INFO LE FIGARO - Siemens propose de racheter l'énergie d'Alstom et de lui céder ses trains
Dans un courrier porté ce dimanche matin au PDG d'Alstom, le patron de Siemens propose de racheter les activités énergies du groupe français. Il lui céderait le TGV allemand et ses locomotives.
Une alternative à la proposition de l'Américain General Electric, qui a déposé une offre de rachat de la branche énergie d'Alstom pour une dizaine de milliards d'euros.
Comcast and Charter near $20bn cable deal
Comcast and Charter Communications are close to agreeing an intricate deal that would reshape the US pay-TV market and draw a line under a lengthy power-struggle at the top of the cable industry. The transaction, which has a total value of about $20bn, is contingent on Comcast being granted regulatory approval for its proposed takeover of Time Warner Cable, the country’s third largest cable company with about 12m subscribers. The three-part deal, which could be announced as early as next week, involves Comcast, the US’ largest cable operator, divesting 3.9m subscribers, or about 18 per cent of its 22m subscriber network, according to people familiar with the matter. First, Comcast would sell Charter about 1.4m subscribers from TWC’s network; it would also place 2.5m subscribers in a new company in which Charter will own a roughly 35 per cent stake. Finally, Charter and Comcast would swap about 1.65m subscribers. It is unclear exactly which subscribers will be swapped or the exact geographies under discussion. The swap would be one of the largest ever in the US cable industry. The FT previously reported that discussions were ongoing over a deal. If the three-part deal is agreed, it would mark a victory of sorts for Charter, the company backed by cable industry veteran John Malone, which was thwarted in its attempt to buy TWC in February after Comcast’s bid emerged. A combined Comcast-TWC would supply up to 40 per cent of US households with high-speed internet access. In a gambit designed to mitigate an immediate backlash from regulators, Comcast said it was prepared to shed 3m subscribers at the time of announcing the deal. The all-share deal has fallen in value since it was announced from $45.2bn, or $158.82 a share, as Comcast’s stock price has declined. At the time of the deal, relations between Comcast and Charter were said by people close to the companies to be severely impaired. Charter had pursued its $132.50 per share bid for TWC on its belief that Comcast had ruled itself out of the running. Comcast executives made contact with their Charter peers in the days after the company made its offer public, but the talks over the subscription sales only started recently, according to people familiar with the matter. Comcast and Charter declined to comment.
GE holds Alstom talks with French government
General Electric executives are meeting French politicians over the weekend to discuss the potential acquisition of Alstom, as Siemens said it was open to talks with the French train and power plant builder. French industry minister Arnaud Montebourg has expressed concern about the sale of a national engineering champion to a US group and said he was working on "other solutions". Jeffrey Immelt, GE’s chief executive will meet the French president François Hollande on Sunday, Le Figaro reported. GE officials will also meet Manuel Valls, the prime minister and Mr Montebourg, according to Bloomberg, which first reported news of a possible formal bid on Wednesday. Siemens on Saturday sent a letter to Alstom saying that if the French group wanted to talk it was happy to listen, a source familiar with Siemens’ thinking said. However, the source denied that Siemens had made, or was preparing, a counterbid. Talks between the two companies are understood to have first taken place some weeks ago after Siemens chief executive Joe Kaeser met his Alstom counterpart. But those initial discussions did not lead to a solution. Siemens declined to comment. Shares in Alstom were suspended on Friday after the price jumped 11 per cent on Thursday following news that GE was considering a €10bn offer for the power unit of the group, which makes turbines and TGV high-speed trains. "Alstom is the symbol of French industrial power and ingenuity," said Mr Montebourg, adding that the government was "concerned" about the loss of jobs that would come with such a deal and were showing due "patriotic vigilance". The firebrand industry minister, who once told Indian industrialist Lakshmi Mittal that he was "not welcome in France" after he tried to close a plant in 2012, also said that he would meet the president of GE to lay out government "concerns". The comments raise the prospect that the government will try and arrange for another French company come in and buy all or part of Alstom in a deal to keep the struggling national champion in French hands. The French government is now said to be digging up old potential deals between Alstom and other French companies, including nuclear reactor maker