TheChek News Flow

Disclaimer: it’s not simple, nor a trick

In 2008, some companies that people thought were too big to fail failed. Shotgun M&A was a popular response, with Bear Stearns, Merrill Lynch, Wachovia, HBOS and Alliance & Leicester all moving overnight to new ownership. Though individual outcomes were mixed, the basic concept was successful enough to try again in 2023.

Money is more important than water to the daily functioning of financial markets, so the GFC had a sense of urgency lacking in the Thames Water crisis. That’s why, five months after Britain’s biggest water utility published its bailout plan, we’re still being confronted with stuff like this.

That maze above is an outcome-probabilities chart published today by JPMorgan. For what all these letters and interconnections mean, the bank also provides a key:

A reminder of how we got here: Thames Water Utilities is the Ofwat-licensed opco that’s owned by a topco called Kemble Water Holdings.

Shareholders of KWH have said they won’t provide a £500mn equity downpayment they’d previously pledged to make this month, because regulator Ofwat won’t agree to their demands. These demands, covering the 2025-2030 regime, are to “approve a 56 per cent real-terms increase in bills by 2030 as well as [give] leniency on dividend rules and fines for pollution and other service failures,” our MainFT colleagues report.

Kemble Water Finance, the main holdco, has a £190mn loan due April 30 that it can’t pay and probably won’t be able to refinance. Debt is secured by share pledges on the opco vehicle, Thames Water Ltd, so insolvency could mean lenders take possession of a big water company no one wants.

The least bad option in the short term might be to offer a loan extension, so Ofwat has more time to cave to shareholder demands. That’s the JPMorgan analysts’ base case:

On the margin, we think a short term extension to await regulatory/equity clarity may be in lenders’ best interests, but enforcement risk remains on the table. With 15 months of liquidity, and assuming holdco debt is extended, there is still a window to source equity from existing/new shareholders. However, better regulatory allowances from Ofwat are critical to drive up Thames Water’s valuation and incentivise equity investment. We think Ofwat may be willing to offer modest regulatory concessions, but will be constrained by competing political factors (unpopular bill increases vs. the risk of Thames collapsing).

Or, to put it in a visual form:

OK. But what happens if playing regulatory brinkmanship doesn’t deliver a decent compromise?

As referred to above, the opco’s £2.4bn in cash (as of Feb 2024) provides about 15 months of liquidity. But covenant levels will deteriorate as this buffer burns down, so the equity value will quickly move from little to nothing.

Holdco debt is on the same trajectory:

Agreeing on a debt-for-equity swap in these circumstances looks tricky. Disappearing equity value means there’s no guarantee that funding raised will cover the £16.9bn of holdco debt. What’s needed is a debt-for-equity swap at very deep impairments combined with new equity, but lenders won’t want to agree terms of a rescue without knowing how far Ofwat is prepared to bend.

Without an agreement, Thames Water could fall under state control via a special administration regime. SAR only applies to regulated opcos that are insolvent, however, or for breaches of service quality. The failure of a non-regulated entity like Kemble Water Finance is, in isolation, not enough.

Nevertheless, a lot hangs on avoiding negative equity. The balance sheet test written into SAR legislation would be triggered if Thames Water’s enterprise value is below its £15.6bn of net debt. Given the need for £3.25bn of equity funding and countless environmental fines, it’s a challenge. If the holdco is declared insolvent, it becomes an even bigger challenge.

For what it’s worth, JPMorgan is cautiously confident that topco insolvency can be avoided, and focuses on the compromises required at lower levels:

One worst case outcome we see as plausible is an opco debt restructuring that marks opco gearing down to 55-60% (Ofwat’s gearing target). This implies opco haircuts of 15-25% at the class A level. A valuation discount of this magnitude may be sufficient to attract new equity investment, but if not, the UK government could step in and own Thames Water itself. In our view, special administration is not imminent, but remains a tail risk that will increase with time. Overall, opco haircuts of 15-25% reflect a plausible downside scenario that credit investors should consider when making their investment decisions, in our view.

All of this hints towards a way forward. It’s path two of JPMorgan’s flow chart above, where Thames Water’s opco is sold to new private shareholders that commit substantial new equity. Old shareholders would be wiped out and holdco lenders would take whatever haircuts would be needed to reset gearing.

What’s missing are new private shareholders for Thames Water. High distress levels and uncertainties make that no surprise. When it’s in the interests of equity holders to advertise that their equity is worthless, which new investor is going to step up?

