TheChek News Flow

Government contingency plans could see bulk of debt taken on by state with utility split in two

Some lenders to Thames Water would lose up to 40 per cent of their money under government contingency plans to nationalise Britain’s biggest water company dubbed “Project Timber”.

The utility, which supplies 16mn people — or about 25 per cent of the population of England and Wales — is struggling to stay afloat after its shareholders refused to put more money into the heavily leveraged business, which has been hit hard by higher interest rates. 

The government first drew up contingency plans last year for the possibility of the company’s failure — although officials insisted on Thursday that a collapse was not imminent. 

Under those plans, drafted by the Treasury and the environment department (Defra), Thames Water would be managed by an arms-length body — modelled on the one that built London’s Crossrail project — while ministers try to deliver it back into the private sector in the medium term. 

The company could be split into a “London Water” company serving the capital and a “Thames Valley” business serving the rest of its area, according to the plans that were leaked to The Guardian newspaper on Thursday and confirmed by government officials. 

While the net debt of more than £15.6bn within Thames Water’s so-called regulatory ringfence is supposed to be firewalled from the troubles of its parent company Kemble, bonds at the utility are now trading at deep discounts that reflect market concerns over potential writedowns. 

The Project Timber analysis suggests that the smaller share of creditors, who hold “Class B” debt — and own about £1.6bn of the Thames Water operating company’s borrowings — would probably lose 35-40 per cent of their money. 

That is in line with current market expectations given that a default at Kemble earlier this month sent the price of a second-ranking “Class B” bond plunging to little over half of its face value.

It is now trading about 60p on the pound, similar to the hit the government is now considering. 

Meanwhile, the majority of bondholders, owed about £13bn, would take a lighter “haircut” of 5-10 per cent. 

William Wade, a credit analyst at JPMorgan, warned earlier this month that haircuts of 15-25 per cent on the ringfenced debt were now a “plausible” outcome that investors should be wary of.

Shareholders, which include the pension funds Omers and USS as well as the Abu Dhabi and Chinese sovereign wealth funds, would take losses estimated at £5bn, a fact they acknowledged in March when they refused to put money into the company, which they now consider “uninvestable”.

Their resistance to rescuing the company by refusing to invest a further £3bn into the business — including £500mn due at the end of April — precipitated Kemble’s default earlier this month.

If the shareholders were to withdraw, it would potentially leave Thames Water without owners and running down its cash reserves. The company argues it has enough cash to last for 15 months, or until July next year.

Project Timber acknowledges the likelihood that Thames Water’s huge debts would probably end up on the government’s balance sheet. “That’s what happens with a nationalisation,” said one government official. 

Yet the final decision on how to recognise those liabilities would still have to be formally made by the Office for National Statistics, an independent body. 

If the government is forced to renationalise, the closest parallel may be Railtrack, the rail infrastructure company. That faced public opprobrium over safety issues and was eventually taken into special administration in 2002. The government eventually paid £500mn to shareholders and renationalised the business as Network Rail.

In 2014 Network Rail’s £30bn of debts were added to the government’s balance sheet after the ONS reclassified it as a public body.

Thames Water has paid out £10.4bn in dividends in the three decades since privatisation while racking up £14.7bn in net debt at the regulated company in the year to March 2023, according to research by the Financial Times.

Sarah Olney, Treasury spokesperson for the Liberal Democrats, urged the government to publish the contingency plans immediately: “Thames Water should have been put into special administration long ago, but the government is too weak to take on this disgraced polluter.”

Washington’s opposition will kill Algerian proposal that would have in effect granted statehood

The US will vote against a UN Security Council resolution later on Thursday that would grant a Palestinian state full UN membership, killing a move proposed by Algeria.

“The United States is voting no on this proposed security council resolution,” state department spokesman Vedant Patel said, adding that Washington sees direct negotiations between Israel and the Palestinians as “the most expeditious path” towards Palestinian statehood.

The 15-member council will vote later on Thursday on the resolution that calls for full membership of the UN General Assembly for the state of Palestine. It requires nine votes and no vetoes by any of the Security Council’s permanent members, the US, UK, France, Russia and China.

US opposition leaves the resolution with no prospect of success.

“Premature actions in New York, even with the best of intentions, will not achieve statehood for the Palestinian people,” Patel said.

Arab states and the Palestinians have been pushing the US and other western nations to recognise a Palestinian state and grant full membership of the UN as a sign of their commitment to a two-state solution. They consider the move as critical to any broader settlement for the crisis triggered by the Israel-Hamas war. Permanent Security Council members Russian and China already recognise Palestine as a state. 

