TheChek News Flow

AB InBev could slake investors’ takeover thirst with SABMiller

Carlos Brito, head of Anheuser-Busch InBev, sells one in five beers globally, including Budweiser, Corona and Stella Artois, but the 54-year-old Brazilian may have an appetite for more. Heightened expectations that he may be considering a bid for SABMiller have helped the UK-listed brewer’s shares jump 27 per cent since this year’s February low. The rise also reflects diminishing fears about risks in emerging markets, which account for 75 per cent of SABMiller’s sales.

Shares in Diageo, the maker of Johnnie Walker scotch and Guinness, which have underperformed the market this year, also received a boost from a suggestion by analysts at Barclays that SABMiller could be plotting a merger with its spirits rival to prevent an anticipated AB InBev approach. Takeover talk has intensified, partly because the strength of mergers and acquisitions this year in food, spirits and healthcare is expected to spill over into beer. “There is one more round of consolidation to go in the beer sector,” said one prominent M&A banker, arguing that the sector is less consolidated globally than some others. The top four brewers – AB InBev, SABMiller, Heineken and Carlsberg – account for 49 per cent of global beer sales and 60 per cent of operating profit, according to Bernstein Research. But some investors are voicing opposition to the idea of a mega merger between AB InBev and SABMiller, which makes Peroni, Grolsch and Miller Lite. These investors fear value would be destroyed through the creation of a company with a market capitalisation close to $300bn on current valuations, making it one of the world’s five biggest. “Ferrets run quicker than elephants. SAB at $80bn will be able to grow faster than SAB/ABI at $300bn,” said one top 10 investor in both companies. On paper, a tie-up between AB InBev and SABMiller looks good, which is why the idea has been fermenting for some years. It would address AB InBev’s main problem of a slowdown in growth in beer volumes, mainly due to its reliance on the US. These have fallen from more than 5 per cent annually in the five years to 2012 to 2-3 per cent, according to Euromonitor. Taking over the UK group would allow AB InBev to inject SABMiller’s fast-growing markets – especially in Africa where AB InBev has virtually no presence – into its portfolio. AB InBev is highly acquisitive and is paying down the debt incurred by 2012’s $20bn takeover of Mexico’s Grupo Modelo, freeing it up to mastermind another deal. However, some investors and bankers, who know all three companies but did not want to be cited, believe that although AB InBev may be seeking a new deal, SABMiller is not the right one. They point to at least two potentially large obstacles to an imminent bid. The first is SABMiller’s joint ventures – in the US, Africa, Turkey and China – which could have change-of-control clauses. Competition issues in the US and China, would oblige divestments, potentially leaking value to the joint venture partners in those countries. The second obstacle is price. AB InBev would need to pay a premium for SABMiller of at least 30 per cent, according to bankers and analysts, on top of its already high valuation. “When we think about ABI, we think about cost-cutting,” said analysts at BTIG Research. “SAB is a well-run company that has cost-cutting potential but not to the extent seen in prior ABI acquisitions.” This may account for the wide range of analysts’ estimates of potential synergies – from $1bn to $2.5bn. Another banker, however, points out that since 40 per cent of SABMiller’s shares are in the hands of two entities, “you could get the main parties round the table on a Friday and announce the deal on the Monday”. Altria, the US tobacco group, which has 27 per cent stake, and Colombia’s billionaire Santo Domingo family, with 15 per cent, are likely to prefer equity to avoid a large capital gains tax bill. The Santo Domingos may also want some cash to invest in their other business interests, which include telecoms, food and coffee. “The cultural differences between AB InBev and SABMiller are overdone. These guys already know each other,” said another banker referring to DE Masterblenders, the coffee group which is merging with Mondelez and in which the Santo Domingos and some AB InBev directors are shareholders. Asked this year whether a SABMiller-AB InBev deal makes sense, Alan Clark, SABMiller’s chief executive, said: “Someone somewhere could probably get the numbers to work . . . There would be value loss and value destruction because they’d know that they’d have to sell the US though.”