That’s why the most elegant solution is to engineer a GFC-style shotgun merger.

Next door to Thames Water’s patch is Southern Water. It’s about a quarter of the size by customer count, but its 62-per-cent owner, Macquarie, has lots of relevant experience. Raising the £3.25bn in equity funding is a big ask, but the Australian bank has proven itself to be a skilled manager of UK utilities, having extracted £2.7bn in dividends and £2.2bn loans from Thames Water between 2006 and 2017.

Macquarie says on its website that it will “play a leadership role” in improving UK water-industry infrastructure and complains that most pollution incidents fall outside its direct control. “Macquarie wants Southern Water to go further and faster and to share learnings with its peers to ensure successes can be replicated nationwide,” it says.

What better way to demonstrate that commitment than with a bit of regulator-aligned benevolent M&A to create a national champion? If nothing else, it’d be a welcome example of a utility owner cleaning up its own mess.

Private equity firms Bain Capital and Permira also interested in lossmaking ecommerce business owned by Richemont

Luxury online retailer Mytheresa is among potential bidders to buy lossmaking ecommerce business Yoox Net-a-Porter from Swiss luxury group Richemont.

Private equity firms Bain Capital and Permira have also looked at Yoox Net-a-Porter, according to people with knowledge of the process.

However would-be bidders have expressed reservations about agreeing a deal because of ongoing losses at Yoox Net-a-Porter, which are expected to continue in the coming years and make the business difficult to value, according to people with knowledge of the sales process which is being run by Goldman Sachs.

Permira is looking at a potential transaction through its portfolio company BestSecret, a retail club based in Germany, according to people familiar with the matter.

Parent company Richemont, which also owns jeweller Cartier and fashion house Chloé, has been looking for a new buyer for Yoox Net-a-Porter ever since a deal to sell a 47.5 per cent stake to rival ecommerce retailer Farfetch fell apart at the end of last year because of Farfetch’s own financial problems. 

Richemont has so far booked €1.8bn in non-cash writedowns on Yoox Net-a-Porter © Charlie Bibby/FT

Yoox Net-a-Porter has been a problem for Richemont for years with pressure from investors in the Swiss group to offload it. Richemont has so far booked €1.8bn in non-cash writedowns on Yoox Net-a-Porter and the division made a loss of €128mn in the first half of Richemont’s current financial year. 

“We are willing to look but it’s uncertain whether this makes sense [to buy],” said one of the potential suitors.

“It’s very much a turnaround type case,” said another. 

Richemont, Permira, Bain and Goldman declined to comment.

Mytheresa, a Germany-based luxury online retailer listed in New York, declined to comment on whether it was looking at Yoox Net-a-Porter but added: “Mytheresa is constantly evaluating opportunities to grow our business, which may include M&A activities from time to time.”

Richemont’s search for a new owner of Yoox Net-a-Porter comes amid a reckoning over the viability of luxury ecommerce sites following an implosion of several rivals.

In December Farfetch was bought by South Korean ecommerce group Coupang as it rushed to avoid insolvency while Matchesfashion was put into administration in March, only three months after being bought by Mike Ashley’s Frasers Group for £52mn. Its previous owners, Apax Partners, had acquired it in 2017 at a $1bn valuation

Richemont bought Net-a-Porter in 2010 before merging it with Yoox five years later in a fraught deal that led to the departure of Net-a-Porter founder Natalie Massenet. A troubled technology and logistics overhaul then dragged on for years, costing hundreds of millions of euros. 

Luxury ecommerce retailers flourished during the easy money era as they benefited from luxury brands being slow to embrace selling online.

However while pandemic-era savings helped create a boom in online luxury sales, pressures were beginning to build: the cost of running the sites soared just as the brands, who resented the discounting offered by ecommerce retailers, began cutting back on wholesale and taking back control of their online sales. Meanwhile slow progress towards profitability for most of these businesses dimmed investor enthusiasm.

Recent data contains clear hints of improvement. But the Fed, for one, could play spoiler.

Better late than never: After a rough 2023 and early 2024, the first read on China’s economy in March points to a tentative rebound heading into the second quarter.

Data released over the weekend showed China’s official factory purchasing managers index in March moving back above the 50-point level separating expansion from contraction for the first time since September. The services sector index notched its strongest reading since June, and a separate factory gauge from Caixin and S&P Global hit a 13-month high.

