and how we can become a country that rewards hard work once again. Because Labour is the party of hard work, fairly paid."

The announcement came on the eve of Labour's annual conference in Manchester - the last before next year's general election.

Mr Miliband said he was inspired to bring in the hike after meeting a woman who worked in Burger King.

He said: "She had worked there for six years and I think she was number two there, but was paid just above the minimum wage.

"She said, 'It's incredibly hard for me. I live three miles away. I can't afford a car and there aren't many buses. I often have to take a taxi. That's where my wages go.'"

Mr Miliband added: "It's just so ­grindingly hard, and it's time we stood up for people doing these hours."

The planned increase, which would affect around 1.4 million jobs, would be introduced in annual stages by the Low Pay Commission before October 2019.

The promised rate is said to be similar to that in force in Australia and EU countries such as Belgium and Germany, but still lower than in France and New Zealand.

Mr Miliband told the BBC's Andrew Marr show: "I can assure you, it doesn't cost money, it saves money. It saves hundreds of millions of pounds in getting the welfare bill down."

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Balls To Freeze Child Benefit To Balance Books

Real-terms cuts in child benefit will form part of Labour's plan to balance the country's books, shadow chancellor Ed Balls will say at the party's conference.

Mr Balls will present a 1% cap on rises for the first two years of a Labour government as one of the "tough decisions" necessary to deal with the deficit if the party takes power next year.

In a speech in Manchester today, Mr Balls will pledge to "change the way our economy works" and to "not flinch from the tough decisions we must make".

He will say: "Three years of lost growth at the start of this parliament means we will have to deal with a deficit of £75bn  - not the balanced budget George Osborne promised by 2015. And that will make the task of governing hugely difficult.

"People know we are the party of jobs, living standards and fairness for working people. But they also need to know that we will balance the books and make the sums add up and that we won't duck the difficult decisions we will face if they return us to government.

"Working people have had to balance their own books. And they are clear that the Government needs to balance its books too."

Mr Balls will say a cap in child benefit rises will save £400m

Under austerity measures introduced by the coalition, child benefit was frozen from 2010 to this year.

It rose by 1% in April and is due to rise by the same amount in 2015/16, but Mr Balls will commit to extending below-inflation hikes for at least one more year.

He will tell delegates: "We will not spend money we cannot afford. So for the first two years of the next parliament we will cap the rise in child benefit at 1%.

"It will save £400m in the next parliament. And all the savings will go towards reducing the deficit."

Other elements of the Labour party's plans for the economy include cutting pay for ministers by 5%, reintroducing the 50p top rate of income tax for those earning more than £150,000, and ending the winter fuel allowance for the richest 5% of pensioners.

A 5% cut in ministerial salaries is also on the cards

The party also has plans to raise the minimum wage to £8 an hour, and introduce a jobs guarantee for young people and the long-term unemployed funded by a tax on bank bonuses and limiting pensions tax relief for the highest earners. 

Treasury Exchequer Secretary Priti Patel poured scorn on Mr Balls' plan for the economy, claiming Labour would put the deficit up, not down.

"These savings on ministerial pay only cut a miniscule fraction of the deficit - less than 1% of 1&. And it comes just days after the Institute for Fiscal Studies said Labour's economic policy means £28bn extra borrowing," he said.

"For all his bluster, Ed Balls still refuses to admit that Labour spent too much and he's opposed every decision we've taken to cut the deficit. All a Labour government would offer is more inefficient spending, more taxes and more debt than our children could ever hope to repay.'

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Miliband Sets Out Plan For £8 Minimum Wage

Britain 'Can Afford' To Increase Minimum Wage

Updated: 9:25am UK, Friday 17 January 2014

Britain can afford to increase the amount its lowest-paid workers earn, the Chancellor has announced.

George Osborne said an above-inflation rise in the national minimum wage - currently set at £6.31 an hour - would "secure a recovery for all".

He has not revealed how much the wage could increase by, although he said it would need to rise by more than 10% to £7 an hour to match improvements to the economy.

