TheChek News Flow

General Electric will soon be no more, but shares of the three new companies look attractive.

General Electric is nearing the end of its five-year journey back from the brink. For investors, a looming corporate breakup is only the beginning.

The future looked bleak for GE in October 2018. John Flannery had just been removed as CEO after a year at the helm. Profitability was declining. GE Capital was losing money. The acquisition of Alstom’s power business had proven disastrous. And investors were forced to sift through dozens of pages of disclosures to gain a coherent picture of the company’s financial condition.

Worse still, its massive debt load—some $112 billion, excluding cash and insurance liabilities—was growing more unwieldy as free cash flow deteriorated, resulting in downgrades from the major credit-rating firms and a slashing of its dividend to a penny per quarter.

By the end of the year, GE stock had fallen 80% from its 2000 peak and was trading for less than it had during the depths of the financial crisis in 2009.

Into this mess stepped Larry Culp, the retired CEO of Danaher. Culp had joined GE’s board in April 2018, but now, five months later, he was being asked to do the seemingly impossible—save General Electric, the company founded by Thomas Edison in 1892. Culp immediately set about selling businesses and paying down debt, before announcing in 2021 that GE would split into three separate companies.

So far the breakup plan is working brilliantly. Since the early 2023 spinoff of GE HealthCare Technologies, which makes medical imaging products, shares of General Electric have gained about 120%, while GE HealthCare has gained 50%. Both have outperformed the S&P 500 index, which has advanced 30% over the same span.

The final move is due on April 2, with General Electric splitting itself into two. The parent company will be renamed GE Aerospace, and will be a maker of airplane engines; and the power business will be spun off and named GE Vernova. Shareholders will receive one GE Vernova share for every four GE shares.

Buying General Electric stock ahead of that split could well pay off handsomely. There’s a strong case that the two new stocks together will be worth more than the existing shares. Expect to hear more on that when GE management makes the cases for the new companies during its investor days on March 6 and 7.

The truth is, all three of the new companies will be dominant players in their respective industries and, remarkably, all three will have investment-grade credit ratings.

“With Culp’s visionary guidance, GE began one of the most amazing turnarounds I’ve ever seen,” says Jim Osman, founder of the Edge, which provides research and recommendations about special situations such as corporate breakups and spinoffs.

Getting here hasn’t been easy. GE was a darling of the 1980s and 1990s, at one point becoming the world’s most valuable company. By 2000, it was worth some $600 billion, but cracks were appearing, such as a growing reliance on financial earnings. The expansion of GE Capital, whose assets peaked at more than $600 billion in 2008, happened just in time for the 2008-09 financial crisis, and its problems didn’t end there. “I recall not sleeping a lot,” says Culp about his early days as CEO. “There was just so much to do, so much to learn.”

Fixing GE also has meant a smaller GE. Culp aggressively sold off assets to pay down debt. GE’s biopharma business was offloaded to Danaher for $21 billion in March 2020. GE’s aircraft leasing business was sold to AerCap Holdings in 2021 for $30 billion. GE also exited its transportation business, merging it with Wabtec in 2019, while a lighting unit was sold in 2020. GE exited energy services, and GE Capital is no more—the unit has been effectively shut down.

The results have been impressive. GE has repaid some $100 billion in debt since the end of 2018, bringing its debt load down to just $21 billion. What’s more, free cash flow, which had dropped from $5.6 billion in 2017 to $2.3 billion in 2019, has started growing again: GE generated $5.2 billion in 2023 and should produce more than $6 billion in 2024.

The free cash won’t accrue to General Electric, at least not as we once knew it. Instead, it will go to the two new companies, while all three will bear the GE logo. GE HealthCare, which has some 50,000 workers, is already independent. It generated 2023 sales of $19.6 billion, up 7% year over year, and operating profit of $3 billion, up $100 million. The stock, at a recent $91.92, has been a winner since it started trading on a when-issued basis in 2022 and since Barron’s recommended it in March 2023.

GE Aerospace, though, is the crown jewel. Three-quarters of new single-aisle jets made by Boeing and Airbus carry GE engines, and they’re also found on twin-aisle jetliners like the 787 Dreamliner and jet fighters like the F-18 Hornet. In total, there are more than 40,000 GE engines in commercial airliners and 26,000 in military aircraft.