The good news is the improvement is probably real: Exports and the global electronics sector seem to be on the mend again, and looser Chinese credit markets are helping support investment. The bad news is that Beijing still seems very nervous about letting the yuan fall too far, and U.S. rates are rebounding again.

That could make further significant monetary stimulus much trickier. And China’s job market and property sector still look weak. Growth of around 5% for 2024, the official target, still looks like a big reach.

Even so, there is no denying China’s recent monetary easing—especially the big cut to banks’ reserve requirement ratios effective in early February—seems to be working. After a long period in which borrowing costs looked much too high for the economy’s health as a whole, credit markets have begun to noticeably improve in recent weeks, particularly for lower-rated borrowers. Yields on three-month, AA-minus-rated corporate debt have fallen by a full 0.6 percentage points since mid-February, according to figures from data provider CEIC. Chinese government-bond yields are down significantly too, although by much less.

At the same time, exports have begun looking healthier. China’s official export orders PMI subindex jumped to a 13-month high of 51.3 in March—a rise that was echoed in the privately compiled Caixin survey. Seasonal factors including the end of the Lunar New Year may be one reason. But the global electronics sector has also been recovering of late, and U.S. consumers have been feeling less grumpy, at least according to some measures: The University of Michigan’s consumer sentiment index hit its highest level since mid-2021 in March.

No surprise then to see China’s manufacturing investment beginning to bounce back a bit more convincingly: Overall factory investment rose nearly 10% year over year in January and February. Investment in computer and communication-equipment manufacturing was up nearly 15%. For 2023 as a whole, those figures were 6.5% and 9.3% respectively.

There are also some reasons to doubt that momentum will be sustained. Short-term interbank rates have jumped again noticeably since late March, a period that also saw a renewed rise in U.S. Treasury yields and inflation data, and a selloff in the yuan. If China’s central bank starts tightening liquidity again at the margins to defend the yuan, factory sector investment might lose steam. Just as important, the improvement in the headline official PMI readings last month wasn’t mirrored in the employment subindexes, and the housing sector data for January and February still looked weak.

With the job and property markets still in the doldrums, China’s economy needs all the help it can get from a supportive central bank and exports. If the Fed delays rate cuts, at least one of those props might not stick around.

L’Occitane Group has sold its majority stake in the Australian skin care brand.

PARIS – Grown Alchemist has changed ownership.

The Australian skin care brand’s majority stake was sold by L’Occitane Group to André Hoffman, the group’s former vice chairman and former chief executive officer, who remains a board member. Anna Teal, Grown Alchemist CEO, is now a minority shareholder. The transaction was priced at 28 million euros.

“With increased business agility, Grown Alchemist will focus on large-scale partnerships and activations in lifestyle, music and retail, driving the consumer experience to accelerate international growth in key markets, such as North America and China,” the brand said in a statement Tuesday, adding it will be headquartered in London.

The news comes at a time when speculation swirls about whether L’Occitane Group will be taken private. The French group, which is quoted on the Hong Kong Stock Exchange, acquired Elemis in January 2019 for approximately $900 million and Sol de Janeiro in November 2021 at a valuation of $450 million.

In January, L’Occitane Group named Laurent Marteau as its new CEO.

Last month, Bloomberg News reported that Blackstone Inc. might team on a buyout with Reinold Geiger, chairman of L’Occitaine Group, who has a controlling stake in the company.

L’Occitane acquired a majority share of Grown Alchemist in March 2022 from boutique investment band Lempriere Wells. At the time, industry sources said that the purchase price was in excess of 50 million Australian dollars, or $32.5 million today.

“The L’Occitane Group has been an incredible partner and supporter of the business since its acquisition of a majority control in 2022, enabling us to establish a strong foundation for growth, a stellar team, investment in product enhancements and new market entries,” said Teal in a statement. “That being said, we see this acquisition of Grown Alchemist as an opportunity to accelerate brand growth, as we gain more strategic flexibility and autonomy outside of a listed group. We are appreciative to the group for their open-mindedness and support for this transition in line with growth strategies of both parties involved.”

Melbourne-based Grown Alchemist offers 100 percent natural, vegan and cruelty-free topical and ingestible skin care products, as well as IV infusion therapy, hair and body care.

The brand, founded in 2008 by the brothers Keston and Jeremy Muijs, sells in more than 40 countries, including Sephora, Credo Beauty and five-star hotels and spas.

