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Telecoms eye end to long cold spell for European deals

Two mergers – one approved, one still in the works – do not make a summer in Europe’s telecommunications industry. The month of July is nevertheless sending hopeful signals that the sector’s long cold spell will give way to warmer weather. At last, Europe is finding a formula to reconcile the twin objectives of consolidation and consumer protection.

Compared with their US and Chinese rivals, Europe’s large telecoms companies are compelled by fragmented market conditions to operate with one hand tied behind their back. But a serious attempt to set straight Europe’s cockeyed telecoms industry is in motion. Arguably, it is already irreversible, though not yet far-reaching enough.

It may gain momentum after Jean-Claude Juncker takes over this year as European Commission president. During his campaign for this job, the former Luxembourg premier identified fixing the telecoms industry as a priority and indicated that EU regulators should look more benevolently on merger proposals.

The two deals that justify a prudent optimism are the €8.6bn purchase by Spain’s Telefónica of E-Plus, the German mobile business of KPN of the Netherlands; and the decision of Sweden’s Tele2 to sell its Norwegian mobile unit to TeliaSonera, also of Sweden, for SKr5.1bn. Telefónica’s deal received approval last week from commission regulators. The Scandinavian deal, announced on Monday, will come under scrutiny from Norwegian regulators, but the companies hope to close it by the first quarter of 2015.

The merger in Germany has exciting implications. Telefónica Deutschland and E-Plus, once united, will compete for customers against Deutsche Telekom’s T-Mobile unit and Vodafone. EU regulators have broken new ground by declaring, in effect, that three network carriers constitute sufficient competition in a big European state, not just a country the size of Austria or Ireland.

After Germany, France and Italy may be next. How long before France’s four operators – Bouygues Telecom, Iliad, Orange and SFR – overcome their differences and, in one combination or another, come down to three? This is the openly expressed wish of Arnaud Montebourg, France’s economy minister, who frets that the four-way price war that has raged since 2011 is bad for jobs and industrial development.

One EU condition for the German merger was Telefónica’s disposal of up to 30 per cent of the new company’s network capacity. The beneficiary will be Drillisch, a midsized mobile virtual network operator, or MVNO. Similarly, the Scandinavian deal will probably go ahead only if TeliaSonera and Tele2 sell some network assets. One obvious purchaser is an upstart local carrier owned by Access Industries, the conglomerate of Len Blavatnik, a Ukrainian-born billionaire.

At last, Europe is finding a formula to reconcile the twin objectives of consolidation and consumer protection

The regulatory principle guiding both deals is that they permit consolidation but, at the same time, uphold fair competition. It is a sensible approach. In telecoms, this is the closest Europe has come to demonstrating that antitrust rules, intelligently applied, can benefit consumers without obstructing the essential restructuring of the sector.

It would be too sanguine to suggest that the worst is over for European telecoms companies. As Tim Höttges, Deutsche Telekom’s chief executive, observed in May during his debut speech to shareholders, internet data traffic keeps on expanding in Asia, Europe and the US – but Europe is the only continent where the combined revenues of telecoms companies keep on shrinking.

Europe, like China and the US, is an enormous, sophisticated market. But China and the US have one national regulator and one authority that allocates spectrum. Each has applied its competition rules in such a way that each has emerged with a handful of very big, profitable telecoms firms. This allows the companies to pour investment into the latest technologies.

By contrast, Europe is filled with more than 100 fixed and mobile operators, most not very big and some not especially profitable. At times, governments treat the sector as little more than a cash silo whose function is to lighten their fiscal burdens in spectrum auctions. Funds for investment in new technology are accordingly less abundant.

Besides, regulatory standards vary so much from one EU nation to the next that groups such as Telefónica and Vodafone do not compete against each other on a European level at all. In telecoms the 28-nation EU’s “single market” exists mostly on paper. It is to be hoped that politicians and regulators will redouble their efforts to turn it into a reality.

In reaction to disappointing earnings/guidance: GIMO -31.5%, TCS -14.3%, SIMG -10%, MSM -3.6%, BOBE -1.2%, IMOS -0.9%.

Other news: PT -6.1% (reports of debt deal scrutiny), SLXP -4.2% (to combine with Cosmo Technologies; upon completion of the merger, shareholders of Salix are expected to own slightly less than 80% of the ordinary shares of the new company), RARE -2.6% (Pharma prices 2,017,349 shares of common stock at $40.00 per share), NURO -2.6% (cont strengh from yesterday), CELG -2.1% (Phase III POSTURE study did not achieve primary endpoint), RAX -1.4% (following late move higher on increased volume), LOGM -1.3% ( attributed to cautious Off Wall Street report), CLUB -0.8% (disclosed an amendment to property sale agreement to permit Purchaser additional time to complete its financing).