The UN General Assembly granted the Palestinians non-member observer status in 2012 but the Security Council as well as at least two-thirds of the General Assembly must approve full UN membership.

UN secretary-general António Guterres has said he supports “good-faith efforts” to find “lasting peace” between Israel and a sovereign Palestinian state.

Ziad Abu Amr, the Palestinians’ UN ambassador, said full membership would not endanger any possible negotiations.

“To those who say that recognising the Palestinian state must happen through negotiations and not through a UN resolution, we say: ‘How was the State of Israel established? Wasn’t that through a UN resolution, which was Resolution 181?’”

Gilad Erdan, Israel’s ambassador to the UN, said full membership for the Palestinians would be a “prize to terrorists” and would make “any future negotiation almost impossible”.

The Palestinian Authority exercises limited self-rule in parts of the occupied West Bank. It ruled Gaza until 2007, when it was ousted by Hamas.

The Algerian proposal comes just over six months after Israel launched its war against Hamas in Gaza, a response to the group’s October 7 attack on Israel that killed 1,200 people. The Israeli offensive in the enclave has killed more than 33,000 people, according to Palestinian authorities.

The US has often used its veto in the Security Council to prevent resolutions critical of Israel, its close ally in the Middle East, but last month proposed its own measure calling for an immediate ceasefire in Gaza amid mounting concern in Washington about the humanitarian toll. Russia and China vetoed the US initiative, saying it was “hypocritical”.

The long-shot plan offers Biden the chance of a diplomatic breakthrough in the middle of re-election campaign

WASHINGTON—The Biden administration is pushing for a long-shot diplomatic deal in coming months that presses Israeli Prime Minister Benjamin Netanyahu to accept a new commitment to Palestinian statehood in exchange for diplomatic recognition by Riyadh, U.S. and Saudi officials said.

As inducements to recognize Israel, the White House is offering Riyadh a more formal defense relationship with Washington, assistance in acquiring civil nuclear power and a renewed push for a Palestinian state—a package that U.S. officials say they are in the final stages of negotiating.

The U.S.-brokered effort offers Israel a prize it has long sought: a historic normalization deal with Riyadh, Israel’s most powerful Arab neighbor.

U.S. officials say the successful multicountry effort to shoot down Iranian missiles and drones on Saturday should make it clear to Israel that its security against threats from Tehran can be enhanced through closer integration with Saudi Arabia.

For President Biden the gambit offers the chance of a significant diplomatic breakthrough in the middle of a presidential-campaign year, one that would expand the Abraham Accords that his Republican opponent Donald Trump sealed when he was in office. The accords led to the normalization of relations between Israel and the U.A.E., Bahrain and Morocco.

But persuading Netanyahu to embrace talks on establishment of a Palestinian state remains a difficult hurdle, with right-wing members of his government and much of the Israeli public opposed to statehood after the deadly Oct. 7 attack on southern Israel, U.S. and Israeli officials say.

Saudi Arabia’s leaders have said for decades that a Palestinian state is a priority, and its top diplomats have said creating a path to a two-state solution is part of their price for normalization. Now, Saudi officials have privately indicated to the U.S. that they might accept verbal assurances from Israel that it would engage in new talks on Palestinian statehood to secure the other parts of the deal of more interest to Riyadh, Saudi officials said.

A U.S.-brokered deal might also aid Israel with a potential exit strategy from Gaza once that conflict is brought to an end, Saudi officials said. The U.S. has sketched out a postwar plan that would draw on troops from Arab states to secure Gaza.

But several potential Arab contributors say they wouldn’t consider participating without public moves by Israel toward establishment of a Palestinian state, among other requirements.

If the U.S. completes a deal with Riyadh but Israel balks at endorsing a Palestinian state, a senior U.S. official might give a speech laying out the benefits Israel could receive if it accepted the diplomatic package, according to one idea being discussed within the Biden administration.

Secretary of State Antony Blinken offered a preview of the U.S. message earlier this year at the World Economic Forum in Davos, Switzerland.

“You now have something you didn’t have before, and that is Arab countries and Muslim countries even beyond the region that are prepared to have a relationship with Israel,” Blinken said at the January meeting. “But you also have an absolute conviction by those countries, one that we share, that this has to include a pathway to a Palestinian state.”

The U.S. discussions with Saudi Arabia over normalization are aimed at settling several issues, including security arrangements between Washington and Riyadh, U.S. help in acquiring civil nuclear power and moving forward toward the establishment of a Palestinian state, which U.S. officials have said must include reform of the Palestinian Authority.

Another goal in these discussions, U.S. officials say, is to limit China’s influence in the region and further isolate Iran by tying Riyadh more closely to Washington’s closest ally in the region.