Focusing on natural skin care, with minimalist, gender-neutral packaging and a signature, three-phase skin care system of “cleanse, detox, activate,” the brand later expanded into hair and body care and ingestibles.

It boasts cosmetic and nutritional research facilities in London, Paris, Switzerland, Spain and Australia, and accreditations from the ACO (Australian Certified Organic) and SCA (SAFE Cosmetics Australia) organizations.

Product bestsellers include the Tinted Age-Repair Lip Treatment with tripeptide and violet leaf extract; the Hydra-Restore Cream Cleanser with olive leaf and plantago extract; the Detox Serum Antioxidant+3 Complex, and the Age-Repair Eye Cream, with tetrapeptide and centella.

L’Occitane Group’s overall portfolio also includes the flagship brand L’Occitane en Provence, L’Occitane au Brésil, France’s Melvita, South Korea’s Erborian, U.S.-based LimeLife by Alcone and Dr. Franjes Firenze, in Italy.

In his first exclusive interview since being named CEO of Prada in January 2022, D'Attis said that, among the priorities for the brand is a focus on China and the U.S.

MILAN — Gianfranco D’Attis admits he is “obsessed with details” and acknowledges that he is leveraging this character trait and channeling his retail experience in his role as Prada’s chief executive officer.

For years the Italian luxury brand has invested in a long-term retail strategy, which is clearly paying off. Retail sales of the Prada brand in 2023 increased 12 percent to 3.48 billion euros, including 10 percent growth in the fourth quarter, accelerating on the third quarter across all categories. The increase was driven by full-price like-for-like sales and solid growth across categories, genders and age groups. While sister brand Miu Miu has been gaining traction and growing exponentially, Prada continues to account for the bulk of revenues at the group, which last year reported sales of 4.72 billion euros, up 13 percent on 2022.

D’Attis joined Prada in January 2022 as the group was going through a managerial reorganization and is the first executive outside of the family to hold the CEO role. Chairman Patrizio Bertelli and Miuccia Prada were previously co-CEOs of the group and of the signature brand. D’Attis reports to group CEO Andrea Guerra, who was appointed to that job at the same time as D’Attis joined.

D’Attis was previously president of Christian Dior Couture Americas. Earlier, he was international managing director of Jaeger-LeCoultre.

In an exclusive interview, his first since his appointment, D’Attis provided his views on Prada’s growth potential, with a focus on the U.S. and China; leveraging the brand’s “strong story to tell,” and further improving the client-centric experience, for example with the recent unveiling of a private apartment at the Paris store on Rue du Faubourg Saint-Honoré.

WWD: Prada has been reporting an acceleration in sales and profitability over the past few seasons. What do you attribute this performance to?

Gianfranco D’Attis: I think this was a response to the appreciation for the brand, because it affirms the relevance of desirability of our products in the industry. I think it has been clear that over the past we have been consistently investing in the brand without compromising. And I think we are starting to see the first results. Plus obviously, we can say that today the brand has a very well-balanced product mix driving growth and resilience. And obviously, the company’s focus is always on uncompromised quality and on long-term, sustainable growth. And we have started to benefit also from an evolved organization and more valuable talent, and a solid precision in execution of the company’s strategy.

WWD: Prada’s retail growth of 12 percent was driven by like-for-like sales. Can you elaborate on this performance?

G.D.: We continue to have a bit more of an organized retail excellence, with an obsession and attention to like-for-like in-store productivity. We have a strong focus on retail; KPIs are critical for us, driven by conversion. We have improved a lot in our execution of our 360-degree strategy. This means having the right product, the right experience in store with the right communication approach, to really all be aligned, and create a strong impact for our customer.

We have invested and we are continuing to invest in client experience in stores, which is critical to really create trust, a trusted relationship between store staff and customer. This is our consistent retail culture. We have a very significant part of the business that is generated by existing loyal customers, but also we are working to attract new and young ones, and convert them into brand ambassadors.

WWD: What can you tell us about the year ahead, given the macroeconomic, social and geopolitical issues?

G.D.: 2024 has started well. It’s a year where we have to say we are going back to a certain industry growth normalization, the market enters a new phase. After three years of exceptional growth, we are expecting a greater polarization this year. We need to be obsessed with delivering market share gains this year. We need to continue to do better than the market.

WWD: What are the main challenges for Prada in your opinion?

