TheChek News Flow

Can H&M and Zara Compete with Chinese Rivals?

With consumers tightening their belts in China, the battle between global fast fashion brands and local high street giants has intensified.

Shares of Capri are trading nearly 23 percent below the buyout price already agreed to with Tapestry as investors fret over antitrust reviews.

There are a lot of questions surrounding Tapestry Inc.’s acquisition of Capri Holdings.

Will Tapestry sell off Capri’s Versace and Jimmy Choo brands to fund the deal? Will the turnaround chops Tapestry displayed at Coach work for Michael Kors? Will the arrival of a much larger group reset the competitive dynamic in American fashion?

But the question investors seem to be asking themselves most immediately is: Will the deal get done?

When Tapestry’s chief executive officer Joanne Crevoiserat signed on the dotted line in August, the price on Capri was $57 a share, valuing all the company’s shares at $6.7 billion.

While Capri’s stock shot up 55.8 percent to $53.90 the day the deal was announced, investors have become much more bearish. The stock closed at a nearly 23 percent discount from the deal price on Tuesday, at $44.03.

It’s common for shares of companies waiting for a buyout to close to trade at a bit of a discount — something could always go wrong — but that’s unusually widespread. And a good part of the disconnect can be attributed to angst around regulatory approval for the deal, analysts suggest.

In November, the Federal Trade Commission reached out to both Tapestry and Capri with a second request for more information so they can evaluate the deal.

Second requests aren’t unheard of, but it certainly raised some eyebrows among traders, who are trying to gauge whether the deal will go through and their shares will suddenly be worth $57 each or if the deal will falter, leaving them to the whims of the market.

“In the merger arbitrage world, the stock price has to do with the probability of outcomes,” said Oliver Chen, an analyst at TD Cowen. “It’s really people doing math around risk.”

In the case of Tapestry’s deal for Capri, Chen said investors are working those calculations with “a lot of unknowns.”

“We’ve seen general weakness in the wholesale channel,” he said. “We’ve seen volatility in China.”

Capri’s business has weakened significantly since the deal was struck. Revenues fell 5.6 percent year-over-year to $1.4 billion for the quarter ended Dec. 30, while adjusted profits fell to $142 million from $240 million a year earlier.

While that could give a buyer some pause, Chen said he was “cautiously optimistic that Tapestry assumed pretty conservative guidance” for Capri.

And then there are concerns around just how the FTC will evaluate the deal.

Darrell Prescott, an attorney and antitrust expert, said: “I would have thought that by now they would have come into compliance with the second request. Once you come into compliance, the FTC has 30 days to either let it go or go to court and get an injunction against the deal.”

From the outside at least, the deal appears to be pretty straightforward in antitrust terms.

“I’d be very surprised if combining these brands would give Tapestry and Capri market power in the sale of garments or accessories — market power is simply a term for the ability to increase price or decrease supply and decrease quality,” Prescott said. “From the labor standpoint, would they have the ability to reduce wages to employees who have very few or no other alternatives? Again, that seems farfetched.

“It seems to me like an easy case to clear because there are so many other luxury and near-luxury brands,” he said. “This all leads me to wonder if during the compliance with the second request, the FTC stumbled onto some issue that is not merger specific.”

While the companies await word from the FTC, antitrust officials in Europe are expected to weigh in on the deal next week.

Tapestry declined to comment and Capri did not respond to a WWD query. Companies in the midst of a deal typically don’t talk specifics.

But Crevoiserat told analysts on a conference call in February: “We remain excited about the runway ahead. We recognize the opportunity to unlock value by improving execution, leveraging the Tapestry platform, and we have continued confidence…that our strategies and our execution deliver. And in terms of the deal, the economics remain strong. We’re making progress as we expected toward the close in this calendar year, that’s unchanged from our prior outlook.”

Scott Roe, chief financial officer and chief operating officer, added that Tapestry continued to work toward obtaining all the required approvals for the deal and that the transaction had been cleared in China.

“In terms of timing, we remain confident in our ability to complete the transaction with a close expected in calendar 2024, consistent with our original expectations,” Roe said.

The central bank decided at its March meeting to end easing policies, including negative interest rates

TOKYO—The Bank of Japan would consider a policy response if the yen’s weakness causes inflation to rise sharply higher, Gov. Kazuo Ueda said Wednesday.