"I believe Britain can afford an above-inflation increase in the minimum wage, so we restore its real value for people and make sure we have a recovery for all and that work always pays," he told the BBC.

Prime Minister David Cameron has also said the Conservatives have taken "difficult decisions" to "fix the economy" and could now afford to put "more money in people's pockets".

However, Labour accused Mr Osborne of "flailing around under pressure", while a Liberal Democrat source said the Chancellor had "dragged his feet" on making an announcement.

Chris Leslie, the Labour Treasury spokesman, said: "The Tories cannot hide from the fact that working people are on average £1,600 a year worse off since they came to office.

"We need action now to earn our way to higher living standards and tackle the cost-of-living crisis."

Any increase to the minimum wage would be recommended by the Low Pay Commission (LPC), which talks to businesses and looks at economic data before suggesting a rate.

The LPC, which is independent and overseen by Business Secretary Vince Cable, reviews rates each year and reports to the Government in February.

 It has been handed the Government's latest analysis on jobs and the economy ahead of its report next month.

The Government sets the rate based on the LPC's recommendation, with HM Revenue & Customs handling enforcement. 

An increase to the minimum wage would likely take effect in the autumn.

The Federation of Small Businesses backed an increase to the minimum wage but said it should rise by no more than the rate of inflation - currently 2%.

Its national chairman John Allan said: "The Low Pay Commission will recognise that in some industries, such as retail and social care, small businesses operate very fine margins and are still struggling with rising costs in areas such as utilities and business rates.

"At the same time, the recovery remains on a fragile footing in certain regions of the UK."

:: Watch Sky News live on television, on Sky channel 501, Virgin Media channel 602, Freeview channel 82 and Freesat channel 202.

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Richard Branson Tops 'Most Admired' Boss Poll

Branson's Virgin To Pilot New Cruises Venture

Updated: 1:16pm UK, Friday 28 February 2014

By Mark Kleinman, City Editor

Sir Richard Branson is drawing up plans for a secret assault on the international cruises sector which will involve raising hundreds of millions of pounds in funding from external investors.

Sky News can reveal that Virgin Group has appointed the US-based corporate advisory firm Allen & Co to oversee the development of a cruise operation that would eventually aim to compete with industry giants including Carnival Corporation.

Virgin has been working with Allen & Co on a range of potential opportunities across the wider leisure sector, including an investment in a four-star city centre concept called Virgin Hotels.

The development of Virgin Cruises, which is expected to be the name of the new venture, is at an early stage, people close to the project cautioned on Friday.

However, Virgin executives and their advisers have already held detailed talks with banks about raising an estimated $1bn (£598m) of debt to finance the acquisition of the company's first vessels.

They also want to raise in the region of $700m (£418m) of equity by selling stakes in Virgin Cruises to outside investors.

Sir Richard and Josh Bayliss, chief executive of Virgin Management, are understood to believe the global cruises sector possesses many of the same characteristics which have led Virgin to build a significant presence in sectors such as aviation, rail and mobile telecoms.

The cruise market is dominated by fewer than a handful of companies, such as the FTSE-100 group Carnival, Royal Caribbean and Norwegian. Between them, the three companies have a global market share of approximately 80%.

"Cruises is a classic Virgin market, dominated by two or three players and where the product needs to be refreshed," an insider said.

The industry is forecast by Cruise Market Watch, an industry research group, to grow from 21.5 million passengers this year to 22.2 million passengers carried worldwide in 2015.

Virgin Cruises is expected to be headquartered in the US, reflecting North America's status as the world's biggest cruise market, the source said.

Globally, the industry is likely to generate revenue of $37.1bn (£22.2bn) this year, a 2.3% increase on 2013.

The plans for the launch of Virgin Cruises emerge as Sir Richard targets a flotation of his domestic US airline, Virgin America.

The carrier, which recently undertook a debt restructuring covering roughly $300m (£179.8bn) of borrowing obligations, has hired investment banks to prepare the listing.