G.D.: We are in a transformation mode. I’m here because I’m a strong retailer, bringing a lot of retail know-how and client-centric strategies, which will bring us to the next level in terms of retail maturity. We were always good retailers with the best-in-class product but we want to grow in terms of client experience, offering a superior client experience in-store, making sure that we can evolve on this level because we have such a strong story to tell. We have such an incredible, creative and innovative spirit driven by our creative directors Miuccia Prada and Raf Simons that have a strong partnership and dialogue, which is so unique.

We have an opportunity to grow into key markets over the next three to five years, in Asia and in the U.S. China’s one of our key bets over the next three to five years, where we are still under-penetrated. And we have to catch up, I think we have an opportunity to grow. And we have a plan to enhance our distribution with larger, more beautiful stores to offer an upgraded client experience in China.

WWD: Prada has been exploring new categories, such as jewelry with recycled gold and home. What is the product extension strategy for the brand?

G.D.: We are trying to integrate new categories, home and jewelry in our flagships and in our epicenters to also try to attract the new and younger consumers. We selectively integrate those categories in markets where we have the potential opportunity to speak to a new consumer. It’s very selective; we don’t want to have home and jewelry everywhere.

I think we have a very well-balanced brand mix with a strong core of leather goods but also ready-to-wear and footwear have been an extreme accelerator in the past two years and what is very important to mention is that we attract new clientele through these categories.

[Speaking of the brand DNA] I think this is what the customer at the end of the day appreciates, this clarity, this consistent creativity and vision. And innovation is what is very much making the difference in this world.

WWD: Several luxury competitors have increased their prices. What is Prada’s take on this strategy?

G.D.: We have increased our prices over the past year but in line with the market and we haven’t had extraordinary price increases.

We will continue to enrich our price-point pyramid, also on the luxury segment with the introduction of jewelry with recycled gold and we have been working on getting some luxury customers with a specific tailor-made offer on the high end, through specific services and spaces within our distribution. We just opened our private apartment in Paris on the third floor above our store on Rue du Faubourg Saint-Honoré. We have a beautiful space to offer a very intimate, very specific customer experience and we’re offering to our very selective customer a very unique client experience where you have art, hospitality, and the real true “Pradaness” experience for men and women. We want to really offer something unique that you can’t get elsewhere. We would like to integrate it in the epicenters worldwide, in Milan, New York, Los Angeles and Tokyo.

WWD: How is business split between menswear and womenswear?

G.D.: Both men’s and women’s category are very well-balanced. It’s true that over the past 12 months we saw an acceleration on men’s, which is very good to see.

WWD: While retail sales last year grew 17 percent to 1.44 billion euros in Asia Pacific and 10 percent in Europe to 1.31 billion euros, jumping 31 percent to 484 million euros in Japan, revenues in the Americas decreased 2 percent to 767 million euros, and were flat at constant exchange rates. However, in the U.S. sales did show a sequential improvement in the fourth quarter, supported by some repatriation of spending. Why was the performance less buoyant in this market compared to others? Is the acquisition of the building in New York housing the Prada store on Fifth Avenue signaling a change?

G.D.: We had just a different strategy in the past; Asia was the priority and we developed Asia more. So now we are changing it and one of the reasons for this investment in New York is clearly the importance of the market. We wanted to secure the location and we are going to upgrade it and enlarge it, improve the client experience, and hopefully have a surprise in terms of new hospitality concepts to make sure that we engage with the American consumer on a different level. We have plans to develop Miami in 2024, we have plans to penetrate Texas with openings in Houston and Dallas in 2024, and Austin, Chicago and Philadelphia where we are not present.

There’s still a lot of potential, in the Middle East and Latin America. It’s important to prioritize, but clearly there is potential everywhere.

As we said before, we have a long-term strategy in the next three to five years. Our focus is the U.S. and Asia, specifically China, where we want to really try to make a difference, try to get to know the customer better, to invest in a narrative, in storytelling so that the customer gets to know the Pradaness. We will invest in the future also more and more in events that represent the Pradaness, such as Pradasphere or Prada Mode and all these platforms that are really there to convey a cultural message to our clients through the lens of Prada.

The Prada Reporter pop-up in New York.

WWD: You certainly bring your international experience — developed also in the U.S. — to the brand, as you relocated to New York from Geneva when you were named managing director of Christian Dior Couture North America in April 2019.