Equity investors braced for disappointing US bank earnings

Equity investors are marking down US banks that rely on trading revenues and international operations, rewarding the stronger growth prospects of domestic oriented and consumer-focused financials as earnings season heats up this week. Investors are braced for disappointing results from financials as analysts expect earnings for the sector will contract 3.9 per cent for the second quarter compared with the same period a year ago.

Within the broad financials group, however, there is a clear divergence between banks with a strong trading and global presence versus the domestic players that cater to commercial and retail customers across the US. The outperformance of domestic-orientated banks reflects a pick-up in the US economy, while banks with capital market franchises have suffered from a drop in trading volumes and tougher regulations. “Among major developed economies, the US stands out as doing better,” said James Paulsen, chief investment strategist at Wells Capital Management and who thinks the economy will expand north of 3 per cent during the second half of this year. This is illustrated by the share price for Wells Fargo, which is has risen 13 per cent so far this year, while Goldman Sachs is down 7 per cent and Citigroup has dropped nearly 10 per cent. Shares in JPMorgan Chase have fallen about 5 per cent, with Bank of America Merrill Lynch, which is primarily domestic though it has large trading operations, down just over 1 per cent in the year to date and Morgan Stanley flat. By contrast, shares in PNC and US Bancorp, two domestic banks, are up 12.6 per cent and 6.9 per cent respectively. These two groups did not have the litigation risk or the capital markets risk that had weighed on the shares of the large, diversified US banks since the financial crisis, analysts said. “There has been a chronic downgrading of valuations since 2008 for banks with a large capital markets mix,” said Mr Paulsen. Still, some weaknesses in domestic US banking began to show on Friday, when Wells Fargo broke its 12-quarter streak of record earnings per share. The bank kicked of the second-quarter earnings season, but its stock slipped nearly 1 per cent after it failed to counter a pronounced slump in mortgage refinancing. Jeff Rottinghaus, portfolio manager at T Rowe Price said financials were generally a lagging sector for equity investors: “There is some hope that fundamentals improve if interest rates go higher and net interest margins improve. Maybe heading into the midterm elections, banks also get some regulatory relief. And the stocks are relatively inexpensive versus the market.”

Vince Cable plans to toughen up takeover rules

Vince Cable plans to strengthen Britain’s takeover rules to make it harder for international bidders to renege on promises made during a deal. The business secretary concluded that the existing rules were inadequate after Pfizer’s £69.4bn approach for AstraZeneca. Mr Cable said on Sunday he was going to bring in new rules to ensure that companies honoured commitments made during the takeover process, or face “tough” financial penalties. The government has been considering how to tighten the rules since April, when Pfizer made its approach to the UK drug company. Pfizer made a five-year commitment to retain research and development investment in the UK. But it also said this could alter if circumstances changed “significantly”, raising fears that the takeover would lead to cuts in UK science jobs and research.

“What the government did then was to engage in negotiations to seek assurances,” Mr Cable said. “Where we now have to strengthen that is to make sure that where commitments are made, there is no wiggle room.” The business secretary also said he wanted to introduce “tough financial penalties” for companies that renege on promises and is prepared to introduce legislation to enforce this if necessary. The government will consult on the changes, with new laws set to be introduced before the general election in 2015. Mr Cable said the government was discussing options with the Takeover Panel, which oversees mergers and acquisitions. The minister wanted the panel to drop the “material change of conditions” get-out clause for binding commitments in the takeover code. Companies have reneged on promises. Kraft, the US food group, was criticised by the panel for breaking a promise, made during its five-month battle to buy Cadbury, to keep the UK chocolate maker’s Somerdale factory open. The business secretary also said he believed that the government should have more powers to intervene if a company refuses to give assurances about British jobs and investment in strategic sectors. Mr Cable said he believed a narrow “last resort” power should be put into law to enable ministers to intervene in a takeover that is “very clearly against the national interest”. This “narrow, specific intervention” would be a sensible compromise between introducing a wider public interest test and a “laisser-faire” approach, he said. Under EU public interest test rules, the government can only intervene in a takeover if national security, economic stability or media plurality are threatened. However, the Labour party wants to strengthen government powers to intervene in deals affecting the science industry – although this would need approval from Brussels. Chuka Umunna, the shadow business secretary, said on Sunday he supported Mr Cable’s attempts to make sure commitments “have more teeth” and was happy to work on a cross party basis to pass new laws. Pfizer walked away from AstraZeneca in May after its advances were rebuffed. But it is thought likely to return with a fresh offer after a six-month “no-approach” period ends in November.