For the Saudis, obtaining more concrete defense commitments from the U.S. is an important goal. Pentagon assistance to Riyadh in beefing up its defenses against Iranian missiles and drones is an area of potential agreement, according to a U.S. official, but details of the talks on defense and nuclear assistance haven’t been made public.

Blinken discussed normalization with Saudi Crown Prince Mohammed bin Salman during a March 20 visit to Jeddah, and said the next day an agreement seemed to be within reach.

“The progress is good, it’s real,” Blinken said. “I can’t put a time frame on it, but we are I think getting close to a point where we’ll have agreements.”

U.S. national-security adviser Jake Sullivan had planned a trip to Saudi Arabia earlier this month, but the trip was canceled after he broke his rib in a minor accident.

An earlier White House push for a diplomatic deal was derailed by Israel’s invasion of Gaza after the Hamas attack in October.

Arab officials say that a temporary cease-fire in Gaza would make it easier for the Saudis to conclude their portion of the U.S.-brokered draft agreement. But separate talks on halting the fighting and the release of hostages held by Hamas and prisoners detained by Israel are stymied.

Israel is also determined to proceed with a military operation in the coming months against Hamas in Rafah, the Gaza city near the Egyptian border where more than one million Palestinians have sought refuge from the fighting.

U.S. and Israeli officials were due to meet Thursday for discussions on Rafah, according to John Kirby, a spokesman for the National Security Council.

The Biden administration has publicly urged Israel to refrain from a major ground operation in Rafah, fearing it could harm civilians and further isolate Israel in international opinion, including in Arab capitals with sensitive talks over normalization and postwar arrangements for Gaza under way.

Netanyahu has argued there can be no postwar plan for Gaza without the complete dismantlement of Hamas. He has also said the chances for normalization with Saudi Arabia will improve after Hamas’s defeat.

Netanyahu has been staunchly opposed to the creation of a Palestinian state, arguing it would undermine Israeli security. In January, he said Israel must maintain security control of Gaza and the West Bank for the foreseeable future.

But Netanyahu has also tempered his opposition to a Palestinian state several times during previous stints as prime minister, under pressure from Washington. Doing so this time, however, would likely require him to reorganize his current governing coalition, which includes far-right parties.

The most vocal proponent inside the Israeli government for a Saudi normalization deal has been minister Benny Gantz, a member of the three-member war cabinet and a Netanyahu rival. Most polls show Gantz is the most popular leader in Israel today.

In a statement at the start of this month, Gantz said a Saudi normalization deal as well as an international effort involving moderate Arab states to provide security and aid in Gaza “is in reach.”

Israel and Saudi Arabia already cooperate in secret on security and other issues. Gantz said that formal diplomatic recognition would help forge an alliance against Iran, which he accused of trying to spark a regional war, Though he has avoided talking about the issue of a Palestinian state since Oct. 7, he has often talked about reconciliation and peace once the fighting is over in Gaza.

Israeli leaders, even those who previously supported a two-state solution for Palestinians, are concerned that agreeing to statehood now would be seen as rewarding Hamas for its deadly assault on southern Israel.

According to a recent public-opinion poll in January, 59% of Jewish Israelis oppose an agreement that would lead to a Palestinian state, even if it led to peace agreements with Arab states.

The department-store chain formed a special board committee and tapped bankers to consider a potential bid

Members of the family that founded Nordstrom JWN 4.23%increase; green up pointing triangle are considering a bid to take the company private, as department stores continue to struggle and Nordstrom’s rival, Macy’s, is under pressure to sell itself.

Erik Nordstrom and Pete Nordstrom—the company’s chief executive officer and president, respectively—recently told the board they are interested in exploring a deal for the company, according to people familiar with the matter.

In response, Nordstrom formed a special committee of independent directors to evaluate their potential proposal, along with those of any other suitors, the people said. The special committee is working with bankers from Morgan Stanley and Centerview Partners.

There are no guarantees the current efforts will result in a transaction.

Nordstrom’s shares have dropped roughly 50% over the past five years, giving the company a valuation of around $3 billion.

The company has explored deals on and off for years, including in 2017 when the family tried to take the retailer private with a group that included the private-equity firm Leonard Green & Partners. Those talks ended less than a year later, after the board rejected their offer as too low.

Nordstrom family insiders control roughly 30% of the company’s shares. Another significant owner is El Puerto de Liverpool SAB, which operates high-end department stores in Mexico and bought a 9.9% stake in the business in 2022.

Erik Nordstrom was named sole CEO of the company in March 2020. He previously shared the co-president role with his brother, Pete. (A third brother, Blake, who also had been co-president, died in 2019 of lymphoma.)