G.D.: I spent a lot of time in the U.S. and I think we have a significant opportunity in the American market. That’s why I’m also here. I’m here because I think the brand has an opportunity to further gain market share and the retail presence is still very limited in the U.S. So we are going to invest in America, in new, bigger and more productive stores. We were pioneers starting from 2000s with the Epicenter in New York and Los Angeles with Rem Koolhaas and in Tokyo with Herzog & de Meuron that offers a unique client experience. But not only — we have artistic talks there, we have a beautiful platform for intellectual gatherings, for film screenings or performances. So the epicenter as a concept, it’s not just a commercial platform, but also a very cultural platform that our customers love to engage in.

The acquisition of the building on Fifth Avenue is a strong signal and message that we want to continue to invest and secure key retail locations in key cities like New York, Milan, London, Paris, Shanghai, Hong Kong and Tokyo. We want to make sure that we will secure brand visibility in those key markets to offer an evolved client experience. There are plans for Milan, too — after all, the city is our home — to increase our footage. And to increase our client experience here. I won’t be able to share too much insight, it’s going to be something big.

WWD: Commenting on year-end results in March, chairman Patrizio Bertelli underscored that “innovation, dynamism and flexibility will be even more key to our success in 2024, and I am confident that our reinforced organization will be able to further evolve the group.” Can you elaborate on these remarks?

G.D.: We are about flexible organization, adapting to external challenges and internal transformational process. We are a very dynamic group with dynamic brands that focus on retail. We are about creativity and innovation which is critical, which obviously sparks the dialogue in fashion between Miuccia Prada and Raf Simons, which is very, very important to us and to the brand. And we are about pushing the boundaries always, surprising with creativity and innovation. Also through unexpected partnerships, such as with Axiom [Space, the architect of the world’s first commercial space station, on NASA’s lunar space suits for the Artemis III mission] or Adidas and this will help us to continuously enlarge our audience, which for us is important.

WWD: There has been talk about a double listing, which group CEO Andrea Guerra has quashed. Is there any comment you can make?

G.D.: We are very happy with being listed, but this is a question that we have to ask the ownership and Andrea Guerra. I think we have to do what we do best, create brand desirability and best-in-class client experience in our stores. The dream, you know, I think this is the substance, this product that our clients love. I think this is what we are good at delivering, this cultural substance through the lens of Prada is what we’re all about, and what makes us different in the market.

WWD: What do you look for when recruiting your team? How would you describe your management style?

G.D.: I have an obsession for details, creativity, innovation, being curious, this obsession of conquering the world, this obsession of conquering new customers and in trying to do the best and that’s what we’re looking for today.

Japanese company’s bid for US Steel further complicated by industrial state politicians

Three US senators have voiced concern about Nippon Steel’s business ties in China, opening a new front in a political effort to stop the Japanese group from completing its proposed $14.9bn acquisition of US Steel.

Sherrod Brown, an Ohio Democrat who chairs the Senate banking committee, on Monday asked US President Joe Biden to investigate Nippon’s business relationships in China, according to a letter obtained by the Financial Times.

Brown raised concerns based on a report by Horizon Advisory, a consultancy, which said Nippon’s market exposure and operations in China created a “material national security risk”.

The Ohio lawmaker said it was “imperative” that the Biden administration “thoroughly examine” Nippon’s exposure to the Chinese steel industry with which it had been “fundamentally intertwined” for four decades.

Brown sent the Horizon report to Biden, and his position was backed by two other industrial state senators — Ohio Republican JD Vance and Pennsylvania Democrat Bob Casey — in comments to the FT.

“Nippon’s connection to the Chinese steel ecosystem and industrial policy agenda has concerning implications regarding ties to China’s military-civil fusion strategy and quest for global economic power,” Brown wrote, referring to a Chinese government requirement for domestic groups to share new technology with the military.

Biden last month objected to the acquisition, saying it was “vital” that US Steel remained domestically owned and operated. Biden made no mention of Nippon’s business in China, however, and instead focused on the need to retain American jobs.

Biden’s intervention came after Nippon had submitted the transaction to the Committee on Foreign Investment in the US, an inter-agency government panel that vets inbound investments for national security threats.

Biden’s move was designed to boost union support in Pennsylvania, a key swing state in November’s presidential election that he narrowly won against Donald Trump in 2020. Brown is up for re-election in Ohio, which Trump won in 2016 and 2020, while Casey is in a tight re-election race in Pennsylvania.

Biden will next week host Japanese Prime Minister Fumio Kishida in Washington. His statement has soured an otherwise rock-solid alliance with Japan.

