TheChek News Flow

Tata’s JLR unit targets the ultra-rich

Jaguar Land Rover will build its largest and most expensive Range Rover as the British luxury carmaker looks to continue leveraging strong sales growth in emerging markets. The company’s first long-wheelbase sport utility vehicle for two decades marks a significant move to cater to wealthy, chauffeur-driven customers in places such as China, Russia and the Middle East – key growth markets for the resurgent brand. The ultra-rich in China and other emerging markets have become crucial targets for global luxury carmakers hungry for growth outside of Europe and the US, with manufacturers such as Mercedes, Audi and BMW developing longer, more luxurious limousine-style variants of their western models. Boasting airline-style seats with inbuilt muscle massagers, leather tables and a champagne chiller, the car is expected to cost more than £130,000, about twice the price of an entry-level Range Rover. JLR, which has been revitalised since being bought by India’s Tata Motors in 2008, has almost doubled its global sales in the past three years thanks mainly to demand outside its traditional British, US and European markets. The launch of the car, which will be built from lightweight aluminium at JLR’s factory in Solihull in the West Midlands, comes six weeks after the company unveiled a concept Jaguar SUV in a move seen further expanding its portfolio targeting emerging markets. Newly-minted millionaires in developing countries such as China and India have turbocharged the global luxury market and forced some manufacturers to shift their focus from high-performance models to more luxurious and opulent features. BMW, Mercedes and Audi all offer extended versions of their flagship sedan models in China, offering extra legroom in the rear seats for owners who are typically ferried round by chauffeurs. The shifting market demands have prompted luxury carmakers to move into segments typically dominated by rivals and dilute their traditional branding areas. The extended Range Rover puts JLR in a limousine market traditionally controlled by the likes of Rolls-Royce and Bentley, while the trend towards SUVs has seen traditional sports car brands such as Porsche and Lamborghini tackle a segment previously reserved for the likes of Land Rover. Phil Popham, JLR group marketing director, said: "With the addition of the Range Rover long wheelbase to our portfolio of luxury SUVs, customers can now choose a vehicle that offers superior levels of interior space and comfort to compete in a market dominated by saloon cars up until this point." The new Range Rover will be officially unveiled at the Los Angeles and Guangzhou motor shows at the end of November and go on sale in March next year.

Ministers plan shake-up of water industry

Ministers plan to reform the British water industry amid concerns that companies are making large profits while charging customers too much and failing to invest in infrastructure. George Osborne, the chancellor, and Danny Alexander, Treasury chief secretary, are looking at ways to ensure that the industry pays more tax, while Number 10 and the environment department are looking at broader reform of the industry to encourage competition and bring down bills. A senior government adviser said: "Our focus is on improving the cost of living for bill payers and increasing competition. But there is no reason we can’t do this while also making companies pay more tax. Looking at the profits of some of these companies, there is a general feeling that not all of them are behaving properly." The chancellor plans to tackle the tax and consumer issues in his Autumn Statement next month. Environment ministers are rewriting the water bill going through parliament to enact a wider-ranging regulation shake-up. The co-ordinated move follows a request by Thames Water to raise its bills 8 per cent, well above the rate of inflation. That request was turned down by Ofwat, the regulator, which has said it expects bills to fall up to 10 per cent in real terms over the five years from 2015 to 2020. But all three man political parties believe more could be done to reduce bills and they are battling over how to do so as part of efforts to tackle the "cost of living crisis" that has so far focused on high energy bills. Mr Osborne and Mr Alexander want to stop water companies using high interest payments to cut their tax bills. The Financial Times has learnt that Robert Halfon, a Conservative backbencher, is urging the Treasury to impose a windfall tax on the industry – although this suggestion is unlikely to be taken up. Instead the chancellor will probably focus on reducing the size of interest payments that can be deducted from a company’s tax bill, especially for larger or more highly indebted companies. A report by Charlie Elphicke, a Conservative MP, shows that the biggest water companies owe 85 -105 per cent of what they are worth and high debt levels are helping companies write off potentially large tax bills. Thames Water has come under fire for not paying any corporation tax last year, despite being the UK’s biggest water company by revenue. Thames said: "We have not paid much corporation tax in recent years because the government’s tax system allows companies to delay, not avoid, payment of tax based on how much they invest." Another proposal would put a levy on the debt held by highly leveraged water companies, along the same lines as the bank levy. The Treasury would then benefit either from the levy or, if companies decided to reduce their debt levels, from higher corporation tax. The industry is likely to complain that these measures will force them to put up bills but coalition officials believe it is possible to ease the burden on bill payers at the same time. Ministers will use the water legislation to allow companies to take more aggressive action against customers who fall behind on their bills. The government wants to force landlords to give companies access to details of their tenants so they can be taken to court if necessary. Ministers estimate that this could shave £15 from other customers’ bills. The measures have been pushed by MPs on both sides of the coalition. Simon Hughes, the Liberal Democrat deputy leader, has long called for more transparency in the industry.