A group of investors in December offered $5.8 billion to buy Macy’s, partly attracted by its real-estate holdings. The investors, Arkhouse Management and Brigade Capital Management, later raised their offer to $6.6 billion and have been working on due diligence.

Big-box retailer Kohl’s was also in talks to sell itself to the owner of the Vitamin Shoppe, but the deal collapsed in 2022.

Nordstrom’s sales have declined in recent quarters, partly due to the closure of its Canadian business. Nordstrom operates more than 350 stores in total.

Last month, the company offered up a weaker-than-expected outlook for the current year. Nordstrom said consumers are still being cautious with discretionary spending, with one bright spot being an industrywide pullback in deep discounting, which could help lift profits.

Erik Nordstrom said the company is focused on increasing online sales and opening more of its off-price Nordstrom Rack locations in the coming years.

Bernard Arnault Talks Family Values as Two of His Sons Join LVMH Board

The luxury mogul is tightening his family's grip on the group as he maps out his succession.

PARIS — Bernard Arnault is betting on family unity to guarantee the long-term future of his luxury empire.

At LVMH Moët Hennessy Louis Vuitton’s annual general meeting on Thursday, shareholders overwhelmingly approved the appointment of two of his sons to the board of directors, tightening the family’s grip on the leadership of the world’s biggest luxury group.

Alexandre Arnault, executive vice president of product and communications at U.S. jeweler Tiffany & Co., and Frédéric Arnault, chief executive officer of LVMH Watches, join their siblings Antoine Arnault, head of communication, image and environment at LVMH, and Delphine Arnault, chairman and CEO of Christian Dior Couture, in their new role.

That leaves the youngest sibling, Jean Arnault, 25, who is marketing and product development director for watches at Louis Vuitton, and who appears destined for a similar career trajectory in due time.

Bernard Arnault, LVMH’s chairman and CEO, has frequently described the conglomerate, which posted sales of 86 billion euros in 2023, as a family-run firm. The Arnault family’s holding company owns 48.6 percent of LVMH’s share capital and 64.3 percent of the voting rights.

After the meeting, the billionaire underlined the importance of taking a long-term view.

“We’re trying to create a spirit that is different from purely anonymous companies,” he told reporters.

“The role of the family is first and foremost to foster this spirit and it also allows us to have a long-term vision because today, everything is going well, the share price is rising, but what we care about is making sure that in 10 years’ time, our brands are still as desirable, if not more, as they are now,” he continued.

Arnault is well-placed to know the dangers of a divided clan. Early in his career, the entrepreneur capitalized on family owners’ internal disagreements to swoop in to acquire luxury brands, earning him the nickname “the wolf in cashmere.”

In recent years he has worked to shed that image in the face of rising anti-rich sentiment in France, where workers’ revolutionary leanings always bubble close to the surface.

At the AGM, a short film highlighted the LVMH Heart Fund, launched in 2021, which provides emergency financial aid, as well as social and psychological support, to help employees deal with sudden emergency situations.

“We take care of employees, we try to help them grow and develop their entrepreneurial spirit. And when things aren’t going well, we continue to take care of them. You see, we’re a company with a strong human side,” Arnault emphasized afterward.

The executive is known for prizing loyalty and promoting from within the company’s ranks. Last year, 72 percent of key posts were filled with internal talents, representing 18,000 appointments, Chantal Gaemperle, group executive vice president of human resources and synergies at LVMH, said in a presentation.

Bernard Arnault, Toni Belloni and other LVMH executives at the group’s annual general meeting.

Recent senior executive moves at the group show that Arnault, 75, is sharpening his succession plan. Thursday’s meeting saw Toni Belloni step down as group managing director and chairman of the executive committee after decades as Arnault’s right hand.

“He did most of the work. I was just there to supervise things. We make a great team and have done so for 23 years, so that’s quite a stretch. It shows there’s a continuity in business,” quipped Arnault, going on to laud Belloni’s people skills.

“He succeeded in creating a truly sensational atmosphere,” he said. “I’m a little less, how shall I put it, warm?” Arnault added, to laughter from the audience.

Belloni will be succeeded by Stéphane Bianchi, a relative newcomer to the company who was previously in charge of its watches and jewelry division. Bianchi takes on the new role at a time when luxury spending is slowing following several years of post-pandemic euphoria.

LVMH’s shares rose on Wednesday despite the company reporting that group sales fell 2 percent at actual exchange rates in the first quarter, with analysts highlighting its ability to navigate choppy economic conditions better than many of its competitors.