But Japanese officials privately say that Tokyo wants to avoid being drawn into US presidential politics. Trump, the presumptive Republican presidential nominee, has said he would immediately block the deal if he beats Biden.

Two other senators briefed on the Horizon report who have previously opposed the deal said it raised red flags about allowing Nippon to acquire the Pittsburgh-headquartered US Steel. All three senators are from states where the United Steelworkers union has a large presence.

“Nippon Steel’s deep ties to the Chinese Communist party are troubling, and its relationship with the CCP must be scrutinised as it pursues an acquisition of US Steel,” Casey said.

Vance, who is seen as a possible vice-presidential running mate for Trump, urged Biden to block the acquisition, saying that “the foreign takeover of US Steel poses significant national security risks”.

“We cannot allow one of the largest American steelmakers to be gobbled up by a foreign entity with ties to the Chinese Communist party and its military-industrial apparatus. The president must find the courage to do what’s right and block this deal without delay,” Vance told the FT.

Nippon said the Horizon report was “rife with inaccuracies and misrepresentations” and stressed that it had only limited operations in China which amounted to less than 5 per cent of its global production capacity. China and Japan are strategic rivals in east Asia, and Tokyo has, with US support, been rapidly increasing its defence spending to counter mounting Chinese aggression in the region.

“We have no [research and development] facilities in China,” Nippon said. “The entities in which we invest in China have no control over our operations or business decisions outside of China, including in the US, and our Chinese partners do not have any access to information about Nippon Steel’s operations, including about its R&D and engineering, outside of China.”

The Horizon report does not allege any legal wrongdoing by Nippon. But it says its joint venture partners in China include “keystone backbone players” in the country’s steel industry, meaning that Nippon indirectly supports China’s civil-military fusion strategy.

For example, it says one partner, Beijing Shougang International Engineering Technology Co, has a clear affiliation with Chinese military-civil fusion strategies that meet the criteria for groups to be listed on a Pentagon list of Chinese military groups that pose concerns for US national security. It is not on the Pentagon list, however.

The concern comes as US and multinational companies face rising scrutiny from Washington lawmakers over their operations in China across a wide range of industries, including microprocessors and other so-called dual-use technologies.

The Horizon report says Nippon has been instrumental in helping the Chinese steel industry to develop, including through one joint venture involving Baosteel, the largest Chinese steel company.

Brown said he was concerned about allegations that Baowu, the conglomerate that includes Baosteel, may have been involved in implementing Chinese government policies in Xinjiang that are viewed as enabling forced labour. The Chinese government has repeatedly denied that it is engaging in repression against Uyghur Muslims in the region.

Horizon’s report said there was some evidence that Nippon maintained an office in Xinjiang. Nippon told the FT that it has never had an office in the north-western region.

Nippon has nine facilities in China that can produce 3.6mn tonnes per year, according to its latest annual report. According to the World Steel Association, Chinese groups make up six of the world’s top 10 steel producers, with Baowu the biggest. Nippon Steel is the fourth largest.

The modern world is dependent on a vast network for extracting, processing, transporting and ultimately consuming hydrocarbons like crude oil and natural gas. But these resources come with a cost: they’re finite, difficult to extract and take carbon dioxide out of the ground and release it into the air.

Instead of reducing humanity’s dependence on hydrocarbons — which is impossible or undesirable or both, depending on who you ask — Terraform Industries’ solution is to produce this resource, using electricity and air, via a system it calls the Terraformer. Today, the startup is announcing that it has commissioned a demonstrator Terraformer and produced synthetic natural gas for the first time.

Roughly the size of two shipping containers, the Terraformer consists of three subsystems: an electrolyzer, which converts solar power into hydrogen; a direct air capture system that captures CO2; and a chemical reactor that ingests both these inputs to produce pipeline-grade synthetic natural gas. The entire machine is optimized for a one-megawatt solar array.

As CEO Casey Handmer admits, what the company has done is not “super original.” Electrolysis and Sabatier chemical reactors are well understood processes, for example. But the company has been able to innovate on the process, including building its proprietary direct air capture system, and adapting all of it to work with a variable energy source, solar power. So while any particular subsystem can trace its origins to, say, the nineteenth or twentieth century, the entire process is entirely new.

The result is some fairly staggering cost reductions: Terraform says its system converts clean electricity into hydrogen at less than $2.50 per kilogram of H2 (currently, green hydrogen ranges from $5-11 per kilogram, Handmer estimated). The direct air capture system also filters CO2 for less than $250 per ton, which the company said in a statement, is a world record.