Big Six face challenge over power bills

Britain’s energy regulator is on course to clash with the "Big Six" power companies this week over the importance of wholesale gas and electricity prices in rising customer bills. British Gas, SSE, Scottish Power and npower have all used the argument of mounting wholesale costs – which make up nearly half of household bills – to justify recent price increases averaging 9.1 per cent. They have also blamed government green schemes and rising network charges. But data from energy regulator Ofgem show wholesale prices have been almost flat over the past year, rising by a mere 1.7 per cent. According to the regulator, wholesale costs should contribute only around an additional £10 to household charges. This element of the average annual bill has gone up from £600 to £610, according to Ofgem, while the regulator estimates that the companies’ average net profit margin has more than doubled over the past year from £45 a household to £95. The findings will prove awkward for company bosses, who are due to appear in front of the energy select committee on Tuesday amid mounting anger over rising bills. With the effect of the recent price rises, the average dual fuel energy bill has now risen to £1,320 per household. Labour has promised a 20-month price freeze if elected in 2015, while Sir John Major, the former Conservative prime minister, last week called for a windfall tax. The regulator’s data on wholesale power costs is contained in its Supply Market Indicators which show the annual costs per customer that suppliers incur for delivering electricity and gas. However, energy companies claim the method Ofgem uses is flawed. In explaining their recent price rises, SSE said the average wholesale cost of energy for this year was 4 per cent higher than in the previous year, while Scottish Power said it had jumped 7 per cent. "The prices that individual suppliers pay depend on their own hedging strategies, and the Ofgem methodology is, at best, an approximation of what those hedging profiles are," a British Gas spokesman said. "We buy a certain amount of gas more than two years in advance, and if you look at the 24 month figure to October 2013, there has been an 18 per cent increase in the wholesale cost." SSE said the suggestion that wholesale costs had not risen over the last year was "simply false". "This is very much a global market and we are seeing increased international competition for supplies, which is putting up prices," a spokesman said. However, Ofgem did agree with the suppliers that wholesale prices were continuing to rise. It said the price of gas for use this winter would be 8 per cent higher than for last winter, and the price of electricity 13 per cent higher.

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Actelion’s Next $1 Billion Drug Seen Enticing Buyers: Real M&A 2013-10-27 22:00:00.7 GMT

(For a Real M&A column news alert: SALT REALMNA <GO>.)

By Tara Lachapelle and Simeon Bennett Oct. 28 (Bloomberg) -- Actelion Ltd. is once again shaping up as a takeover candidate after the lung-disease drug on which the company staked its future won regulatory approval. The drugmaker, which has a market value of 8.3 billion Swiss francs ($9.3 billion), was granted U.S. approval on Oct. 18 for Opsumit, a pill to treat pulmonary arterial hypertension that may generate $1.1 billion in annual revenue by 2017, according to analysts’ estimates compiled by Bloomberg. While the company has gotten $3 billion more expensive in the last year, the drug’s clearance increases Actelion’s chances of receiving takeover interest, Bryan Garnier & Co. said. Opsumit is the Allschwil, Switzerland-based company’s answer for continued growth after its best-selling medicine Tracleer loses patent protection in 2015. With the approval, buyers from Bayer AG to GlaxoSmithKline Plc now may be more comfortable gambling on an acquisition of Actelion, Jefferies Group LLC said. Potential buyers also will probably be watching for successful phase 3 data in mid-2014 for selexipag, another drug in its pipeline, UBS AG said. “The risk is out and it’s going to make it more attractive and easier for the company to be valued,” said Philippe Comby, New York-based co-manager of Hottinger Capital Corp.’s $453 million Swiss Helvetia Fund, which owns Actelion shares. “It’s probably an M&A candidate for sure now.”