Arnault was characteristically bullish on Thursday, saying he expected Vuitton’s new flagship on the Avenue des Champs-Elysées, currently under construction, to rival Tiffany’s Landmark store in New York City for the crown of the world’s leading luxury flagship.

However, he cast doubt on reports that the multi-use building would include a hotel.

Former Louis Vuitton chairman and CEO Michael Burke first floated the idea of a Vuitton hotel, to be located in the company’s headquarters near Pont-Neuf, in an interview with WWD in 2022.

After Burke handed over the running of LVMH’s star brand to Pietro Beccari last year, Vuitton took possession of a mammoth building on the Champs-Elysées previously earmarked for Dior’s new headquarters.

At a show on the construction site last fall, Nicolas Ghesquière, creative director of womenswear at Vuitton, said it would be a hybrid space including a store, a cultural venue and a hotel, to be designed by architect Peter Marino.

“We have still to determine some elements of what exactly we will put in there because I keep reading that there will be a hotel, which I’m personally not too convinced about,” Arnault said.

“There are already lots of hotels in Paris, frankly. There’s already the Cheval Blanc, which is the most beautiful,” he added, referring to his trophy property on the Seine.

Beccari previously won over Arnault with his plans for the Dior mega flagship on Avenue Montaigne, which also includes a restaurant, an exhibition space and a private apartment, but the two are likely still debating the details of the Vuitton project, which does not yet have an opening date.

Arnault also expressed optimism about the outlook for China, ahead of Chinese President Xi Jinping’s official visit to France in early May, timed to coincide with the 60th anniversary of the renewal of Paris-Beijing diplomatic relations.

“I hope that economic tensions will ease and that we can continue sustained economic collaboration with China,” he said, noting that LVMH’s sales to Chinese nationals rose in the first quarter. “I think this is a trend that will continue. I think China will succeed in reviving its economy.”

Arnault said he had just returned from a trip to Japan, accompanied by his daughter Delphine, during which he witnessed long lines in front of the stores of Celine, another one of his brands.

LVMH reported organic sales in Japan jumped 32 percent in the first quarter, helped by tourists taking advantage of the weak yen. While the U.S. only posted a 2 percent increase, Arnault was confident about its prospects, too. “The United States, I think, is going to bounce back,” he predicted, without elaborating.

If not, there’s always outer space. The luxury mogul shared that he had once been asked to create bespoke Louis Vuitton interiors for a rocket. “The person who suggested this also proposed to take me for a ride on a rocket. I thought that maybe it wasn’t such a great idea, as I try to avoid taking unnecessary risks,” he said with a chuckle.

Arnault said the conversation was about a voyage to Mars, but declined to confirm whether the other party was SpaceX founder Elon Musk, whom he met with last year. “That’s a secret,” he demurred.

The building, due to open next month, "will contain a store, spaces for art, communication and community, and offices and showrooms for developing brands."

A GAME OF CLUE: Ahead of the opening of Dover Street Market Paris next month, the retailer’s website keeps drip-feeding clues about the hotly anticipated new fashion destination. News flash: It’s not simply a shop, but more of a building.

“DSMP is like a helix, a diagrammatic manifestation of various connected activities making an integrated whole” reads a five-point manifesto posted this week, that explanation under the header “Community.”

“The building will contain a store, spaces for art, communication and community, and offices and showrooms for developing brands,” it reads. “It seems more and more a time to pursue the end of borders and classifications. Connections are at the core of humankind.”

The building, a grand 17th-century town house at 35-37 Rue des Francs-Bourgeois in the Marais district, has been operating for two years as a cultural center, hosting a freewheeling mix of exhibitions, happenings, musical performances, brand installations and retail spaces.

Rei Kawakubo and Adrian Joffe, the two mavericks behind the project, are closely guarding details about the Paris outpost, which is slated to open toward mid-May and roughly coinciding with Dover Street Market’s 20th anniversary. But they have hinted they are recontextualizing the retail emporium that first took root in London and has since spread to Tokyo, Beijing, New York, Singapore and Los Angeles.

Other clues on the Dover Street Market Paris site are more cryptic. Click on the “Communications” tab, and you will see a Morse Code chart and images depiciting cave drawings, horse messengers and smoke signals.

“Commonwealth” yields the wrenching lyrics to “Villanelle for Our Time,” a song by Leonard Cohen based on a poem by Frank Scott, while “Complicity” leads to a high-minded definition of the word.

Not a single brand is mentioned, but it’s clear this new building leaves space for humor. The “Community” tab houses a video of zookeepers gently herding a flock of Emperor penguins down a park path to the tune of “waddle, waddle, waddle.”