Areva and aircraft engine maker Safran, that have been regularly mooted over the past decade, according to people with knowledge of the groups. Some voiced scepticism at the government’s ability to stop a tie up with General Electric at this point. A Siemens deal, if one were to emerge, would at least keep the company in European hands. Siemens has held back from big acquisitions in recent years and has been reluctant to become financially overstretched. Of late it has focused on selling underperforming assets as well as share buybacks. It is also in the process of concluding a portfolio and strategy review, which could lead to further asset sales. "Siemens is very careful regarding its balance sheet . . . d need huge European assurances that it wasn’t going to fly back in their faces," a London-based analyst said. Analysts also view a Siemens counterbid as unlikely due to considerable overlaps in their transmission, power generation and rail businesses. "Siemens would probably not counterbid due to antitrust issues in Europe in most businesses," Gael de Bray at Société Générale said. Alstom was bailed out by the government in 2004 and relies heavily on orders from state-owned rail operator SNCF and utility EDF. Alstom said on Thursday that it was "not informed of any potential public tender offer for the shares of the company" but has not communicated since. Bouygues, which has a near 30 per cent stake in Alstom, and GE, declined to comment. People close to the Alstom-GE talks said GE on Friday was considering a roughly €10bn offer for the group’s turbine equipment business, which makes up 70 per cent of Alstom’s €20bn revenues. The Alstom board met on Friday. The driving force behind starting the deal discussions has been Alstom, according to one person with knowledge of the deal, rather than GE. Alstom has been hit by the shift in the European energy landscape away from thermal power in recent years, as utilities cut back on orders for traditional coal and gas-fired plants. Its shares are still down by a half since the start of 2010. In January, the engineering group cut its operating margin and cash flow forecasts for this year, citing weakness in its thermal power division. The group last year announced it was cutting 1,300 jobs, mainly at its coal-fired boiler business. Michel Barnier, the EU single market commissioner, said on Friday that a deal with GE could make "sense" for Alstom given the problems facing the European energy market. A GE acquisition of Alstom’s energy business might also be positive for Siemens as it would have one less competitor in European power generation. Siemens and GE already coexist quite happily in the US market and could do so in Europe.
Alstom redemption by General Electric curly Sunday?
This is not yet a blitzkrieg but it looks like more. Wednesday, April 23 partially revealed by the agency Bloomberg, the proposed acquisition by the U.S. General Electric (GE) of energy 'activities of Alstom , which account for nearly three quarters of the activity of the French, is accelerating.
According to our information, the "deal" could be completed as soon as Sunday, April 27th by Patrick Kron, CEO of industrial lights, and announced Monday, April 28 in the morning, before the opening of the stock exchange of Paris and the resumption of trading the title Alstom suspended Friday at the request of the Autorité des marchés financiers .
Read also: The State calls in discussions between Alstom and General Electric
While a first board of directors of the tricolor turbine manufacturer and TGV was held Friday afternoon in Paris, a second is set for Sunday afternoon. It could prove decisive.
THE BOSS OF GENERAL ELECTRIC TO PARIS Sunday
The boss of GE, Jeffrey Immelt, who succeeded in 2001 to the famous Jack Welch, is expected in the capital Sunday to continue the discussions begun with the direction of Alstom and meet some of the principal officers of the group. Mr. Immelt should also be received by Arnaud Montebourg, the minister of the economy, and perhaps François Hollande at the Elysee Palace, or Manuel Valls , the Prime Minister, if he came back in time to Rome, where he must attend the canonization Mass of John XXIII and John Paul II.
"Kron clearly wants to make the government and speed loop operation as soon as possible, in order to avoid it being called into question, "decrypts near negotiations to explain this accelerated schedule.
Asked Friday by Le Monde, Mr. Montebourg, it is true, stated that "the government worked [ed] to alternatives and contingencies than imagined alone and without the government being informed by Alstom." Way to say that Patrick Kron, whose intransigence is known, is not supported by the executive and its precipitation is moderately appreciated.
TRACK AN ALLIANCE WITH SIEMENS
Reportedly, David Azéma, the Director General of the Agency for State Holdings, try to activate emergency several avenues explored in recent months by Bercy to come in aid to Alstom, experiencing significant difficulties.