Analyst comments: POT -2.7% (downgraded to Neutral from Overweight at JP Morgan), MRVL -2.7% (downgraded to Underperform from Perform at Oppenheimer), GRMN -2% (downgraded to Underperform from Sector Perform at Pacific Crest), ALV -1.7% (downgraded to Hold at Nordea), VMW -1.3% (downgraded to Market Perform from Outperform at Wells Fargo), COH -1.2% (downgraded to Underperform from Neutral at Buckingham Research), LPX -1% (downgraded to Sector Perform at RBC Capital Mkts), PCL -0.8% (downgraded to Sector Perform at RBC Capital Mkts).

In reaction to strong earnings/guidance: AVAV +4.3%, AA +2.7%, SYRG +1.4%, GTIV +1.1%.

M&A news: RAI +1.9% (IFA Mag report discusses potential British American Tobacco (BTI) buyout).


Select Air carrier related names showing strength after strong AAL op guidance: UAL +2.6%, ALK +2.6%, DAL +2.5%, LUV +2.4%, JBLU +2%.

Other news: LXRX +12.1% ( announced that JDRF will provide funding to support a Phase 2 clinical trial to evaluate the efficacy and safety of LX4211), USU +7.8% (cont vol), ARWR +7.2% (following CNBC Fast Money commentary), CAMT +6.1% (extending Monday's move higher), AAL +5.3% (June RPM +1%; sees Q2 PRASM +5.5-6.5%, adj. pre-tax margin ~12-13%), SDRL +4.7% (cancels contemplated convertible bond issuance and voluntary incentive payment offer ), TXMD +4.6% (following 32%+ move higher yesterday), RVLT +4.6% (still checking), KNDI +3.4% (name may be getting boost from FT story indicating Japan carmaker fuel cell growth), LJPC +2.7% (announces planned initiation of Phase 3 Registration Program for LJPC-501 in resistant hypotension),GWPH +2.3% (still checking), BLUE +2.1% (prices 3 mln shares of common stock at $34.00 per share), TSL +2.1% (announces supply of 200MW PV modules to Zonergy), NQ +1.9% (still checking), AMX +1.3% (confirmed that it resolved to authorize measures to reduce its national market share), BA +1.1% (Co and Emirates finalize order for 150 777Xs).

Analyst comments: JD +3.3% (initiated with a Outperform at Oppenheimer), AINV +1.6% (upgraded to Buy from Neutral at Sun Trust Rbsn Humphrey), KKR +1.6% (upgraded to Outperform from Neutral at Credit Suisse), BIIB +1.4% (target raised to $375 at RBC Capital Mkts ), HFC +1.2% (upgraded to Outperform from Market Perform at Wells Fargo), DB +1.1% (upgraded to Overweight from Neutral at JP Morgan), BRCM +1% (upgraded to Outperform from Perform at Oppenheimer), SLB +0.7% (upgraded to Overweight from Neutral at HSBC Securities), FFIV +0.6% (initiated with a Buy at DA Davidson)

But after another attempt to take over the company failed in April, many investors have lost patience. They are urging the miner to either rekindle this year's aborted deal with No. 1 Barrick Gold ABX.T +2.10% Corp., or break itself up.

All gold miners are facing a lengthy list of problems—lower gold prices, high costs and declining accessible gold grades. Newmont, based in Greenwood Village, Colo., posted a loss of $2.5 billion last year, the biggest in its history, and its share price has fallen by half since 2011, making it one of the worst performers in the S&P 500.

Investors "are frustrated because they wanted something to happen, after being bruised and battered for the past 18 months," said Dan Denbow, a portfolio manager for the San Antonio-based United Services Automobile Association, a Newmont shareholder.

Newmont "hasn't communicated the specifics of what they're doing," he said.

Now, as many Newmont shareholders clamor for action, the question is: what kind of change do they want?

Joe Foster, a fund manager at Van Eck Associates Corp., says he wants to see both Newmont and Barrick split into many pieces. "Both companies are too big for their own good," he said. "I would like to see them get smaller, not bigger."

Van Eck was Newmont and Barrick's largest shareholder as of the end of March.

Newmont solicited input from its shareholders about its future, and is "pursuing every viable opportunity to improve value," said Omar Jabara, a spokesman. The miner sold $800 million of assets in the last 12 months, "with more sales in the works," he said.

Newmont reduced costs by nearly $1 billion in 2013 and will save up to $700 million more by 2016, Mr. Jabara said.