European Approval

A European Union advisory panel recommended approving the drug last week. The European Commission, the EU’s executive arm, usually follows the panel’s recommendation. Next, the company needs to figure out how to market the new pill and encourage doctors to prescribe it. “As a company, we must create value at all times,” Jean- Paul Clozel, Actelion’s co-founder and chief executive officer, said in an Oct. 20 interview with Switzerland’s SonntagsZeitung newspaper. “If we are successful, as is the case with Opsumit, then Actelion continues to enjoy a bright future as a stand- alone company.” Roland Haefeli, a spokesman for Actelion, declined to comment on whether the company has been approached by potential suitors or is considering a sale. Opsumit and Tracleer -- as well as Gilead Sciences Inc.’s Letairis and Bayer’s Adempas -- treat an incurable disease in which the blood vessels in the longs become narrowed, making the heart work harder and causing elevated blood pressure.

Tracleer Expiration

Tracleer already has been losing market share to Gilead’s Letairis since the U.S. Food and Drug Administration allowed the Foster City, California-based company to remove a reference to the risk of liver damage from the label in 2011. When the FDA approved Actelion’s Opsumit on Oct. 18, it said the new drug also won’t have to carry that warning. The U.S. patent for Tracleer, which accounted for 87 percent of Actelion’s $1.84 billion of revenue last year, expires in November 2015, and in Europe it could face generic competition less than two years later. The drug’s sales may tumble 70 percent to $484 million in 2017, according to the average of six analysts’ estimates compiled by Bloomberg. Opsumit will be replacing much of the lost revenue. CEO Clozel said earlier this year that its peak sales may surpass Tracleer’s. Annual revenue from the drug may be as high as $2.2 billion by the time its patent expires in 2024, according to UBS.

Actelion’s Pipeline

“For a company with so few products and with its main product going off patent in the next three years, having this new compound in the same category approved with a good label makes it clear for any company interested in the field and acquiring some growth,” said Eric Le Berrigaud, an analyst at Bryan Garnier in Paris. Opsumit is “more a question of execution, but they have all they need to make it a success.” The next product in Actelion’s pipeline is selexipag, which is in the third and final stage of trials usually needed for regulatory approval. Positive data from that study will increase the likelihood of Actelion receiving takeover offers, said Guillaume van Renterghem, a London-based analyst at UBS. Bayer is the most likely suitor, he said. Bayer, which has a market value of $104 billion, already had $14.7 billion of debt and $3.2 billion of cash as of June 30. Oliver Renner, a spokesman for the Leverkusen, Germany-based company, declined to comment on speculation regarding acquisitions.

Respiratory Drug

Buying Actelion would enable Bayer to add the Swiss company’s drugs for pulmonary arterial hypterension to Adempas, its own treatment for the disease that was approved by the FDA earlier this month. Glaxo, also named as a potential buyer, already sells Gilead’s Letairis in Europe under a different brand name. Novartis, whose headquarters in Basel, Switzerland is only 2 miles (3.2 kilometers) from Actelion’s, is building up a business in respiratory diseases such as asthma and smoker’s cough and also may be interested in acquiring its neighbor, said Bryan Garnier’s Le Berrigaud. Eric Althoff, a spokesman for Novartis, and Simon Steel, a spokesman for Glaxo, declined to comment on whether the companies are interested in acquiring Actelion. Actelion hasn’t been a willing seller in the past. In November 2010, Bloomberg News reported that Amgen Inc. was considering a bid for Actelion, citing people with knowledge of the matter. Clozel, Actelion’s CEO, wanted to keep the company independent, and the talks never led to a deal.