The startup says that improvements are already in the works to bring these prices down even further to ensure that its synthetic natural gas hits cost parity with conventionally sourced liquified natural gas. Much of that is dependent on the build-out of lots (and lots and lots) of cheap solar power, and the requisite production of thousands of Terraformers per year.

Indeed, while Handmer is an extraordinarily ambitious thinker, it would be a mistake to think his head is stuck in the clouds. He’s keenly aware that Terraform’s plans will be dead in the water without a strong business case behind the company.

“There’s this idea that we’ve been driving towards, which is, a lot of these cool technologies to address the climate problem are fundamentally not within the realm of capitalism because they don’t make money,” he said. “They actually consume more money than they make. That makes it really, really hard to scale them. But if you can figure out some way to make more money than you use, then you are inside the tent of capitalism. That is just a system to which money naturally flows. That’s the critical thing to do.”

Burbank, California-based Terraform has agreements to sell the small amounts of natural gas it produced to two unnamed utilities, but even though the initial volume is low, “it’s a very key step,” Handmer said. “It shows that we have produced gas that meets their standards.”

The company has ongoing discussions regarding prototyping or selling standalone electrolyzers as separate products, and making liquid fuels other than methane. Terraform is also taking reservations for the first production Terraformers — with the ultimate aim of ramping up factories to support a buildout that could do nothing less than transform the world’s energy systems.

Tucked inside Canoo’s 2023 earnings report is a nugget regarding the use of CEO Tony Aquila’s private jet — just one of many expenses that illustrates the gap between spending and revenue at the EV startup.

Canoo posted Monday its fourth-quarter and full-year earnings for 2023 in a regulatory filing that shows a company burning through cash as it tries to scale up volume production of its commercial electric vehicles and avoid the same fate as other EV startups, like recently bankrupt Arrival. The regulatory filing once again contained a “going concern” warning — which has persisted since 2022 — as well as some progress on the expenses and revenue fronts.

The company generated $886,000 in revenue in 2023 compared to zero dollars in 2022, as the company delivered 22 vehicles to entities like NASA and the state of Oklahoma. And it did reduce its loss from operations by nearly half, from $506 million in 2022 to $267 million in 2023. The revenue-to-losses gap is still considerable though: The company reported total net losses of $302.6 million in 2023.

Still, one only needs to look at what Canoo is paying to rent the CEO’s private jet to put those “wins” into perspective. Under a deal reached in November 2020, Canoo reimburses Aquila Family Ventures, an entity owned by the CEO, for use of an aircraft. In 2023, Canoo spent $1.7 million on this reimbursement — that’s double the amount of revenue it generated. Canoo paid Aquila Family Ventures $1.3 million in 2022 and $1.8 million in 2021 for use of the aircraft.

Separately, Canoo also paid Aquila Family Ventures $1.7 million in 2023, $1.1 million in 2022 and $500,000 in 2021 for shared services support in its Justin, Texas, corporate office facility, according to regulatory filings.

This could be chalked up to small monetary potatoes if Canoo reaches its revenue forecast for 2024 of $50 million to $100 million.

We’ve asked Canoo for comment and will update this post if we hear back.

Deal expected to expand SLB’s presence in the less cyclical and growing production and recovery space.

Oilfield services giant SLB said it has agreed to buy ChampionX in an all-stock deal valued at about $7.8 billion.

ChampionX shareholders will receive 0.735 SLB shares for each share of ChampionX they already own. Once the deal is complete, ChampionX shareholders will own about 9% of the combined company. SLB shares closed on Monday at $55.22 and ChampionX at $35.40.

SLB Chief Executive Olivier Le Peuch said the deal will expand SLB’s presence in the less cyclical and growing production and recovery space. Still, he said the company will continue to focus on accelerating decarbonization and emissions reduction in SLB’s core oil-and-gas business.

“Our customers are seeking to maximize their assets while improving efficiency in the production and reservoir recovery phase of their operations,” he said.

ChampionX provides chemistry solutions, artificial lift systems and other equipment to help companies drill for and produce oil and gas.

SLB said it expects to realize annual pretax synergies of about $400 million within three years after the deal closes. The benefit will come from both revenue growth and cost savings, the company said.

SLB said it expects the deal to close this year. Separately, SLB said it plans to return $7 billion to shareholders over the next two years.