One of them would be an alliance or merger of some activities with the German company Siemens to build the "great Franco-German company for the energy transition" desired by François Hollande during his press conference on January 14.
The catch? Of Alstom's management does not want to hear talk of the "Airbus energy" Kron. "would rather be burned on a pyre rather than s' alliance with Siemens, provides for his family. Not by anti-Germanism, but because it would be a massacre social and dismantling term Alstom, as the activities of both groups are redundant. "
According to various interlocutors, other tracks are also contemplated, including reducing the scope of discontinued operations and limit the impact, very symbolic of the sale to GE.
The "electricity distribution networks and" division, which represents 19% of 20.2 billion euros in turnover of Alstom, could be given to Schneider Electric . Similarly, offshore wind turbines, whose French is one of the main promoters could be recovered by Areva .
Negotiations ON OFFSHORE WIND
Some also pushing for GE to make concessions to make the "deal" acceptable. Reportedly, negotiations are taking place between Clara Gaymard, president of GE in France , and Mr. Montebourg, during a meeting at Bercy Friday night.
One of the main topics of discussion would, in addition to the guarantee of employment in factories in France and commitment are leading investment on the location of several centers of decision of General Electric.
According to a close to the negotiations, the giant Connecticut would be ready to implement in France the seat of its offshore wind business. Similarly, he agreed to locate to Paris some decision centers currently located in other European countries.
At Bercy, it also stresses that it is not the quality of General Electric is involved. Longtime partner of Safran , the U.S. group employs 11 000 people in France and has its European headquarters in Belfort .
Chevènement, Senator MRC Belfort, nevertheless stated in a letter Friday to Mr. Valls, that the sale of the energy industry Alstom "deal a fatal blow to the independence of [the] industry power. " The former minister also argued that General Electric, "if at first developed its products in Belfort, now tends to relocate part of its manufacturing in the United States."
Result: a floating reigned Saturday morning on the side of the executive "Either the state does. break the deal but leaves Alstom in trouble for lack of solution, or he accepts the offer of G E but gives the impression of selling off a tricolor flagship Americans, "said one adviser . govern is to choose , said Mendes France ...
Rising Interest Rates Will Hurt These Hedge Funds
Talk to Andrew Silton for five minutes about hedge funds and you may want to sell every one you have. The retired chief investment advisor of North Carolina's pension plan thinks many funds will be in for a world of hurt once interest rates rise. And with the Federal Reserve winding down its bond-buying program, he thinks that rate spike is coming soon. "Hedge strategies that work 90% of the time could have serious problems," he says.
The structure of hedge funds presents unique challenges. Because hedge fund fees -- typically 2% of assets and 20% of profits -- are so high, managers often employ leverage to juice returns. This amplifies the exposure to rate-sensitive securities, and also creates a cost structure that increases along with rates -- they're borrowing at higher rates -- when their portfolios could be the most vulnerable. For this reason, Silton, in his Meditations on Money Management blog, has urged his fellow pension managers to rethink their hedge-fund positions.
Not only does the cost of leverage increase with rates, but the amount of collateral brokers demand from funds increases, as well. That forces fund managers to sell off their portfolios to reduce their leverage and meet margin calls. In a falling market, the end result could be a snowball effect for their most illiquid stocks and bonds.
Ironically, Silton thinks the hedge funds most vulnerable to a rate shock today are those designed to avoid it. Many fixed-income hedge funds buy high-yield bonds and short Treasury bonds as a defense against rising rates -- historically, the higher yields on junk bonds provide enough of a cushion to withstand rate increases. In 2009, for instance, junk yields got as high as 20%, while Treasuries paid almost nothing. No interest-rate increase will damage a 20-point yield spread. But today, high-yield bonds pay less than four percentage points more than Treasuries—a tight spread that will probably blow out if rates rise. For one, yield-hungry investors will start to view Treasuries as more attractive relative to other bonds. Two, default levels for junk bonds could increase as overleveraged issuers refinance at higher rates, putting pressure on the sector. Meanwhile, hedge funds will face margin calls from their brokers, higher financing costs, nervous investors, and the challenge of selling illiquid junk bonds in a falling market.