Expensive Stock

The recent gain in Actelion’s share price may deter bids, according to Michael Leuchten, a London-based analyst at Barclays Plc. The stock has risen 59 percent this year and is already more expensive than most of its peers based on projected revenue for the next several years, data compiled by Bloomberg show. “I’m not quite sure why people are jumping on the M&A bandwagon now,” Leuchten said in a phone interview. “As a disciplined acquirer, I’m not sure you can make this deal work at this sort of level.” Actelion should wait to sell until next year when the outlook for selexipag is clearer so that it can get the best price for shareholders, said Ori Hershkovitz, a partner at Sphera Funds Management. The Tel Aviv-based firm oversees about $325 million and owns Actelion shares. “If I were the company, I would definitely wait until mid-2014” to sell, Hershkovitz said in a phone interview. If they hit the mark with selexipag, “then all hell breaks loose. It could be a huge company.” Actelion may fetch about $13 billion in an acquisition if selexipag fails, and as much as $20 billion if it’s successful, he estimates. The company had an enterprise value of $8.7 billion last week. Before Opsumit got FDA clearance, a suitor would have been gambling on both Opsumit and selexipag without the guarantee of being able to market either product, said Le Berrigaud of Bryan Garnier. “Now Opsumit is a given,” he said. “For any acquirer, it’s good to have a given and a bet, rather than two bets.”

For Related News and Information: Actelion Rises After Winning Approval of Opsumit Lung Drug NSN MV10466K50YJ <GO> Actelion’s Macitentan Halves Risk of Death, Hospitalization NSN MC3L916S9728 <GO> Actelion May Keep Suitors at Bay Longer With Lung Drug Test NSN LKOHZ507SXKX <GO> Actelion deal news: ATLN VX <Equity> TCNI MNA BN <GO> Real M&A columns: NI REALMNA <GO> Top deal stories: DTOP <GO>

--Editors: Sarah Rabil, Beth Williams

To contact the reporters on this story: Tara Lachapelle in New York at +1-212-617-8911 or tlachapelle@bloomberg.net; Simeon Bennett in Geneva at +41-22-317-9238 or sbennett9@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at +1-212-617-5992 or srabil@bloomberg.net; Phil Serafino at +33-1-5530-6277 or pserafino@bloomberg.net

In Brazil, it was once accepted wisdom that four telecom operators was the correct number to ensure good levels of profit versus competition. But in recent weeks, events in Europe are being felt across the Atlantic as Telecom Italia prepares for a possible sale of its Brazilian asset, Tim Participações, a manoeuvre that could leave the Latin American market with only three major players.

This is already having repercussions among rivals with Portugal Telecom and Brazil’s Oi signing up for a merger ostensibly to prepare themselves for consolidation. Brazil is one of the world’s prized telecom markets. Subscriber numbers were more than 268m in August, representing penetration rates of more than 1.35 lines per head of population, compared with 46m cellular lines a decade ago, according to Anatel, the industry regulator. By 2018, Brazilian cellphone users are expected to increase to 350m, a report by Ericsson predicted. The prime beneficiary of this growth has been Vivo, owned by Telefónica of Spain, with more than 77m subscribers, followed by Tim, controlled by Telecom Italia, with nearly 73m. In third place was Claro, owned by Mexican billionaire Carlos Slim’s América Móvil, with about 67m and then Oi, the former Brazilian incumbent fixed line operator, with 50m. Speculation is rife, however, that Tim will soon be put up for sale by Telecom Italia in a transaction that could be worth at least €9bn, according to analysts. Anatel is unlikely to let Telefónica own the country’s two largest mobile operators, so Tim is expected to be divided up between Vivo, Claro and Oi. Regulators are expected to be suspicious of any sale of Tim to its three rivals. Brazilian telecom companies are already regularly criticised by consumers for low-quality services, and any reduction in the number of operators would raise fears this would get worse. Operators counter that high taxes, red tape and fierce competition limit their ability to invest, particularly in remote areas and in new technology, such as next-generation 4G services, which they aim to roll out in time for next year's World Cup. For this reason, analysts expect the regulator to consider allowing only three operators, as long as they carve up TIM in such a way that no one company dominates any single region. Zeinal Bava, chief executive of Oi who will remain in charge after the merger, says the combined Portugal Telecom and Oi would have the scale and financial firepower to participate in the wider consolidation of the fiercely competitive Brazilian market. “If we do not make this move then we will never have the option to consider anything,” he told the Financial Times in an interview. “Let’s suppose that Telecom Italia gets rid of its asset in Brazil and sells bits to different people. Then there is a knock on my door and someone is saying how about this? I would have to raise capital – do you think I could do [that] before?” The merger would result in a single, Rio de Janeiro-listed group with 100m customers and almost $19bn in annual revenue. It would span the new and old world economies with large operations in Brazil and Portugal, as well as an African business that could be sold, according to people familiar with its strategy. It is a union though that has left some analysts scratching their heads, who say the transaction benefits the controlling shareholders of both companies at the expense of Oi’s minority shareholders. “The level of disclosure has been poor,” said Richard Dineen, analyst with HSBC.

