FT : Deutsche under pressure to raise capital

Deutsche under pressure to raise capital

Deutsche Bank is facing pressure from investors to raise capital amid fears the bank is still not robust enough to cope with a tougher regulatory environment and a slump in global debt markets. Insiders at Germany’s largest lender are understood to accept as a real threat that the European regulators will direct them to raise fresh equity after eurozone-wide bank health checks later this year. Several peers including Barclays and Credit Suisse have in the past two years been compelled by local regulators to accelerate plans to raise capital. Deutsche, which declined to comment, has not seen similar demands but is expected to face a stricter oversight regime when the European Central Bank takes over in November. Several large investors told the Financial Times they were "unhappy" with top management over their slow response to issues ranging from capital weakness to legal investigations. Some of them are pushing for executives to raise equity, not least because they fear an aggressive plan to reduce the bank’s outsized debt-load is severely damaging its fixed income trading business. "It is very difficult for them to say we got it wrong. But I clearly think they need to raise capital as they have already harmed their business by not doing it," said a top 20 investor in the bank. Anshu Jain, co-chief executive, is trying to build up capital by reducing assets and retaining earnings. A €3bn equity rise 12 months ago had prompted him to declare the bank’s capital "hunger march" over, but since then it has been hit by fresh rules on how much debt a bank may have compared with its equity capital. Deutsche’s core tier one ratio – a crucial gauge of balance sheet strength – stood at 9.7 per cent at the end of 2013, the third worst among 12 of the world’s largest investment banks, according to Kian Abouhossein, a JPMorgan analyst. David Moss, head of European equities at F&C Asset Management, said: "They have improved their capital position dramatically, but for a bank with the size of their balance sheet and their business mix it still looks to be on the low side." Deutsche is targeting a more than 10 per cent ratio in a year’s time but has already warned it could fluctuate before that. Analysts at JPMorgan and UBS project it to fall to 9.2 and 9.1 per cent respectively this year due to regulatory adjustments. "I’m definitely not happy with this capital ratio," said a top 10 investor. Investors expect to see fresh evidence from first-quarter results next week that Deutsche is in danger of losing its crown in fixed income, a market that has been hit by tougher regulatory rules and investors’ reticence to trade. The bank’s share price has vastly underperformed its sector in the past 12 months. "I don’t think there is a happy shareholder in Deutsche Bank at this point in time, just because of the share price," said Vincent Vinatier, head of research for European equities at Axa Framlington. He was more sceptical about the need for a rights issue. "If you look at the amount of work done on cutting costs and accruing capital, it’s all happening, it’s just not happening quickly enough for the market to be happy with."

>>> US Option Activity IBM, WLT

* IBM Weekly May30 192.5 puts are seeing interest with 1290 contracts trading vs. open int of 120, pushing implied vol up around 1 points to ~15% -- co is scheduled to present at the Intelligent Trading Summit on May 13 (co reported earnings earlier this month).

* WLT May 8 calls are seeing interest with 1810 contracts trading vs. open int of 5050, pushing implied vol up around 5 points to ~76% -- we noted bullish activity in the May 9 calls on Apr 17 (see 4/17 10:30 OPTNX). Co is confirmed to report earnings May 1 before the open

>>> Elisabeth Arden +10% on rumor of LG Household Bid

South Korea's LG Household considers bid for Elizabeth Arden

SEOUL, April 23 (Reuters) - South Korea's LG Household & Healthcare Ltd said it is considering a bid for U.S. cosmetics firm Elizabeth Arden Inc, an acquisition that would give it globally recognized luxury brands and would be its most ambitious to date.

Elizabeth Arden, which has a market value of $845 million, has seen its sales hit by a much weaker-than-expected North American retail market as well as deep industry discounting in key European markets that have eroded profit margins. Its shares have fallen 20 percent so far this year.

LG Household, keen to expand its product lines and reach, has completed 12 acquisitions since 2007, though the biggest of these has been a relatively small $375 million purchase of a local retailer.

Four of its five latest deals were overseas acquisitions, including Japanese cosmetics firm Everlife and Canadian retailer Fruits & Passion.

"LG Household has grown so far based on M&A. We are looking at several potential deals at the moment for the same reasons, and Elizabeth Arden is one potential option," said a company spokesman, responding to a report in the Maeil Business Newspaper about the potential bid.

"We are considering both local and overseas deals," he added.

Representatives for Elizabeth Arden could not be immediately reached for comment outside of regular U.S. business hours.