Airbus set to overhaul A330 passenger jet

Airbus is set to launch an overhaul its popular A330 aircraft at the Farnborough International Airshow as the plane maker seeks to overturn Boeing’s dominant position in the lucrative long-range passenger jet market. After months of speculation, the Toulouse-based company will announce a revamp of its wide-body A330, dubbed A330neo, with more fuel-efficient engines on Monday, according to people with knowledge of the plans.

The company is hoping to recreate the success of the re-engineered narrow-body A320. More than 2,800 A320neo planes have been sold. In June, Airbus said it could sell more than 1,000 A330neos were the plane to go ahead. Airbus needs to extend the life of the A330, which entered service in 1994, because there are just less than 250 orders remaining on the books to deliver to customers – about two years’ worth of production. The revamp is also part of its broader strategy to overtake Boeing in the lucrative wide-body jet market. The two companies sell fewer of these larger planes compared with short-range aircraft, but usually secure higher profit margins. Executives at Airbus insist that the new plane will have similar fuel efficiency to its Boeing rivals, which are chiefly the small and medium-sized versions of the Dreamliner, also known as the 787. James McNerney, Boeing’s chief executive, however, took issue with the idea that the fuel efficiency would be the same, insisting the group could maintain a clear lead over Airbus in the long-range passenger jet market. “Our experts tell us that [the A330neo] will not get close to our 787 versions in terms of fuel efficiency,” he saian interviewrview with the Financial Times. “Boeing has the strongest wide-body offering by far.”

The sophisticated Dreamliner, which has suffered serious teething problems since entering service in 2011, is mainly made from lightweight carbon composites to reduce fuel burn. It carries between 210 and 320 passengers. By contrast, the A330neo’s fuselage and wings are expected to be made from traditional aluminium, which is heavier. The existing A330 carries between 250 and 300 passengers. Airbus is planning to sell the A330neo at lower prices than the Dreamliner. If Airbus could supply as many as 1,000 aircraft to airlines and leasing companies it would broadly match the orders notched up by the 787. The A330 programme is profitable, while its A350 is expected to be loss making until the end of the decade, and the A380 superjumbo is only due to reach break-even next year. Airbus’ efforts to end Boeing’s dominance of the long-range jet market are also focused on its new A350 jet. The A350 – like the Dreamliner, mainly made from lightweight composites – is due to enter service at the end of this year with Qatar Airways as the launch customer.

Barron's Summary: positive on select retailers, JCI, ORAN; cautious on GPRO

Cover story: Investors are fleeing the retail sector as American consumers rein in spending and as bricks-and-mortar stores face growing threats from AMZN and other Internet-focused retailers, creating an opportunity for investors to buy shares cheaply (Positive on BBBY, GME, SPLS, TGT, TJX, WFM). Features: Positive on JCI: Disposal of its auto-interiors business should give added credibility to companys vow to manage capital more aggressively, a commitment that could have a very favorable long-term effect on its share price, which could jump 20% or more; Positive on ORAN: With competitive pressures easing and potential to generate about $4.5B in annual free cash flow over the next five years, along with a 5.3% dividend yield, shares could see a 25% rise.

Tech Trader: Cautious on GPRO: As accessory makers perfect wearable mounts for smartphonesand they inevitably willit becomes hard to justify GoPros competitive advantage, particularly at 83 times earnings; Cautious on OVTI: Companys digital-image sensors are no longer used in iPhones, freeing it from being tied to AAPL but raising questions about its long-term potential.

Trader: Despite the contraction in U.S. GDP in the first quarter, theres a basic market assumption that the economy is on a growth track, if a slow one, says Richard Weeks, partner at HighTower Advisors; Positive on BA: Despite a confluence of mostly non-fundamental and macro factors leading to a drop in share price, companys long-term attractions remain, and the outlook remains strong; Cautious on HE: Utilitys 2013 results look good at first glance, but company has seen little or no sales growth for three years and it continues to face a threat from solar power rivals.