The structure of the company will be simplified to take out the debt of the old controlling shareholder, Telemar Participações. Portugal Telecom will go from holding a 25 per cent direct stake in Oi and an indirect stake of 12.1 per cent in Telemar to about 38 per cent of the new combined group. From the spaghetti-like corporate structure of the old group, which had many classes of shares with unequal voting rights, the new company will have one class of shares with the same rights 100 per cent free floated on Brazil’s Novo Mercado, which entails the market’s highest standards of corporate governance. “This transaction is not just about scale, although that is important,” Mr Bava says. “We will have one listed entity, one class of shares, high liquidity, high standards of governance . . . the company becomes investable.” Analysts question whether the deal will really fortify Oi to make acquisitions. The merger is expected to generate synergies of R$5.5bn, although Oi will need to raise R$7bn-$R8bn to complete the deal. However, the group will be left with a large net debt of R$41.2bn even after the equity raising. That is equivalent to a net debt to 2013 earnings ratio of 3.3 times, a metric similar to Oi on a standalone basis, which Mr Bava acknowledges is high. This also worries analysts, with rating agencies threatening to downgrade the group’s debt to junk status. The company’s debts are a legacy of a period of high dividend payouts to investors, a shareholder perk that mostly disappeared under Mr Bava after he cut the dividend by three-quarters. “Of course, the shareholder base has got to change as a lot liked the dividend and yield, but now we are positioning ourselves as a growth stock.”

Tyremaker Titan changes track on Europe plants

Titan International, the US tyre and wheel manufacturer, is planning to nearly double the size of its European business in a bet on the continent’s rebounding economy, its chief executive told the Financial Times. Maurice Taylor confirmed that the Illinois-based group is considering the acquisition of a beleaguered tyre factory owned by Goodyear in northern France. Arnaud Montebourg, French industry minister, made Titan’s interest public this week.

Mr Taylor added that the company, which makes tyres for off-road vehicles, is also weighing bids for three additional plants in Europe in deals that would take its sales in the region from $750m in 2012 to to $1.3bn. “The thing in Europe is that there are not large farms,” Mr Taylor said. “That means you have to be able to make tyres that can go on both the fields and the roads. The opportunity for us, if we can pull it off, is to be like Apple in that market”. Mr Taylor declined to identify where the factories under consideration were located but said they were in the countries in which Titan already has operations: Germany, France, Italy, the UK and Spain. The decision to expand in Europe marks something of a volte face for Mr Taylor, who has previously been critical of European labour practices in the past, reserving particular vitriol for those of France. In February, the outspoken 69-year old, who styles himself as “The Grizz” or “Grizzly Bear” penned an excoriating letter to Mr Montebourg, in which he criticised French workers for receiving high wages for working short days. “They get one hour for breaks and lunch, talk for three and work for three,” the letter said. Mr Taylor confirmed his renewed interest in the Amiens plant, saying he had spoken with Mr Montebourg and that the two were on good terms. “He is tall, very tall; he would have made a great wide receiver [an American football position] if he was born in the US,” Mr Taylor said. He added that both men shared a common experience: running for but failing to secure the presidency of their respective countries. The European push reflects Titan’s ambition to replicate its operations in the US, where it is the third-largest manufacturer and supplier of tyres. The group supplies parts directly to agricultural and mining vehicle manufacturers. Titan generated income of $174.7m on sales of $1.8bn in 2012. “As the growth of global agriculture moves away from North America, [Titan] are setting up in places where they will be able to serve their customers going into eastern Europe and Africa,” said Larry DeMaria, an industrial infrastructure analyst at William Blair.

Buyout groups set course for record investment in shipping

Private equity-backed investment in shipping is set to hit record levels this year, having already surpassed $2.7bn, as buyout houses bet on a recovery of an industry hit hard by the economic downturn. The amount committed so far matches the previous record set in 2011. It is part of a recent trend that has seen more than $11bn in private equity-led investments in ships and shipowners since the start of the financial crisis, according to new data from Marine Money, a specialist consultancy.