Some hedge-fund experts are already lightening up on their bond-fund exposure. "We have probably the lowest weighting in credit hedge funds in years," says Dan Elsberry, senior managing director of K2 Advisors, a subsidiary of Franklin Templeton that has more than $10 billion invested in hedge funds. "As rates pick up, it will be much better on the long-short equity side than the credit side."
Bond hedge funds are enormously popular, especially among pension plans. "So many institutions, from my former pension plan in North Carolina to Calpers in California, have been liquidating their conventional fixed-income exposure and moving money into credit hedge funds," says Silton. According to Hedge Fund Research, some $684 billion is invested in these "relative value" strategies, making it one of the largest categories in the $2.6 trillion hedge-fund universe.
THIS IS NEW TERRITORY. Interest rates have been falling for more than 30 years. There is some indication how bad things may get when rates rise, since even when rates decline, yield spreads between junk bonds and Treasuries can widen significantly, as investors sell junk and buy Treasuries. When spreads widened 12 percentage points in 2008, the average corporate-bond hedge fund was down 24%, and 1,471 hedge funds went out of business.
Other hedge-fund categories also face risks. Merger arbitrage is often portrayed as safe from rising rates, as mergers-and-acquisitions deals tend to close quickly. Todd Munn, manager of the Arbitrage Event Driven fund (ticker: AEDNX), penned a report with this conclusion. Because yields on T-bills are factored into the prices arbitrageurs will pay to invest in merger deals, he argues that an increase in rates would actually improve merger-fund returns.
More-objective experts disagree. "If rates pop fast, it's game over for merger-arb," says Jim McKee, senior vice president of hedge fund research at Callan Associates, a consulting firm to nearly $2 trillion in institutional assets. As rates rise, M&A deals become more expensive to finance; the number of deals declines as private-equity firms can no longer afford to do them, and even existing deals fall apart.
For some categories of hedge funds, the effects of rising rates are more ambiguous. Long-short equity funds could do very well in a rising-rate environment. Those that favor quality growth stocks with strong balance sheets and little leverage over highly leveraged value stocks with weak balance sheets could outperform.
The biggest winner in a rate-shock environment could be global macro and/or managed futures funds. They often invest in highly liquid derivatives contracts and employ trend-following strategies that benefit precisely from such harmful events. If they can get on top of the trend while rates are rising, their portfolio values will be rising, too.
Doug Kass: Preparing for the Bear's Return
Investment pro Doug Kass, who thinks the S&P is at least 12% overvalued, has ramped up his short positions.
Doug Kass, a regular presence in Barron's since 1992 and a longtime student of the markets, brings keen insight, contrarian ideas, and humor to any financial conversation. Kass, 65, is president of Seabreeze Partners Management, an asset manager in Palm Beach, Fla., with several hedge funds. Concerned about stocks' big gains in recent years, he has put a lot more short positions into the firm's portfolios. "Most bull markets end with the emergence of speculative excesses," he says. "Some end with bubbles, and this one could be ending with both." Kass, a prolific pundit and television commentator, has put many of his ideas in Doug Kass on the Market: A Life on TheStreet, a book that John Wiley & Sons plans to publish this fall. Barron's spoke with him recently by telephone.
Barron's: What's your assessment of current stock valuations?
Kass: Prices are high, and values are growing scarce. Warren Buffett, based on the words of Benjamin Graham, teaches us that price is what you pay, and value is what you get. And my buddy Howard Marks, at Oaktree Capital Management, says that investing success is not a function of what you buy—but what you pay. Last year, the S&P 500's earnings were up only about 5% or 6%, but the index advanced by more than 30%. The difference in performance between earnings and investment returns was an outsize increase of 25% in market valuations, as animal spirits were awakened. Since 1990, the average annual increase in the multiple has been 1%. So last year's valuation rise borrowed and has taken away from future market returns.
What's driving stock returns?
Share prices have obviously benefited from massive liquidity and a zero interest-rate policy. The recent high-beta earthquake in which stocks sold off was probably the first shot across the bow. Increasingly, the market seems to be realizing that each progressive quantitative easing is having a more restrained impact on growth. With rates at zero, QE has become a blunt tool. The Federal Reserve has built a bridge to growth, but it can't deliver the destination on its own. And the flattening of the yield curve tells a story of slowing growth. There is about a 230 basis point [2.3 percentage points] spread between two- and 10-year Treasuries, compared with almost 270 bps at the end of last year. That's signaling muted economic growth. If growth fails to emerge in the months ahead, we'll see an ah-ha moment in which investors, to quote the singer Peggy Lee, say, "Is that all there is?"