The aerospace business shows no signs of slowing down. Global air travel has nearly returned to prepandemic levels, and growth will require new planes. Both Boeing and Airbus expect the global airline fleet to grow to some 50,000 planes over the coming 20 years, up from about 25,000 today. GE’s aerospace sales and orders both grew about 22% in 2023 compared with 2022.

What’s more, every engine GE sells needs to be serviced and cared for. That aftermarket business accounted for 70% of Aerospace’s $32 billion in sales in 2023, and is more profitable than selling new equipment. Wall Street expects operating profit margins to expand by about two percentage points over the coming few years, up from about 19% in 2023, as new engines start to hit the shop for scheduled maintenance. That business should help Ebitda, or earnings before interest, taxes, depreciation, and amortization, hit about $8 billion in 2024, up from $7.2 billion in 2023; it could reach $9 billion in 2025.

“Phenomenally strong aftermarket franchise,” says RBC analyst Ken Herbert. “Massive upside on the horizon.”

Aerospace is so strong that it accounts for most of General Electric’s current value. While it could be compared with RTX, which makes jet engines, flight controls, and a host of defense products, and trades for 12 times Ebitda, or Safran, a GE partner on the single-aisle jet engines, which trades for about 16 times, a better multiple might be that of aftermarket parts supplier TransDigm Group, which changes hands at 18 times. Herbert argues that’s the valuation GE Aerospace deserves, which implies a value of about $160 billion based on Ebitda estimates for the coming two years, or about $140 of current General Electric’s share price.

With GE shares trading at $155, that leaves about $15 for GE Vernova. That could significantly undervalue the company. Vernova didn’t earn a profit in 2023—it reported a bottom-line loss of $540 million—and likely won’t again in 2024. Still, that’s an improvement. In 2018, when Scott Strazik took over the power unit, it posted sales of some $27 billion and an operating loss of more than $800 million. Operating profit margins improved from minus 3% to about 8% in 2023, as the company exited coal businesses.

The big issue at Vernova has been its wind business. While Vernova’s power and electrification businesses turn a profit, the renewable-power group, which builds turbines for giant windmills, is losing between $300 million to $400 million a quarter. The wind business hasn’t been great for anyone. Vestas Wind Systems (VWS.Denmark) posted single-digit Ebitda margins in 2023 after losing money in 2022. Inflation and fixed-price contracts, combined with fluctuating energy prices, have made the wind business tough in recent years.

“In theory, [wind] is a business that long ago should have reached some kind of acceptable level of profit margins,” says Neuberger Berman portfolio manager Evelyn Chow. That hasn’t happened. What’s worse, the new turbines tend to come with a host of warranty issues as well.

Vernova, though, is more than just wind. Heading into the investor event, management has provided more financial details, including the fact that it will report in three segments instead of two: renewable wind power, gas power turbines, and the new grid business, which includes transformers, software, and other products for utilities. Solving for wind should be a big part of the event—cost-cutting and product rationalization are likely to be part of the turnaround strategy—but so should the strength in the other two segments.

In 2023, Vernova’s total sales came in at $33.2 billion, up about 11% from 2022. The gas-turbine power business generated sales of about $17.4 billion, for Ebitda of $1.7 billion, while the grid business notched $6.4 billion in sales and Ebitda of about $230 million. While wind had revenue of $9.8 billion, it produced an Ebitda loss of $1 billion, though that was an improvement from 2022’s negative $1.7 billion.

Finding the right comparisons isn’t easy. Tokyo-based Mitsubishi Heavy Industries (7011.Japan) makes natural-gas-powered turbines, just like Vernova, but it also builds carbon capture, hydrogen projects, and warehouses, and its sales have been flat for the past five years. It currently trades at 11 times Ebitda. Paris-based Schneider Electric (SU.France) makes transformers and software for the grid, and trades at 16 times. Siemens Energy (ENR.Germany), which has a wind, gas, and grid business similar to Vernova’s, trades at just five times.

Mashing up those three stocks can yield a valuation for Vernova anywhere between $20 billion to $50 billion. One way to gauge early trading in the stock is to think of anything near the low end of that range as a good deal and near the high end as fully valued.

Another option is to think about the story Vernova will try to tell—that of an American company building big machines, focused on improving profit margins while growing its service and aftermarket business. That’s not unlike the stories other cyclical manufacturers tell, whether the cream of the crop like Deere and Caterpillar or stragglers like Ford Motor. The main difference is the operating margins they’re able to produce—17% for the former group and closer to 6% for the latter.