Groups such as Carlyle, KKR and Oaktree Capital Management have waded in to shipping as the traditional leveraged buyout market has become more crowded. The groups, who are looking for ways to make more money, with interest rates at rock bottom levels, usually take a stake in ship owners or set up special purpose vehicles to order new ships. Buyout groups have been attracted by low asset valuations and demand for new sources of capital. Many traditional backers have shunned the sector after suffering heavy losses on loans extended to shipowners during the boom years before 2008. The move into shipping by private equity has been widely welcomed as a signal that the industry is emerging from the crisis. “This is smart money and it’s a sign that confidence is returning to the industry, and that we may finally be at the bottom of the cycle,” said Jim Lawrence, president of Marine Money. “It is really good that these players are coming into the market,” said Halvor Sveen, who has been involved in shipping finance since the mid-1980s and is in the process of setting up Maritime & Merchant, a boutique shipping bank in Norway, backed by more traditional industry players. But he said a recent rush of orders was a sign of concern in an industry that is renowned for its structural overcapacity. “I am a little bit worried about the recent order strength.” Set against the overall size of the market for new orders, the contribution from private equity is still relatively small compared to the current order book, which Clarksons, the shipping specialists, put at $280bn. Plagued by overcapacity, charter rates across the industry remain volatile, although there have been some signs in recent months of a sustained recovery in some sectors including dry bulk and tankers. Stephen Gordon, Clarksons’ head of research, said it was hard to judge whether the rebound in orders was coming too soon but pointed out that in recent years the new business won by shipyards was still running at between a third and a half of the levels seen in the boom years in the middle of the last decade. The order book represents only 15 per cent of the active fleet compared with one equivalent to half of the fleet at the peak in 2008 “We have had five years of difficult markets in shipping and there is a sense from some interests that we have reached historic lows,” he said.

Buyout groups set course for record investment in shipping

Private equity-backed investment in shipping is set to hit record levels this year, having already surpassed $2.7bn, as buyout houses bet on a recovery of an industry hit hard by the economic downturn. The amount committed so far matches the previous record set in 2011. It is part of a recent trend that has seen more than $11bn in private equity-led investments in ships and shipowners since the start of the financial crisis, according to new data from Marine Money, a specialist consultancy. More ON THIS STORY Wave of PE money flows into shipping Shadow banks tap into distressed shipping General Maritime files for Chapter 11 Start-up lender steers toward smaller ship owners ON THIS TOPIC Private equity funds flunk Yale Riverstone Energy raises £760m in London listing Foreign investors chase Spanish ‘bad loans’ Blackstone rental bond rated triple A IN SHIPPING Gdansk historic shipyard bankruptcy alert Maersk calls bottom of trade cycle Chinese ship transits Northeast Passage Global Ports agrees $1.6bn deal for NCC Groups such as Carlyle, KKR and Oaktree Capital Management have waded in to shipping as the traditional leveraged buyout market has become more crowded. The groups, who are looking for ways to make more money, with interest rates at rock bottom levels, usually take a stake in ship owners or set up special purpose vehicles to order new ships. Buyout groups have been attracted by low asset valuations and demand for new sources of capital. Many traditional backers have shunned the sector after suffering heavy losses on loans extended to shipowners during the boom years before 2008. The move into shipping by private equity has been widely welcomed as a signal that the industry is emerging from the crisis. “This is smart money and it’s a sign that confidence is returning to the industry, and that we may finally be at the bottom of the cycle,” said Jim Lawrence, president of Marine Money. “It is really good that these players are coming into the market,” said Halvor Sveen, who has been involved in shipping finance since the mid-1980s and is in the process of setting up Maritime & Merchant, a boutique shipping bank in Norway, backed by more traditional industry players. But he said a recent rush of orders was a sign of concern in an industry that is renowned for its structural overcapacity. “I am a little bit worried about the recent order strength.” Set against the overall size of the market for new orders, the contribution from private equity is still relatively small compared to the current order book, which Clarksons, the shipping specialists, put at $280bn. Plagued by overcapacity, charter rates across the industry remain volatile, although there have been some signs in recent months of a sustained recovery in some sectors including dry bulk and tankers. Stephen Gordon, Clarksons’ head of research, said it was hard to judge whether the rebound in orders was coming too soon but pointed out that in recent years the new business won by shipyards was still running at between a third and a half of the levels seen in the boom years in the middle of the last decade. The order book represents only 15 per cent of the active fleet compared with one equivalent to half of the fleet at the peak in 2008 “We have had five years of difficult markets in shipping and there is a sense from some interests that we have reached historic lows,” he said.