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"The recent high-beta earthquake in which stocks sold off was probably the first shot across the bow." Doug Kass Photo: Jeffery Salter
What concerns you about projected earnings growth?
The consensus is looking at $120 a share this year for the S&P 500. But these are anything but normal earnings. They are inflated because corporate profit margins are at a 60-year high, and they are 70% above the average of the past six decades. So normalized earnings are well below that estimate of $120 a share, just as normalized earnings back in 2009 were well above the deflated estimate of $45 a share, which was the 12-month trailing number. So the S&P 500 might appear to be trading at only 16 times stated earnings. But against reasonable margin assumptions and normalized earnings, the market is probably trading closer to 19 times. Based on my analyses for different cases for growth, interest rates, and valuations, the S&P's fair market value is about 1650, 12% below where it traded recently.
What concerns you about corporate profit margins?
Corporate profits are the mother's milk of stock prices. First, we've had this lengthy improvement in corporate productivity, and that's likely near complete. We've had years of fixed-cost reductions by corporations, and that's also likely over, because they've cut to the bone. If the employment market gradually tightens, labor costs will rise, pressuring margins. Both interest expenses and effective tax rates will have to rise as central banks normalize monetary policy and the U.S. sees the need to reduce its deficit. And a very costly regulatory policy is likely to continue, increasing corporate costs. And finally, the quiescent capital-spending cycle will ultimately be awakened. With that, amortization and depreciation costs will ascend.
We are in a market with no memory from day to day, sometimes from hour to hour. But we are seeing the rotation that we began to see between 1999 and 2000. Warren Buffett was really out of favor when, during the technology and Internet boom in 1997, '98, and '99, people said he had lost his touch. Value stocks were out of favor and tech stocks were in favor, but then, all of a sudden at the beginning of 2000, you began to see a rotation out of high-beta, high-octane stocks, which eventually collapsed into value stocks. In early 2000, that move presaged a late-2000 considerable decline. So, we are moving from a one-way market to a two-way market where you can make money both long and short. At another important top, in early 2000, the market leadership rotated from high tech to value stocks—exactly what has happened in the past two months. Leadership changes are often the sign of a market correction or bear market.
What in particular will pressure the markets?
Disappointing global economic growth, weaker-than-consensus earnings, and a contraction of the price/earnings multiple, compared with a 25% expansion last year. Those will be the culprits for a negative return this year. The consensus view is missing, among other things, the vulnerability of the middle class, which provides an important source of economic growth. It's missing the economic vulnerability of our young people. It's missing our addiction to low interest rates, both in the public and private sectors. It's missing the consequences of higher rates and the risks to profit margins, probably my biggest concern. And it's missing the widening gap between the haves and have-nots—and the economic and social consequences over time.
You have been long a group of closed-end municipal bond funds. How has that worked out?
The group is up more than 10% this year. My belief at the end of last year was that, contrary to the consensus, rates were going lower. At the end of last year, muni-bond funds were under pressure, owing to concerns about credit quality and rising rates. The yield on the 10-year Treasury went over 3%, and funds were selling at near-record discounts—almost 10%—to net asset values. They were at a near-record tax-equivalent yield, compared to taxable bonds. The discounts are now 6%, but they're still attractive. The funds were under intense year-end selling pressure. Investors had lots of unrealized stock gains and were using them to take losses to pair against gains. My funds include Invesco Pennsylvania Value Municipal Income Trust [ticker: VPV] and Nuveen Quality Income Municipal Fund [NQU]. By the end of 2014, I suspect, total return will be north of 15%.
Kass' Picks
Recent
Company Ticker Price
Ocwen Financial OCN $38.00
General Motors GM 34.17
Monitise MONI.UK 66*
...and Pans
JPMorgan Chase JPM 56.19
Bank of America BAC 16.34
Tesla Motors TSLA 207.86
*British pence Source: Bloomberg
Do you still see any opportunities in the stock market?