A Barrick spokesman said the Toronto-based company has sold more than $1 billion of noncore assets in recent years.

Newmont and Barrick have said they are still open to cooperation in Nevada—which represents around 40% of their production—as a way to reduce costs.

The Newmont-Barrick deal unraveled amid what people familiar with the matter described as clashes over governance issues. Newmont blamed Barrick Chairman John Thornton for making a "unilateral declaration" that the talks were over. Barrick has said talks unraveled after Newmont tried to renegotiate "foundational elements," such as governance roles.

Newmont, which has traded on the New York Stock Exchange since 1940 and will turn 94 next year, is famously resistant to change. The Elko posters, which Newmont says were created in 2008 as part of a companywide history campaign and trivia contest for employees, detail some of the failed attempts to take it over.

From 1980 to 1994 Newmont faced "tumultuous times" as it worked "to thwart five takeover bids," the posters state. Among those "corporate raiders," Newmont lists a 1987 attempt by T. Boone Pickens and "yet another takeover artist" in British financier James Goldsmith.

In more recent times, Barrick and Newmont have tried at least four times to merge, according to Barrick founder Peter Munk.

The miners predicted they could save about $1 billion by combining operations in Nevada. Analysts disagreed with that number, but most did see up to $500 million of savings. If the two companies had merged they also planned to spin off mines in Australasia.

"What we want is synergies from the Nevada operation," said Chris Mancini, analyst at Gabelli Gold Fund. His fund, one of Newmont's largest investors, has told the company it wants to see it merged with Barrick, with the combined firm's Nevada operations then spun off.

The potential for big savings has many Newmont investors pushing for a full merger of Newmont and Barrick's Nevada operations. Some suggest that Newmont's two high-growth African mines could then be sold or listed. Around 10% of the company's sales are in copper, a part of the business that some investors want to see as a separate company.

Under another scenario, analysts and investors say, Newmont would split into five different companies, based in the U.S., Australia, Indonesia, Ghana and Peru.

Some analysts say losing scale isn't always the best option, given it makes it harder to raise debt. Furthermore, the various scenarios struggle to take into account Newmont's troubled Indonesian copper operation. In January, the Indonesian government banned ore exports and introduced taxes on mineral concentrate exports, in a bid to force mining companies to build smelters and refine their minerals there.

Newmont isn't the only large miner facing calls for action from its investors. As a result, some of mining's biggest names, including BHP Billiton BLT.LN -0.10% and Rio Tinto, have been slimming down by selling assets.

But the gold sector has stirred up more investor anger than almost any part of the mining industry. Gold stocks are at roughly 40% of their value three years ago, compared to 75% for mining stocks overall, according to indexes. Among gold miners, it's the majors that have been kicked hardest.

For Newmont, fund managers point out that its stock trades at almost half the price of 1990.

"You would never get the impression that gold has tripled in that time," said Rick de los Reyes, a portfolio manager at T. Rowe Price. TROW -0.76%

* Stifel raises their AA tgt to $17 from $15. 2Q14 results showed that in addition to strong value-add downstream operational performance, Alcoa is also continuing to improve its upstream commodity operations. Cost reductions coupled with improving metal prices should continue to help Alcoa in 2H14 and 2015.

* Cowen notes Alcoa reported 2Q14 adjusted EPS of $0.18, exceeding our estimate of $0.13 and consensus of $0.12, primarily due to outperformance in the Primary Metals segment. Given the impressive results, they expect shares to react positively; Market Perform.

* RBC notes the outperformance relative to their estimate was driven by a lower effective tax rate than they had been assuming and higher surplus power sales in Primary Metals. EPS and GRP performed essentially in line with our expectations while Alumina came in a little below forecast. They view the results as a positive though they are somewhat cautious on the sustainability of the strong power sales in the quarter; Sector Perform.

As Tech Giant's Cash Pile Grows, Company Executives Are Urged to Raise Dividends, Restart Buybacks

SEOUL—A number of prominent U.S. investors have taken large stakes in Samsung Electronics Co. 005930.SE +1.00% in recent months, putting pressure on the technology giant's management to return more of its $60 billion cash pile to shareholders.

Some of these investors, which include New York hedge fund Perry Capital LLC and mutual-fund managers Yacktman Asset Management and Artisan Partners APAM -1.53% LP, have been pushing Samsung executives to increase dividends and restart share buybacks in private meetings, they said in interviews.

Investors are pushing for changes as Samsung's stock price and profit growth have stalled. On Tuesday, the technology giant warned its profit would decline for the third straight quarter.