A successful flotation of Virgin America would echo the model used several times by Sir Richard to take some of his business ventures, such as Virgin Mobile, to the public markets.

He has also frequently sold stakes in his companies to outside investors, including the sale of shares in Virgin Money, his banking operation, to an entity in Abu Dhabi and Wilbur Ross, a prominent US investor.

Other plans involving Virgin companies this year include the opening of the first City Centre hotel in Chicago in the autumn, with other venues expected in US cities served by the group's airlines.

The plan to break into the cruises market comes weeks after the publication of a new biography of Sir Richard by the author Tom Bower.

Mr Bower claimed the company's maiden flight of its space tourism venture was facing further delays, while Virgin insists it is on track to take off this year.

A Virgin spokesman declined to comment.

:: Watch Sky News live on television, on Sky channel 501, Virgin Media channel 602, Freeview channel 82 and Freesat channel 202.

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Wellcome Trust Toasts £100m Alibaba Profit

By Mark Kleinman, City Editor

Britain's biggest medical research charity is toasting a £100m-plus profit from the flotation of Alibaba Group, the Chinese internet giant that on Friday became the biggest technology company listing ever.

Sky News has learned that at the $68-a-share (£42) pricing settled upon by bankers advising Alibaba, the Wellcome Trust is sitting on a substantial paper windfall from two separate investments it made in the company's shares in recent years.

The news represents a significant boost for medical research funding in the UK and underpins the Wellcome Trust's highly-regarded investment strategy, led by its chief investment officer, Danny Truell.

Jack Ma, Alibaba's founder and now a multibillionaire as a consequence of the company's flotation, was present for the opening bell at the New York Stock exchange on Friday.

The share sale is eventually expected to raise $25bn (£15.3bn), making it the biggest initial public offering in history, once an over-allotment option is exercised.

The Wellcome Trust owns significantly less than 1% of Alibaba stock

It has overtaken Agricultural Bank of China's $22.1bn (£13.5bn) fundraising in 2010 and Facebook, which sold more than $16bn (£9.8bn)  of shares in 2012 to become the biggest-ever technology company listing.

Sky News disclosed the Wellcome Trust's investment in Alibaba in March.

Insiders said the Wellcome Trust, which is one of the world's most renowned medical research organisations, owns significantly less than 1% of Alibaba's shares, although the exact size of its holding is unclear.

A Wellcome Trust spokesman declined to comment.

Alibaba, which is headquartered in Hangzhou, one of China's so-called second-tier cities, has become a major player in the country's e-commerce industry.

It acts as an eBay-style intermediary in the supply and sale of goods online, having established marketplaces targeted at small business traders and consumers.

Using the brand-name Taobao, an e-shopping platform that in China has more than 500 million customers, Jack Ma, Alibaba's founder and chairman, has become one of the world's most successful technology entrepreneurs.

Talks between Alibaba and the Hong Kong Stock Exchange ended without success because of the company's desire to create an alternative shareholding structure that would have given executives additional control over the company.

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Alibaba Bigger Than Facebook On Market Debut

Alibaba Boss Like A Rock Star At 'Epic' IPO

Updated: 7:22pm UK, Friday 19 September 2014

By Hannah Thomas-Peter, New York Correspondent

As Jack Ma swept past me on the floor of the New York Stock Exchange, I asked him how he was feeling.

He smiled at me, waved and mouthed "ok" before turning to a bank of cameras trained on the founder and spiritual leader of Alibaba.

"Ok," felt like a bit of an understatement.

Such was the demand and volume associated with the Alibaba IPO it took nearly two-and-a-half hours for the New York Stock Exchange's designated market maker (DMM) to decide on the right opening price.

The DMM is a person, not a computer. In this case it was Barclays' Glenn Carell.

He was also the DMM for the Twitter IPO, and is responsible for gauging appetite and supply, honing in on the right opening price for a stock.

It's a big job.