One of my long holdings is Ocwen Financial [OCN], a leading player in origination and servicing of subprime loans. The nonprime mortgage business is likely to undergo a renaissance. No company is better positioned than Ocwen, the largest player in subprime. Prior to the financial crisis, about 60% of U.S. households could qualify for a prime mortgage, and about 10% could qualify for a subprime mortgage. The remaining 30% were renters. Postcrisis, approximately 30% of households qualify for a prime mortgage, and subprime is almost nonexistent. So unless we're destined to become a nation of renters, something has to change. At the same time, the recent rise in home prices hasn't coincided with income gains for average home buyers. That represents an opportunity for nonprime mortgage companies. Gone are the days of low- and no-documentation nonprime loans. Today, these loans are very secure. The nonprime industry space has been abandoned and created a void for Ocwen.
What about other sectors of the market?
This is a pair trade. I'm short Tesla Motors [TSLA] and long General Motors [GM]. GM's shares have dropped from over $41 at the end of 2013 to $34.17 recently, down nearly 20% since the recall problem stemming from the ignition-switch malfunctions. It is serious, but GM is intelligently addressing its problem. It reminds me of BP's [BP] oil spill a few years ago. That, too, created a major investment opportunity. GM has taken important steps, including hiring Kenneth Feinberg, an accomplished attorney with a history of dealing with these sorts of events. And GM is taking a voluntary charge of more than $1 billion for repairs, warranty costs, and other restructuring charges. These events, although extremely unfortunate, have provided a fantastic entry point for the stock.
What about Tesla? The shares are up 37% this year, though they're down about 20% from their 52-week high of $265, set in February.
My interest in Tesla started out when I found something in the fourth-quarter earnings release and the most recent 10-K. Based on my analysis, the company reduced its warranty reserve by a hefty $10.1 million, a gain that flowed directly into the income statement and boosted margins. The stock rose substantially, providing a great short entry point. Then there were reports of Apple [AAPL] having had discussions with Tesla, allegedly about possibly acquiring it. To me, that was silly. Nothing has come of the rumor. Tesla is being capitalized at about $1.2 million a car, versus roughly $10,000 a car for Ford Motor [F]. A lot of future growth is in Tesla's share price. The narrative has moved to Tesla's plan to build the world's largest battery factory—a risky move. With a market cap of about $26 billion, Tesla has a lot of execution risk and competitive issues. The hope for bulls is that the Gen III vehicle—a lower-priced vehicle [than Tesla's core Model S sedan] to be launched in 2017—will be enormously successful. We think the new Tesla will be hit by pricing pressures from incumbent manufacturers with deep resources, which have demonstrated a willingness to lose money on electric vehicles and have a big head start in mass production.
Moving on, what do you think of the large U.S. banks?
FICC activity, which involves trading of fixed income, currencies, and commodities, has been weaker lately for many of them, including JPMorgan Chase [JPM]. As for credit quality, interest rates, and the yield curve, if all these go in the wrong direction, capital-market activity could be weak. If I'm correct about a market correction, that will put pressure on these banks. Loan demand is tepid and growing slowly, partly because of subpar economic growth and partly because the country's largest companies are very liquid and don't need a lot of credit. Credit quality has improved in the past three or four years, but it's more of a headwind now, as loan-loss provisions start to be less of a benefit. That leads us to interest rates and the slope of the yield curve, by far the most important factor for bank profits; it should be the most worrisome area for bank investors and bank profits. Consider the hedge-fund community's favorite bank, Bank of America [BAC], which I'm short. Its net interest margin, fell to an adjusted 2.29% in the first quarter, and net interest income around $10 billion was disappointing.
Let's finish up with one more of your ideas.
Monitise [MONI.UK] is a London company that provides a platform for payments on mobile devices. It trades in London and over the counter in the U.S. [MONIF]. I see this as at least a five-bagger. There is probably no larger business than the mobile-payments industry. This company has a market cap of about $1.2 billion, and could well be one of the most important disrupters in the mobile-payments industry. Visa [V] and Visa Europe own about 13% of it. Monitise just did a private offering in the U.K. at 68 pence [$1.14] a share. The stock is down a little to about 66 pence. MasterCard [[MA] has also taken a stake in it. Leon Cooperman, who runs the hedge-fund firm Omega Advisors, has increased his stake to 12% and is the largest shareholder. Monitise, which isn't making money, owing to heavy investment in future growth, has 28 million subscribers. It plans is to have 100 million by 2016, and 200 million by 2018, and it expects fees to go up.