Small Caps: Positive on RYAM: Worlds largest producer of specialty cellulose is the leader in a highly concentrated industry, and shares have plenty of upside over the next few years.

Mutual Funds: Interview with Guy Pope, Portfolio Manager, Columbia Contrarian Core Fund (top ten holdings: AAPL, JPM, VZ, C, CVX, CVS, JNJ, PG, PM, CMCSA); Interview with John Hathaway, Co-Manager, Tocqueville Gold Fund (picks: Detour Gold, B2Gold, Torex Gold Res). Special Report: Profile of three top financial advisory teams, Savant Capital Management, Graystone Consulting/Sherer Team, and Venture Services Group.

Follow-Up: Positive on DOV: Move to spin off smartphone component maker KN to shareholders looks like it will continue to pay off for investors, shares could appreciate by 10-15% over the next 12 to 18 months.

European Trader: Cautious on Banco Espirito Santo: Though bank was target of investor angst last week, the real problem is unlisted conglomerate Espirito Santo International, which indirectly controls the bank and which missed an interest payment on some short-term debt.

Asian Trader: Beneficiaries of Indian prime minister Modis new budget are likely to be infrastructure projects, manufacturing, insurance, defense, and power generation companies.

Emerging Markets: Positive on Prada: Investors have sold shares on fear that growth in China which accounts for a third of saleswill slow, but the worry seems overdone, and analysts expect a gradual revival in earnings.

Commodities: Copper prices are heading higher, with investors betting that ramped-up manufacturing in the U.S. and China will spur demand for the industrial metal.

CEO Spotlight: Profile of QCOM chief Steven Mollenkopf, who says the companys next pivot will be towards the so-called Internet of Things.

Streetwise: Jim Paulsen of Wells Fargo Capital Management thinks a correction, when it comes, could look a lot more like a bear market than your run-of-the-mill selloff

Weekly Market Update: Volatility Picks Up, Correction Fears Rife

- There was much talk about a looming equity correction among market participants this week. Global indices lost ground, very gradually in the US and most of Asia, and more dramatically in Japan and Europe. Trouble at a Portuguese bank midweek drove a brief rash of contagion fears that recalled the darkest days of the euro debt crisis, however the situation ended almost as soon as it had begun. Nevertheless, markets were reminded that unknown risks lurk everywhere as the Fed and the BoE gear up to exit easy policy even as the ECB struggles to deal with Europe's stubborn disinflation and flat growth trends. Alcoa rang in the June quarter earnings season with a strong quarterly report, and Wells Fargo offered a mixed report. For the week, the DJIA fell 0.7%, the S&P500 fell 0.9% and the Nasdaq declined 1.6%.

- Global markets were spooked on Thursday by problems at Portugal's largest bank, Banco Espirito Santo. Trading in shares of BES were suspended after a wealth management affiliate delayed a debt payment. The yield on Portugal's 10-year note surged to 4%, the highest since early April, and the yields on other peripheral Eurozone sovereign bonds pushed higher. Portuguese and EU officials rushed in to reassure markets that the situation was a one-off and the bank claimed to have plenty of capital on hand.

- Volatility trended higher this week, raising hopes that the dull-as-rain trading seen in the last month is over for now. After bottoming out at 10.28 last Thursday, a seven-year low, the CME's Volatility Index (VIX) ticked as high as 13.20, its highest level since mid-May. The volatility index is still 14% below its one-year average of 13.9 and has closed below that level for 49 days, the longest streak since 2007.

- Crude prices continued to slide, with the front-month WTI contract gliding from $103.70 to close out on Friday around $100.70. Brent futures dropped from $111.60 to close out the week around $107. In Libya, the National Oil Company lifted force majeure on recently regained oil ports, Es Sider and Ras Lanuf, and began discussions with OPEC about how to accommodate rising crude production. There has not been any real change in the situation in Iraq this week, with the fighting there causing little disruption to oil production.

- Wells Fargo was the first of the big banks to report second quarter results. The firm's numbers were mixed, reporting a 3% y/y increase in profits for the second quarter, although revenues ticked a bit lower and EPS was flat for the first time in years. The results reflect a decline in provisions for credit losses and slightly lower expenses, both of which helped offset a 39% y/y decrease in mortgage banking income. Mortgage originations were up over the first quarter but down more than 50% y/y. Executives said the pipeline of mortgage originations was better in the firm's third quarter, but still had not returned to pre-crisis levels.