Activist Icahn Oversteps With Apple Buyback Demand

Nowhere is it written that good governance begins with managing the stock price to constantly drive it higher. As Apple continues to innovate, the shares will follow.

Carl Icahn is wading deeper into the weeds of technology. Fresh from defeat at the hands of Michael Dell, whose leveraged buyout he opposed without accomplishing much, the corporate raider has now proposed a dramatic plan for Apple that is couched in a lot of highfalutin' rhetoric and seems generally a bad idea.

Last Thursday, the corporate raider tacked his equivalent of Martin Luther's The 95 Theses to the door of the Internet with a tweet announcing a new Website where shareholders may join what he called a "fight for true corporate democracy."

The first big target posted on Icahn's activist Web page, shareholderssquaretable.com (the name evokes investors' lack of suffrage in the boardroom), is Apple (ticker: AAPL).

In an open letter to Tim Cook, Apple's CEO, Icahn refines a proposal he has been hailing for months, namely that Apple should dramatically accelerate its share repurchases. Apple's current buyback, already the largest in corporate history, totals $60 billion over three years, roughly 13% of the company's market value.

That's not enough for Icahn. He reminds Cook in the letter of the simple math he'd presented when they dined together last month, a plan he insists is a "no-brainer." Apple should use a combination of cash from its $147 billion pile, and debt borrowed at 3%, to fund $150 billion in buybacks.

With Apple shares trading at a ridiculous below-market multiple of nine times forward earnings, the mega-repurchase would boost Apple's earnings per share, and its value, by one third, Icahn claims. He even predicted that in three years' time, the stock could rise to $1,250, as its shares see multiple expansion. He pledged to hold on to his own $2.5 billion in Apple stock and not sell into the tender, a show of good faith.

Ominously, Icahn warned that a failure to do as he suggested would reflect the board's lack of financial expertise. And on CNBC on Thursday, he went so far as to say he would be willing to consider a proxy fight if Apple doesn't go along.

Now, what all this has to do with democracy, I've no idea. Apple under late founder and CEO Steve Jobs was probably more of a benevolent dictatorship. And while the board of any company serves in a sense as the shareholders' representatives, the notion of a democratic government is dubious in the context of a corporation.

Let it be noted, moreover, that Icahn's habit of amassing large stakes in order to push his particular views does not seem in any way democratic.

Leaving all of that aside, Icahn's proposal is wrong for a couple reasons and should not be indulged by Apple. As Warren Buffett noted on CNBC two weeks ago when asked about Icahn's plan, the act of buying back acres and acres of stock in one fell swoop is really a way to reward those who sell the stock, not those who stick with it. That alone makes it seem a lousy thing to do. Buffett implied to the channel's Becky Quick that Apple should stick with its current and ample buyback plan.

Second, large shock-and-awe buybacks of the kind Icahn endorses, along with other windfalls such as special dividends, have not had much benefit in recent tech-stock history.

Microsoft (MSFT) in July of 2004, after several years of poor stock returns, announced to much fanfare that it would double its regular dividend, pay out a special one-time $32 billion cash dividend, and kick off a program to buy back $30 billion of its stock, equivalent to 10% of its market value at the time.

The stock actually fell 18% by the time all that was done in 2006, though it was a less-harrowing 7% if you count the dividend.

IN HIS DEFENSE, Icahn points out that Apple is not a bank, and with $147 billion in cash doing nothing on the books, and with $50 billion in free cash flow coming in annually, the company can and should take on debt to do something constructive. "A lot of shareholders agree with what I'm saying," he told me in a phone call.

Icahn insists he's not just trying to push the stock price up. "Why would I not want to see the earnings [per share] of a company I respect boosted by 30%?" he says, insisting that he is in Apple for the long-term. He adds that "If the board says no" to his great idea, "then why not put one of my people, who have the financial expertise, and the experience, and the track record, on that board."

Icahn notes that in a number of situations, companies have appreciated his contributions and even asked him to participate again.