“If there is a risk that a virtuous cycle of wages and prices strengthens more than expected and underlying inflation rises above 2%, we need to consider changing monetary policy,” Ueda said in a parliamentary committee meeting, when asked by an opposition lawmaker whether the bank would act against the yen’s fall.

The yen is trading around 151.75 to the dollar on Wednesday, staying near its 34-year low.

Ueda also reiterated the bank would maintain accommodative monetary conditions for the time being because underlying inflation is still below the bank’s 2% target.

The central bank decided at its March meeting to end easing policies, including negative interest rates, as the bank has become confident about achieving the inflation target.

Ueda said the bank made the decision to move in March because waiting longer could have caused inflation to overshoot, forcing the BOJ 8301 -6.03%decrease; red down pointing triangle to raise interest rates more aggressively.

The potential investor intends to assist the company in the restructuring and turnaround of its European business

Esprit is in talks with an international private-equity firm regarding prospective investments as the fashion retailer struggles with its European business, after some of its units filed for insolvency.

The potential investor has expressed interest in submitting a non-legally binding framework memorandum of understanding for a possible partnership, Esprit said Wednesday.

The potential investor intends to assist the company in the restructuring and turnaround of its European business, which it will have control of, Esprit said without identifying the private-equity firm.

Esprit’s shares rose as much as 44% in Hong Kong early Wednesday after the news. However, the company’s shares are still down 41% since the beginning of the year.

The retailer’s European business has been stressed due to high energy and logistics costs and weak consumer sentiment. Its units in Belgium and Switzerland have already filed for insolvency, citing cash flow difficulties.

The company has experienced losses in recent years. According to 2023 results, Esprit’s losses widened to 2.24 billion Hong Kong dollars (US$286.0 million) from HK$642 million in 2022. This year, the company expects global economic growth to slow further and weaken consumer spending beyond essential needs.

Esprit said the potential investor was also interested in investing in its North American and Asian markets.

“The potential cooperation is subject to the signing of the definitive transaction agreement. Therefore, the potential cooperation may or may not proceed,” Esprit said.

German industry unlikely to fully recover from energy crisis, warns RWE boss

Markus Krebber says there will be ‘significant structural demand destruction’ in energy-intensive sectors

German industry is unlikely to recover to pre-Ukraine war levels as elevated prices from imported liquefied natural gas have put Europe’s largest economy at a “disadvantage”, the chief of one of Germany’s leading energy companies has warned.

“Gas prices in continental Europe, especially in Germany, are structurally higher now, because we, in the end, depend on LNG imports,” said Markus Krebber, chief executive of RWE. “The German industry has a disadvantage.”

His comments come as European gas prices have plummeted 90 per cent from the record levels seen in 2022 and dipped briefly to levels last seen before the energy crisis, spurring questions about the extent to which industrial demand will recover.

However, despite the sharp declines in the gas market, the European benchmark sits above pre-crisis averages, almost two-thirds higher than at the same time in 2019, according to commodities pricing agency Argus.

Germany had to wean itself off natural gas supplies from Russia after Moscow’s full-scale invasion of Ukraine as it became apparent that the Kremlin was using energy exports as a geopolitical weapon.

Echoing criticism in Germany over the country’s energy policy, Krebber said then-chancellor Angela Merkel’s decision in 2011 to shut down its nuclear fleet without replacing the fuel with another energy source aside from Russian pipeline imports was a “mistake”.

“When you know exactly what you want to shut down, you need to immediately start thinking about how do I get the new technology in the ground?” he pointed out.

Companies and investors have scouted other countries offering attractive subsidies and cheaper energy prices.

“You’re going to see a bit of recovery, but I think we’re going to see a significant structural demand destruction in the energy-intensive industries,” Krebber warned.

Analysts have painted a bearish outlook for Europe’s largest economy. Germany’s five leading economic research institutes recently slashed growth forecasts for the country. German gross domestic product will grow just 0.1 per cent this year, they said, because of a decline in exports.

Berlin maintains that it is pouring money into transitioning the economy, positioning it for major future competitive advantages in a carbon-neutral world. But Germany’s industrial stagnation has become a politically sensitive topic, with the country’s influential industrial lobby, the BDI, lashing out at “dogmatic” green policies that were hitting manufacturers.

Samantha Dart, head of natural gas research at Goldman Sachs, sees permanent closures of industrial capacity in Europe that will not come back. She expects lower gas prices and better economic conditions to spur some demand, but adds that “going back to pre-crisis is a bigger, bigger challenge”.