The demands are sparked by Samsung's low return to shareholders despite a cash pile that is hitting new highs. Samsung paid out 7.2% of its profit to shareholders last year in dividends and buybacks, down from 40% in 2007 and lagging rivals like Intel Corp. INTC -0.77% , Apple Inc. AAPL -0.64% and Taiwan Semiconductor Manufacturing Co. 2330.TW -0.37%

Samsung's dividend yield, which measures a company's annual dividend in relation to its share price, was 1% last year, half of what those three companies paid. The South Korean company hasn't bought back shares since 2007.

According to South Korea's exchange operator, the percentage of foreign shareholders in Samsung rose above 50% in the spring from a low of about 42% in late 2008.

Many of those investors are concerned with how Samsung manages the $60 billion of cash it has on hand. Bernstein Research analyst Mark Newman says Samsung will likely accumulate an additional $25 billion in cash this year, after capital expenditures, putting it on pace to hit $100 billion around the end of 2015.

Samsung, the world's biggest maker of smartphones, televisions and memory chips by revenue, warned Tuesday that its second-quarter operating profit likely fell 24% to 7.2 trillion won ($7.1 billion), from 9.53 trillion won a year earlier. The company cited stiff competition in the mid- to low-end handset market as well as a slowdown in the overall smartphone market.

During an analyst meeting last November, Samsung said that it would review its policy this year, but hasn't yet announced any specific plans.

Samsung Chief Executive Kwon Oh-hyun said in March that the company has to be prudent with its stockpile of cash. "In order to have better dividends in the future, we need to have sustained growth," which requires having money on hand to plow into new investments, he said at the time.

Some investors argue that boosting returns to shareholders will also help Samsung's sagging share price.

Samsung shares have tumbled 11% in the past month, wiping out more than $25 billion in market value, due to concerns about slowing growth and flagging smartphone sales.

Its share price now values the company at about seven times 2013 earnings, compared with about 16 times for rival smartphone maker Apple and 17 times for chip maker Intel.

Samsung shares edged up 0.2% on Tuesday but are down 5.6% over the past 12 months. Shares of Apple, meanwhile, have gained 60% over the past 12 months.

"Returning capital to shareholders will result in a better valuation," David Russekoff, Perry Capital's chief investment officer said, declining to disclose the company's holdings. "That's what we're trying to communicate to them."

Samsung's situation is reminiscent of Apple's position two years ago, when the Cupertino, Calif.-based company had piled up about $100 billion in cash, with no dividend or share-buyback program.

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As activist investors including David Einhorn and Carl Icahn mounted a public campaign last year, Apple raised its dividend and buyback and later executed a seven-for-one stock split.

Its stock has soared 66% in the past year even amid unchanged Apple earnings expectations, while Samsung's shares have remained flat.

"The concerns around Samsung now are the same as the ones for Apple last year," says Joe Vari, a San Francisco-based senior analyst for Artisan Partners, which manages $110 billion in assets and late last year began buying shares of Samsung and also holds shares in Apple. The difference now, he says, is that Apple is aggressively returning its cash to shareholders.

Investors like Messrs. Russekoff and Vari say they are realistic in their expectations for Samsung, which is a much more conservative company and one in the midst of a potential restructuring as the company's controlling family looks to hand over ownership to the next generation.

Even so, the investors say they are prepared to push management on dividends and buybacks to raise Samsung's flagging stock valuation.

"The shareholder base is changing, and it's people like us who will demand change," says Mr. Vari, who holds Samsung as one of the biggest positions in Artisan's $12.2 billion International Value Investor fund, where it accounts for about 3%.

Mr. Vari says that while he admires Samsung's financial strength and business prowess, he wants the company to improve its transparency by disclosing more information about its corporate structure, which he thinks will help the share price.

With Samsung generating so much cash, "eventually, you accumulate so much cash it should be well above and beyond any reinvestment or deal needs," says Jason Subotky, portfolio manager for Yacktman Asset Management in Austin, Texas.

Yacktman, which began buying preferred shares in Samsung last year and now counts the company as its biggest foreign holding in its two funds, wants to see the company buy back more shares, given the stock's low valuation.

One of the biggest champions in Samsung's corner may be its largest shareholder, South Korea's National Pension Service, the world's fourth-largest pension fund, with $427 billion in assets. NPS owned 7.7% of Samsung common stock at the end of 2013.

The fund has generally acted as a passive shareholder, says Jun Kwang-woo, who was until last year the chairman and CEO of the pension service.

"As long as corporate performance has been broadly satisfactory, and clearly it has been in Samsung's case, if I were still in my previous position, I wouldn't take any sort of strong position," Mr. Jun, now a professor at Yonsei University in Seoul, said in an interview.

A spokeswoman for NPS declined to comment.