- Commentary and numbers out of a spectrum of retail names this week suggest not all is well with the US consumer. Walmart CEO warned the hiring rebound has failed to lead to a rise in spending by Walmart's core of middle- and lower-income customers. Restaurant chain Bob Evans said that it sees consumer confidence adversely impacted by macroeconomic headwinds, including health care costs and unemployment. Home improvement supplier Lumber Liquidators guided Q2 lower, saying the demand it experienced following the tough winter did not carry into May and June. After mixed quarterly results, Family Dollar said its numbers reflected the economic challenges facing core lower- and middle-class customers. Finally the June same-store sales figures from L-Brands and Gap missed expectations.

- Airline stocks saw turbulent trading. Early in the week, Air France-KLM warned that rising competition from other airlines on long-haul flights, weak cargo demand and forex issues would reduce earnings more than expected. The slump in Air France's shares pulled major US airlines lower. Then on Wednesday United and American both issued positive second quarter updates. American hiked its Q2 pre-tax margin guidance and disclosed it has sold off its remaining portfolio of fuel hedging contracts, while United said its passenger revenue per available seat mile (PRASM) rose well above expectations thanks to better domestic and Pacific performance. United and American shares gained altitude on the guidance.

- Merger activity quieted down, with only a few deals in headlines. AbbVie raised its bid to acquire Shire, which has already rejected its prior takeover offer. AbbVie raised its cash-and-stock offer by 11%. Reynolds entered negotiations to acquire Lorillard. Imperial Tobacco is also in on the talks, looking to acquire certain brands to help Reynolds address anti-trust concerns. British American Tobacco, which holds 42% of Reynolds, is seeking to maintain an undiluted stake.

- Cable saw its first weekly decline against the dollar since May on signs that momentum in UK economic growth is starting to slow. The pound also fell against nearly all of its other major pairs. The May UK industrial production data slumped, seeing its biggest monthly decline in a year and a half, while June RICS and Halifax home price indices both surprised to the downside. As of July 4th, GBP/USD hit highs around 1.7180, the pound's best level since October 2008, and was back around 1.7110 as of Friday. EUR/USD remained trading in a tight range in the lower half of 1.36.

- US Treasury Secretary Lew travelled to Beijing this week to meet with his Chinese counterparts, who agreed to reduce but not end FX intervention. PBoC Chief Zhou has already signaled that he would like the yuan to reflect market forces, although the PBOC does not really have much independence from China's leadership. China Fin Min Lou Jiwei said that some FX intervention is still needed when China's recovery is not solid and money flows are unstable. USD/CNY exchange rate fell to a 3-week low of CNY6.1950 midweek.

- Initial economic data for the month of June out of China were generally less impressive than May figures but not particularly worrisome. CPI of 2.3% just missed the consensus estimate of 2.4%, as food component slowed to 3.7% from 4.1% and non-food remained unchanged at 1.7% y/y. First-half CPI is well contained below the 3.5% official target ceiling at 2.3%. Chinese trade balance was also lower than expected at $31.6B, with 7.2% exports growth undershooting the 10% forecast as shipments to Japan contracted by nearly 1%. Authorities do not appear concerned over the performance of trade however, expressing more willingness to tolerate renewed Yuan strength.

- In Japan, a 19.5% m/m drop in machine orders - the biggest on record - has renewed speculation the BOJ may be forced to undertake additional easing. Cabinet office has also lowered its assessment on machine orders to state the "increasing trend has been seen stalling", and investors will surely tune in to next week's BOJ policy statement to gauge the extent of its concern over the apparent impact of higher sales tax. The Nikkei225 underperformed regional indices, falling nearly 2% this week.