Despite all that, it's hard not to come away with the impression Icahn is saying Apple's shares, which are flat this year, and down 25% from an all-time high last year of $705.07, absolutely must rise in price tout de suite, and that unless Apple does what Icahn thinks it should to goose the price, it is being derelict in its obligation to shareholders.

Nowhere is it written that good governance begins with managing the stock price to constantly drive it higher. Nor does the notion of creating value for shareholders equate to guaranteeing that the share price is forcibly jammed heavenward by one and only one means, in this case a massive repurchase. It is Icahn alone who has deemed the buyback the litmus test of corporate responsibility.

THERE ARE MANY ROADS TO ROME, and another notion, perhaps too dull for Icahn, is that Apple continues to produce terrific products, and that over time the share price will reflect that fact.

Apple this week unveiled new iPads that show the company is at the top of its game. The new iPad Air is thinner and lighter, which caused some people to roll their eyes, shrug, and ask, What's new, exactly?

But both the Air, and the new iPad mini, are upgraded to a more powerful processor that is many months ahead of the competition, and all while preserving battery life. This is no small feat, and it sets up the device line to be more of a PC replacement in years to come. That's innovation, and that's leadership.

In the meantime, If Icahn is right, and Apple has too much cash, it is up to Apple to solve that problem. To demand to financially engineer the company is not very different from telling Apple how to make iPhones and iPads. It's the business of the company to decide its fate.

Zinc Could Rise More Than 20%

Declining output, along with China's urbanization and U.S. car boom, could boost the metal.

Now might be a great time to galvanize your portfolio with zinc futures.

Why? Booming construction in China, combined with mine closures, could propel prices about 20% higher over the next couple of years, as demand for the metal outpaces output. The likely result: a supply shortfall in 2015.

Zinc has moved roughly sideways since March. But benchmark prices of the metal—used in construction, automobile production, and the manufacture of brass—could hit $2,400 a metric ton by 2015, about 23% above its recent quote of $1,955 on the London Metal Exchange, analysts say. A recent report from brokerage firm Natixis cites "the imminent demise of a number of significant [zinc] mines around the world," as a cause. Mineral deposits get depleted as ore is extracted. At some point, it isn't profitable to continue digging.

[image] While mining companies are constantly seeking new deposits, developing likely sites into working mines can take years. As a result, growth in zinc supplies is slow, a trend likely to continue into 2014 and beyond, states a recent report from New York-based consulting firm CPM Group. Recycling can be expected to pick up as prices rise, but it won't be enough. Recycled metal already accounts for 40% of the zinc hitting the market, according to the International Zinc Association.

MEANWHILE, CONSUMPTION IS LIKELY to remain robust for two main reasons. First, China continues to urbanize. Says Natixis: "In China, investment in urban infrastructure remains a key pillar of the 12th Five-Year Plan," the blueprint for the country's economic strategy. China's annual economic- growth rate ticked up in the third quarter to 7.8%, due in part to government spending on urban construction. Two-thirds of the nation's 1.3 billion people are expected to live in cities by 2030, compared with about half currently, according to estimates.

That means more construction-sector demand for zinc, which helps protect steel from corrosion in a process known as galvanizing that accounts for half of all zinc use, according to the IZA.

The second factor boosting demand is automobile sales. U.S. vehicle manufacturing "is expanding nicely," notes metals broker INTL FCStone in a recent report. Production now translates into an annual rate of 15 million to 16 million vehicles, and zinc is used in various car and truck components.

Zinc output currently exceeds demand, but CPM Group expects that surplus to fall by 31% in 2013, to 184,000 tons, and to continue sliding until 2015, when the industry would post its first supply deficit since 2006. Overall consumption is likely to exceed 13.5 million tons in 2015, up from 12.4 million last year.

As a result, CPM predicts, prices could jump to $2,140 a ton. Natixis is even more optimistic, seeing $2,400 zinc in 2015, when it foresees an industry-wide deficit of 675,000 tons.

INTL FCStone sounds a note of caution: "Despite zinc's more constructive profile, the outlook for the metal is contingent on activity in the Chinese real-estate and steel sectors." In other words, if China tanks, likely so will zinc prices.

Benchmark zinc contracts closed at $1,955 a ton on Friday on the London Metal Exchange.