Thanks, Doug.
Germany's Bayer and British consumer products giant Reckitt have emerged as frontrunners to win the auction after each offering roughly $13.5 billion for the Merck consumer unit, best known for Coppertone sunscreen and Claritin allergy medicine, the sources said.
Both bidders are very keen to buy the asset and the price tag could go higher in the final days, one person added. All the people asked not to be named because the matter is not public.
Representatives for U.S. drugmaker Merck, as well as Bayer and Reckitt, declined to comment.
The sale would be the latest in a wave of healthcare deals in recent days, including Zimmer Holdings Inc's (ZMH.N) $13.35 billion acquisition of orthopaedics rival Biomet Inc LVBHAB.UL and the agreement between Novartis AG (NOVN.VX) and GlaxoSmithKline Plc (GSK.L) to trade more than $20 billion worth of assets, with Eli Lilly and Co (LLY.N) buying Novartis' animal health business for $5.4 billion.
At the same time, Valeant Pharmaceuticals International Inc (VRX.TO) and Bill Ackman are locked in a $47 billion battle for Allergan Inc (AGN.N); Mylan Inc (MYL.O) is seeking to buy Sweden's Meda AB (MEDAa.ST) for around $9 billion including debt; and there is talk of a $100 billion bid for AstraZeneca Plc (AZN.L) from Pfizer Inc (PFE.N).
RECORD HEALTHCARE M&A
The deal surge has driven healthcare M&A volumes to $153.3 billion so far this year, the highest year-to-date level since Thomson Reuters has started tracking data. Pharmaceutical deals have accounted for 71 percent of overall healthcare deals.
The Merck auction also drew interest from several other healthcare and consumer giants including Procter & Gamble Co (PG.N), Boehringer Ingelheim, Novartis and Sanofi SA (SASY.PA), people familiar with the matter have said.
The impending sale underscores drugmakers' efforts to bolster their best businesses and exit weaker ones as the drug industry contends with healthcare spending cuts and generic competition.
Reckitt owns over-the-counter medicines including Mucinex and Nurofen and the international rights for the Scholl foot care business. Its chief executive told Reuters in September that Reckitt aimed to be a major player in consumer healthcare and had the firepower to do sizeable deals.
Germany's Bayer already has a strong portfolio of consumer products including pain medication Aleve and antacid Alka-Seltzer, but is looking at deals to expand the business further. In 2012, Bayer lost a bidding war with Reckitt for Schiff Nutrition International Inc, which agreed to sell to the British consumer products group for $1.3 billion.
Over-the-counter health products are attractive to companies like Reckitt and Bayer because they tap into consumer and demographic trends such as aging populations, ballooning healthcare costs and more interest in wellness.
They also enjoy brand loyalty, fat margins and strong growth - and because of that they don't come cheap.
Merck is looking to sell its consumer unit as it is not a leader in the space and holds only around 1 percent of the market. In exploring alternatives for the consumer business, Merck is following in the footsteps of other drugmakers such as Pfizer, which has created shareholder value by separating non-core business units.
Pfizer sold its infant-nutrition business to Nestle SA (NESN.VX) for $11.9 billion in 2012 and last year spun off its animal health unit as a separate publicly traded company called Zoetis Inc (ZTS.N).
--> After falling by half over the past two years, Tullow's shares finally look ready to rally. They could jump from a recent £8.40 to more than £10.50.
After years of successes, its new-well success rate fell, as did its shares. Better results could lift shares 25%.
Two years ago, Tullow Oil made a major discovery in East Africa, highlighting its position at the forefront of one of the few remaining underexplored onshore regions of the world. But even as Tullow's reserves have gushed higher, its share price has sunk. The stock (ticker: TLW.UK) has been cut in half in the past two years. By some estimates, it now trades at a 35% discount to the value of its assets.