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Shire CEO Says Independence Is Most Favorable Option: Le Temps 2014-07-12 09:15:13.447 GMT

By Patrick Winters July 12 (Bloomberg) -- Shire CEO Flemming Ornskov spoke in interview with Switzerland’s Le Temps newspaper before AbbVie made a fourth offer on July 8. Ornskov said: * “There’s a price at which the board will consider whether the independence of Shire is really the best way forward” * Co.’s rising sales, Ebitda margin is proof independent growth strategy is working * NOTE: Shire Said to hold takeover talks with AbbVie * NOTE: AbbVie/Shire meeting didn’t result in pact for additional talks: DJ

For Related News and Information: First Word scrolling panel: FIRST<GO> First Word newswire: NH BFW<GO>

To contact the reporter on this story: Patrick Winters in Zurich at +41-44-224-4117 or pwinters3@bloomberg.net To contact the editors responsible for this story: Simon Thiel at +44-20-7673-2814 or sthiel1@bloomberg.net Adveith Nair, Mike Harrison

Closing Market Summary: Stocks End Down Week on Modestly Higher Note

The stock market finished the Friday session on a modestly higher note, but the slim gains could not prevent the key indices from finishing the week in the red. The S&P 500 added 0.2%, trimming its weekly loss to 0.9%, while the Nasdaq Composite (+0.4%) finished the week with a 1.6% decline. Small caps had a tough time keeping up as the Russell 2000 shed 0.1% today to widen its weekly loss to 3.9%.

Equities slipped at the open amid weakness in two cyclical sectors. Energy (-0.8%) and financials (+0.1%) were down in excess of 0.5% in short order, while the other sectors held much closer to their flat lines.

The opening weakness in the financial sector followed an in-line quarterly report from Wells Fargo (WFC 51.49, -0.32). The stock ended lower by 0.6%, while the overall sector managed to recover its loss during the afternoon when the S&P 500 returned into the green.

Meanwhile, the energy sector was pinned to its lows throughout the session with the two top-weighted components—Chevron (CVX 128.47, -1.78) and ExxonMobil (XOM 101.74, -0.83)—pressuring the sector. The two lost 1.4% and 0.8%, respectively. In all likelihood, the sector's inability to rebound alongside the broader market was related to the daylong weakness in crude oil futures. The energy component fell 2.1% to $100.79/bbl.

Elsewhere, other cyclical sectors like consumer discretionary (+0.3%), industrials (+0.6%), and technology (+0.4%) rallied in the afternoon, which sent the S&P 500 to a fresh high.

The industrial sector drew strength from a couple of its top-weighted components. Boeing (BA 128.09, +1.30) and General Electric (GE 26.55, +0.35) posted respective gains of 1.0% and 1.3%, while the PHLX Defense Index advanced 0.7%. Transports also rallied with airlines and railroads in the lead. United Continental (UAL 45.70, +0.53) rose 1.2%, Norfolk Southern (NSC 103.95, +1.54) jumped 1.5%, while the Dow Jones Transportation Average added 0.4%.

Also of note, the relative strength of the technology sector contributed to the outperformance of the Nasdaq Composite. Google (GOOGL 586.65, +6.61) and Facebook (FB 66.34, +1.47) spiked 1.1% and 2.3%, respectively, but the top-weighted sector component—Apple (AAPL 95.22, +0.19)—surrendered the bulk of its gain into the close. On the earnings front, Infosys (INFY 54.22, -1.43) lost 2.6% despite beating earnings estimates.

Similar to the cyclical sectors, most countercyclical groups were able to finish in the green. Consumer staples (+0.1%), health care (+0.1%), and telecom services (+0.8%) posted gains, while the utilities sector (-0.7%) ended in the red.

Treasuries posted modest gains with the 10-yr note adding five ticks to send its yield lower by two basis points to 2.52%.

Participation was well below average with just 571 million shares changing hands at the NYSE floor.

Economic data was limited to the Treasury Budget for June, which posted a surplus of $70.50 billion versus a surplus of $116.50 billion in June 2013. The Treasury data are not seasonally adjusted so the June data cannot be compared with the $130.00 billion deficit from May. Fiscal year-to-date, the deficit is $365.90 billion, $144.00 billion less than the comparable period for FY13.

There is no economic data on Monday's schedule.

* S&P 500 +6.5% YTD  * Nasdaq Composite +5.7% YTD  * Dow Jones Industrial Average +2.2% YTD  * Russell 2000 -0.3% YTD