If there are technical problems he can override the system and trade on paper.

If there's uncontrollable volatility he can use his company's own cash to step in and stabilise things.

He told Sky News: "This is a very exciting day for me.

"It's the biggest IPO ever, and we really want to get the best price for opening.

"We have to go slow and get it right."

As traders crowded in on Glenn communicating orders from clients, electronic requests also poured in from across the world, flashing up on screens in front of his team.

Over two hours the price indicator range, which helps investors know how much the shares will cost once trading begins, crept from around $80 to over $90.

"Investors really want this stock," said Meridian Partners trader Jonathan Corpina.

"They see a very well-diversified company with huge international exposure.

"Even if US investors don't know the brand name, the product is easy to understand, and it's a good one."

As Glenn yelled "we're getting close!" the traders bunched together like rugby players in a scrum, whoops rang out, tension rose.

"Come on Glenn what's the price? Close it, close it," muttered one trader, his electronic trading tablet buzzing and beeping with impatient clients.

"$92.70!" came the shout, and trading began, starting with a short-lived 'pop' up to $99, before settling back down in Glenn's predicted range.

"Phew" said one NYSE executive to another.

"I tell you, that was pretty epic."

Glenn looked relieved as trading continued smoothly, confessing he would be having a glass of champagne later that evening.

Jack Ma may well do the same.

As he left the exchange to get in to his car, it was as if a rock star had left his concert.

Fans yelled and screamed and cheered and photographed for all they were worth.

Ma waved, smiled and slipped in to a waiting SUV.

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Sky Forecast: Scotland Rejects Independence

Sky News is forecasting that Scotland has rejected independence, meaning the United Kingdom will remain intact.

Victories in Glasgow, Dundee and West Dunbartonshire had given the Yes campaign a major boost.

However, they were followed by substantial No victories in Stirling, Aberdeen and Dumfries and Galloway.

Scotland First Minister Alex Salmond tweeted: "Well done to Glasgow, our commonwealth city, and to the people of Scotland for such a incredible support."

David Cameron tweeted: "I've spoken to Alistair Darling - and congratulated him on a well-fought campaign."

Voters sided with the Better Together team in the Western Isles (10,544 to 9,195) and Clackmannanshire (19,036 to 16,350) - both key Yes targets.

The No strongholds of Shetland (9,951 to 5,669) and Orkney (10,004 to 4,883) saw the voters reject independence.

Mr Cameron is due to make a live TV address to the nation from 10 Downing Street once the result is confirmed.

The Prime Minister is expected to set out not only proposals to devolve more powers to the Scottish Parliament, but also significant changes for other parts of the country.

The referendum looks set to break records for turnout, with figures as high as 91% in East Dunbartonshire, 90.4% in East Renfrewshire and 90.1% in Stirling.

A poll taken by YouGov after people voted predicted a victory for No by 54% to 46% for Yes.

And even before the first results were announced, its president Peter Kellner told Sky News: "I can't see No losing this now.

"At the obvious risk of looking like a complete prat in eight hours' time, I would say it is a 99% certainty of a No victory."

Speaking on Sky News, Blair McDougall, the Better Together campaign director, welcomed the high turnout.

"There has been the biggest super-poll in Scottish political history today with probably the biggest turnout in recent political history."

Sky News has learned officials at the referendum count in Glasgow are investigating 10 cases of suspected electoral fraud at polling stations.

Although the votes are being counted at 32 regional centres - whichever side "wins" in each area is irrelevant.

All that matters is whoever gets the most overall - even if it is by a single vote.

:: Watch live: Scottish referendum coverage now on Sky News Sky 501, Virgin Media 602, Freesat 202, Freeview 132.

:: Live coverage is also available on sky.com/news and Sky News for iPad and on your mobile phone.

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Scotland Vote: Market 'Relief Rally' Forecast

The pound has strengthened and the FTSE 100 is forecast to rebound by more than 100 points following Scotland's referendum.

More follows...

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