Little known in the U.S., Tullow is an oil and gas exploration-and-production company with an exemplary track record. Reserves, at 1.4 billion barrels of oil and equivalents, have nearly tripled in the past seven years. But the $13.1 billion (market value) company's discoveries have been overshadowed recently by some high-profile drilling disappointments and worries about the costs a major development project in Ghana.
Those concerns appear misplaced. If the company can bring on partners to the Ghanaian oil fields and extend its long-term winning streak on discoveries—and there's reason to believe it can achieve both goals this year—its shares could rise 25% or more.
Tullow's results tend to be bumpy, fluctuating with exploration successes and failures and as proceeds from asset sales vary. Next year, the London-based company is expected to earn $415 million, or 44 cents a share, on revenue of $2.56 billion. (Though it's traded on the London Stock Exchange, Tullow reports financial results in dollars.) That's down from 70 cents a share in 2012, but up from last year's trough of 19 cents. The company expects to increase reserves by 200 million barrels a year, on average, in the near term. The stock yields 1.6%.
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CEO Aidan Heavey, right, says the company can afford to take big risks. Photo: Jonathan Player/Redux
TULLOW WAS FOUNDED IN 1985 in the Irish town of Tullow, about 35 miles south of Dublin, by Aidan Heavey, a former accountant and financial controller at Irish airline Aer Lingus Group. After hearing from a friend at the World Bank about some oil fields in Senegal that had been abandoned by the oil majors, Heavey decided—with no prior experience in the industry—to give it a go. Tullow now operates in 24 countries, though its production is principally in Africa.
After four years of exceptional results, in which Tullow's success rate at drilling new wells ranged between 74% and 87%, the company hit a rough patch in 2013, when its success rate on new wells fell to 65%. Investors latched on to the disappointments, but Heavey, now 61 and still at the company's helm, says that's just part of the business. "What we try to do is mix the portfolio in such a way that you can take big risks, you can drill a dry hole, but still find enough oil to make money," he adds.
Heavey began to transform the company in the early 2000s, embarking on a spree of acquisitions that included producing assets in the North Sea, as well as Uganda, Mauritania, and Tanzania.
The all-or-nothing nature of the exploration business makes for a volatile stock. After hitting a high of 16 pounds ($26.88) two years ago, the shares fell in half, to £7.49, last month. They closed on Friday at £8.40, or about 30 times forecasted 2014 earnings and 33 times projected 2015 earnings. That looks rich, but some analysts put the value of Tullow's assets as high as £14 a share, based on $100 a barrel of oil. (Brent recently fetched $110 a barrel.) A consensus of analysts has an average price target of £10.48 on the stock, 25% higher than its current quote.
BMO Capital Markets oil analyst Brendan Warn puts the value of Tullow's assets at £12.64 a share. The stock traded at a premium to its net asset value until the beginning of the recent downward move, and hasn't traded at a discount since 2008. "It's just an unlucky run of unsuccessful exploration wells," says Warn, adding that Tullow is a fantastic company with a strong balance sheet.
Tullow's net debt at the end of 2013 was $1.9 billion; it has credit lines of $2.4 billion, and this month it raised $650 million in a bond issue. Still, fears that the company may have to shoulder almost half of the $4.9 billion estimated development cost of Ghana's Tweneboa-Enyenra-Ntomme fields have weighed on the shares. Tullow has a 47.5% stake in the project; it's looking to reduce that to 30%, though right now, buyers are scarce.
Seeking to allay those worries, Heavey says that the firm is in discussion with a number of companies interested in buying a stake in the project. "We are well-funded and will wait for the right approach but we are hoping to finalize a deal this year," he says. Current partners in other projects include Anadarko Petroleum (APC), France's Total (TOT), and China's state-owned Cnooc (CEO).
Speculation in recent weeks that Tullow could be a takeover target helped lift the shares from their recent low. Reports named China's state-owned Sinochem and Norway's Statoil (STO) as potential acquirers, with bids as high as £15 a share.
Investors won't need a deal for the stock to prosper. Once new partners are brought in to develop the Ghana project, Tullow, which holds licenses to explore hundreds of thousands of square miles in Africa, Europe, and Latin America, can focus squarely on what it does best: finding new oil.