LG Household, No.2 in the South Korean cosmetics market with brands such as Whoo and O Hui, saw its shares climb 3 percent in a flat market on hopes that Elizabeth Arden would provide it with a new growth engine.

"Should the deal materialise, the key will be how much synergy (LG Household) can generate by acquiring new product lines and selling them in Asia," said Meritz Securities analyst Song Kwang-soo.

"Elizabeth Arden's margins are also lower than LG Household's, so there is also potential for increased value through restructuring."

Elizabeth Arden trades at a 12-month forward price-to-earnings multiple of 16.8, compared with its U.S.-listed peers forward P/E of 22.1, according to Thomson Reuters data. LG Household trades at a forward P/E of 20.8.

In addition to its namesake brand, Elizabeth Arden is known for celebrity brand perfumes such as those of Taylor Swift and Justin Bieber, as well as skin care brands like Ceramide and Prevage.

Elizabeth Arden's net income attributable to shareholders fell to $34.95 million for the fiscal quarter than ended Dec. 31, down from $44.81 million a year earlier. It has said it is working on a fundamental reexamination of how it executes its business, particularly internationally.

FT : Taxi apps should be hailed for breaking the cabby cartel

Taxi licensing illustrates how regulation intended to serve the public is hijacked

They are taking to the streets in Paris. They have secured a ban in Brussels. They have gone to court in Berlin. Taxi drivers across Europe are united against Uber – a Silicon Valley start-up, backed by Google and Goldman Sachs, whose app-based car service is being rolled out internationally.
The regulation of taxi services arouses emotions. My local French driver asked recently: “What do London cabbies do when they retire?” He explained that his colleagues rely on the onward sale of taxi licences to fund their pensions. In New York, the value of a taxi medallion now exceeds $1m. London, however, issues licences freely to anyone who passes “The Knowledge”, the demanding test of London’s geography required of drivers of the distinctive black cabs.

Some regulation of taxis is necessary. The nature of the service they provide means that many of its users are vulnerable. They are disabled, or women who need a safe trip home late at night, or foreign tourists who have no idea what is a reasonable fare from the airport to the city. Beware Oslo, where even the metered fare will max out your credit card.
Taxi licensing illustrates regulatory capture, the phenomenon by which regulation intended to serve the public is hijacked by industry interests. As every passenger knows, drivers are voluble, and enjoy a certain solidarity; their clients, however, are diffuse and diverse. In 1978 a protest by cab drivers brought central Dublin to a halt. The Irish government responded by agreeing to freeze the number of taxis on the streets of the city. Over the next two decades the Irish economy grew strongly and Dublin became notorious for taxi queues. There was even a serious proposal to erect taxi shelters across the city, so that waiting citizens could shelter from the Irish rain.

The regular Christmas chaos – taxis were effectively unavailable at times of peak demand – became a political issue. But Prime Minister Bertie Ahern stood firm in defence of the status quo. It was left to the Irish courts to declare the restrictions on numbers unlawful. Within two years, the number of cab licences in Dublin had increased more than threefold.
So long as regulation ensures that vehicles are safe and drivers honest, it is difficult to see how the public interest could ever be served by restrictions on numbers. Britain’s Office of Fair Trading reached this conclusion in 2003 (although there are no such restrictions in London, many other local authorities impose limits). But the lobbyists prevailed; the parliamentary transport committee issued an extraordinary attack on the OFT report, and the government decided to do nothing. The Law Commission reiterated the OFT’s finding in 2012, but by the following year had modified its advice and suggested that there might be a case for restricting supply, although it gave little guidance as to what that case was.
In Paris, cab numbers are tightly controlled and there are virtually no private hire vehicles. Taxis are mainly used by business people and journeys per head are less than a third of what they are in London or New York. Lower socioeconomic groups rarely use cabs in France – in London and New York they do, extensively – and there are large areas of Paris where a taxi service is in effect unavailable. That elitist outcome is strikingly similar to the experience of another regulated industry, civil aviation, where service was confined for many years to business travellers and the affluent, until deregulation and the internet made the emergence of low-cost airlines first possible and then inevitable. The parallels with the development of Uber are clear.
But the problem of the French driver’s pension remains. The American economist Gordon Tullock described “the transitional gains trap”: the policy of restricting numbers is foolish but cannot be abandoned without wiping out the hard-earned savings of drivers. One might have less sympathy for investors; most New York cabbies rent rather than own licences. In Dublin, the Irish government established a hardship fund to help compensate drivers who had been counting on the value of the licence to supplement their retirement income, or had recently taken out a loan to purchase a licence. Politicians should beware of policies that are easy to implement and costly to reverse.