Gas demand from Europe’s industrial sector was down 24 per cent last year from 2019 levels, according to S&P Global Commodity Insights. The firm expects 6 to 10 per cent of the continent’s gas consumption to have disappeared forever due to demand destruction.

Instead, manufacturers are turning to the US. “You have a coherent and comprehensive policy in the US to incentivise getting manufacturing back into the country,” Krebber said. “Europe has the same intention, but not yet the right measures.”

A survey by the German Chamber of Commerce and Industry last September found that 43 per cent of large industrial companies were planning to relocate their operations outside of Germany, with the US being the top destination.

On top of cheap energy with gas prices one-sixth the prices in Europe, lucrative subsidies in the Inflation Reduction Act for decarbonisation technologies are attracting European companies.

German companies announced a record $15.7bn in capital commitments to US projects last year, up sharply from $8.2bn a year earlier, dwarfing any other foreign destination, according to data from fDi Markets, a Financial Times subsidiary. While Brussels has released its own rival industrial policy to prevent an investment exodus, companies say it lacks the IRA’s simplicity and economic might.

RWE is one of the largest clean energy investors in the US, where it employs 1,500 employees following the $6.8bn acquisition of Con Edison Clean Energy Businesses last year.

Krebber seemed sanguine about the fate of the IRA if Donald Trump is elected president later this year, noting that many Republican states have benefited from investments linked to its incentives and demand for renewables would remain strong.

“If they call it ABC after, I don’t care. The question is will there be a long-term investment environment, which is favourable? And if not, we stop investing, but the investments are needed,” he said.

Monaco private bank faces US lawsuit based on anti-mafia laws

The case against CMB centres on a long-running dispute between two Russian businessmen over a property deal

A court has agreed that a Russian businessman can sue a Monaco private bank under US anti-mafia organised crime legislation from 1970 that has never been used against a bank in Europe.

CMB Monaco — which is owned by Italy’s Mediobanca and caters to the ultra-wealthy from its headquarters in Monte Carlo — is set to face the landmark civil jury trial this summer. An attempt by CMB to stop the case going ahead was dismissed by a California judge at the end of March.

Lawyers in the case believe CMB is the first European bank to be sued under the Racketeer Influenced and Corrupt Organizations, or Rico, Act. It was signed into law in 1970 during the presidency of Richard Nixon and was used by Rudy Giuliani when he was US Attorney for the Southern District of New York to pursue the heads of New York’s five mafia families in the 1980s.

It has also been used to target the Hells Angels, junk-bond king Michael Milken, Fifa and most recently Donald Trump in criminal cases.

The case against CMB centres on a long-running dispute between two Russian businessmen, one of which is a client of the bank.

Former politician Ashot Yegiazaryan and his business partner Vitaly Smagin had invested in a Moscow property deal in 2003 that eventually went sour. Seeking to recoup his investment, Smagin successfully sued Yegiazaryan in the London courts, winning an $84mn arbitration award in 2014.

Yegiazaryan — who by this point had left Russia and moved to Beverly Hills — refused to pay. Smagin then sued Yegiazaryan in the Californian courts and obtained a freezing order on Yegiazaryan’s Californian assets.

In response, Yegiazaryan moved his money through a series of shell companies to his Monaco account at CMB. When CMB did not transfer the money to Smagin, he launched a Rico lawsuit against Yegiazaryan and CMB, claiming the bank helped his former business partner evade the enforcement of the Californian court order.

“This participation of CMB Bank was critical to Mr Yegiazaryan’s plan as it allowed him to hinder, delay, and . . . prevent collection by Mr Smagin of his legitimate debt, despite multiple court orders around the world authorising the same,” Smagin’s lawyers have claimed in US court documents seen by the Financial Times.

The Rico Act allows individuals and companies to be sued for allegedly participating in an enterprise that engages in racketeering, which includes fraud, extortion, money laundering and obstruction of justice.

CMB filed a motion to dismiss the suit last year, arguing the Rico Act did not apply because Smagin still lives in Russia and the law relates only to US claims.

The bank’s lawyers argued that allowing non-US residents to pursue Rico lawsuits would lead to “spurious claims by litigants with no real connection to the US”.

However, judge Gary Klausner of the Central District of California court rejected the appeal, reaffirming a US Supreme Court decision that Rico claims can be made by non-US residents.

“When viewed in the light most favourable to him, [Smagin’s] allegations that CMB orchestrated a years-long freeze of the . . . assets to prevent [Smagin] from recovering the award is sufficient to allege a deprivation of money or property,” the judge wrote in his ruling.

Legal experts believe the case could open up foreign banks to being pursued through the US courts under Rico laws, where penalties can be much higher. 

The case is due to be heard over seven days in June.

CMB and lawyers for Smagin declined to comment. Lawyers for Yegiazaryan did not respond to a request for comment by the time of publication.

Big investors buy European bonds over US Treasuries as economies diverge

Pimco and T Rowe Price among firms to increase exposure in Europe amid cooling inflation

Big investors are selling US Treasuries and buying European government bonds, betting that cooler inflation in Europe will allow its central bank to start cutting interest rates sooner than the Federal Reserve.

Money managers at Pimco, JPMorgan Asset Management and T Rowe Price have all increased their exposure to European government debt in recent weeks.

That has helped push the so-called spread, or gap, between benchmark 10-year German and US borrowing costs to 2 percentage points, close to the highest level since November.

“The path for rate cuts in Europe is clearer than in the US,” said Bob Michele, chief investment officer and global head of fixed income at JPMorgan Asset Management. “It is hard to find an economic reason for the Fed to cut rates.”

He added that he currently has a larger than usual holding of European government bonds and has been “moving in [the] direction” of acquiring more.

The shift comes as the US and European economies have begun to diverge, with softer inflation and a weaker economy in Europe fuelling bets that the ECB will deliver more cuts than the Fed this year.

Markets are currently pricing in three or four ECB rate cuts by the end of the year, compared with only two or three for the Fed.

Government bonds on both sides of the Atlantic have sold off this year, pushing yields higher, as investors scaled back their expectations of imminent rate cuts.

However, the moves have been greater in the US, where the benchmark Treasury yield has risen by 0.5 percentage points to 4.4 per cent. In comparison, the equivalent German Bund is up 0.3 percentage points to 2.4 per cent.

Andrew Balls, chief investment officer for global fixed income at Pimco, said he had favoured European government bonds and UK gilts over US Treasuries this year because there is “more evidence of inflation correcting” there.

Pimco, which manages $1.9tn in assets, lowered its forecast from three to two quarter-point rate cuts by the Fed this year, following a blockbuster jobs report on Friday. 

Economists expect US inflation data for March, released on Wednesday, to show an annual rise to 3.4 per cent. Readings for January and February have already come in above analysts’ forecasts.

By contrast, Eurozone inflation fell to 2.4 per cent last month, lower than forecast, bolstering expectations that the ECB will cut interest rates by the summer.

“We prefer to be underweight in US Treasuries in favour of Eurozone bonds including Bunds,” said Quentin Fitzsimmons, a senior portfolio manager at T Rowe Price, which manages $1.4tn of assets globally.

He said his conviction about an ECB rate cut in June was “high”, while strong US data had caused the Fed to “backpedal from its hitherto clear desire to start to cut interest rates”.

Fitzsimmons said that if the ECB did start cutting faster than the Fed, the lower rates would reduce the hedging costs of holding bonds in the eurozone compared with US Treasuries.

He said this would “possibly encourage more capital to back the idea of relative outperformance by Bunds in relation to US Treasuries”.

But some analysts warn that if the ECB gets too far ahead of the Fed in making rate cuts, the euro could weaken significantly, risking another upturn in inflation.

“There can only be so much divergence before it starts to have a big currency impact,” said Mike Pond, head of global inflation-linked research at Barclays. “It might be difficult for the ECB to cut as much as we’re expecting if the Fed doesn’t cut as well.” 

Nevertheless, the inflation outlook is currently more benign in Europe than in the US. The European Central Bank estimates annual inflation in the eurozone will be 2.3 per cent in 2024, with growth of 0.6 per cent.

That compares with the Fed’s projection that the core personal consumption expenditures index — the US central bank’s preferred inflation gauge — will cool this year to 2.6 per cent, from the current rate of 2.8 per cent.

The US central bank estimates that growth will be 2.1 per cent by the end of the year.

“Growth in the US has been shown to be more resilient than in Europe,” said David Rogal, a portfolio manager at BlackRock. He added that this was partly due to the US having a relatively closed economy and heavy government spending.

Europe, he said, has “a more open economy with more sensitivity to global manufacturing developments, as well as less of the fiscal impulse”.

Rating agency Fitch forecasts that the US government’s budget deficit, the difference between its total expenditures and revenues, will be 8.1 per cent of gross domestic product this year, compared with 1.4 per cent for Germany.