Those differences show up in valuations as well, with Deere and Caterpillar fetching between 12 and 18 times Ebitda, depending on where they are in the cycle, and a range of eight to 12 for the less-profitable, slower growing, companies. Vernova won’t be at the top, but should grow faster than companies at the bottom.

Putting a multiple of 10 times on expected 2025 Ebitda of $3 billion would yield $30 billion, and adding in Vernova’s expected cash balance of $4.2 billion would give a market value of around $34 billion, or about $31 a GE share. Continued improvement in wind combined with more demand for wind power could lead to even better margins—and perhaps a higher valuation. “The future outlook is good,” says the Edge’s Osman. “Vernova will emerge as a stronger and more focused energy player in the upcoming years.”

Osman is a fan of holding GE stock into the spinoff, which should be completed early in the second quarter, and then owning both Aerospace and Vernova. Though there won’t be a company calling itself General Electric for the first time since it was incorporated more than 130 years ago, the results should speak for themselves. A couple of years of improving margins at Vernova and continued strength at GE Aerospace could make the combined companies worth $200, up 30% from the current $154.

“We feel pretty good about [the breakup],” Culp says. “I’m pretty sure Thomas Edison is looking down and saying this is the right thing.”

The financial markets certainly are.

The train wreck in Chinese real estate is grabbing global headlines. But property in some other emerging markets is on a roll, buoying developers’ stocks.

India is reaping the rewards of more effective regulation and a rising middle class. Brazil and Mexico may catch tailwinds from falling interest rates. Dubai has become a refuge for migrants with cash, from Russian draft evaders to Asian crypto bros. “We have more exposure to real estate than any time in the past 10 years,” says Varun Laijawalla, emerging markets portfolio manager at Ninety-One.

India’s property market is a mirror image of its neighbor China’s. It stagnated for a decade after the 2007 global financial crisis while China’s was rocking. In 2016, Narendra Modi’s government pushed through the Real Estate Reform Act, weeding out shady developers and bolstering consumer confidence through measures like escrow accounts for prepaid apartments.

Now prices are rising at 10% a year, says Rob Brewis, head of emerging markets at Aubrey Capital. Inventory has halved from a 2017 peak even as apartment sales nearly doubled.

Macrotech Developers (ticker: 543287.India), the Mumbai region’s largest builder, is a top pick for both Brewis and Laijawalla. “They have very large landholdings on the outskirts of greater Mumbai, which will allow them to build at the affordable end of the spectrum.” Brewis says.

He also likes DLF (532868.India), Macrotech’s more-or-less counterpart in the New Delhi metro.

Latin America is ground zero for falling interest rates as global inflation subsides. Brazil, the region’s biggest market, has already slashed 250 basis points to 11.25% and could go as low as 8%, says Malcolm Dorson, head of emerging markets strategy at Global X exchange-traded funds. No. 2 Mexico should loosen this year from a historic high of 11.25%.

Brazilian real estate is getting an extra push from President Luiz Inácio Lula da Silva’s revival of a subsidized low-income housing program called Minha Casa Minha Vida. Mexico is riding a wave of “nearshoring” investment from U.S. companies. Laijawalla’s top pick in Brazil is home builder Cyrela Brazil Realty (CYRBY). In Mexico he favors Fibra Uno Administracion (FUNO11.Mexico), a real estate investment trust heavy on industrial parks.

Dubai real estate is hot, period. Apartment prices have jumped 12% in the past year, says Abhijit Kukreja, head of emerging markets equity sales at Auerbach Grayson. Things will get hotter still, with housing demand outstripping supply by 40%, he predicts.

The dominant developer in the Middle East’s boomtown is Emaar Properties (EMAAR.United Arab Emirates), with a 30% market share. Its stock has climbed 40% over the past year. Kukreja sees another 50% upside. “I don’t think this sector is expensive at all,” he says. ”All the developers have beaten their estimates.”

A secondary pick for him in Dubai is Tecom Group (TECOM.UAE), the leading provider of high-end office space.

Chinese residential property is a virtual no-go zone for outside investors. Some intrepid souls are bargain hunting in commercial property, though, says Joachim Kehr, head of Asia Pacific at real estate specialist CenterSquare Investment Management.

“We think there’s value in commercial real estate in China,” he says. “A number of firms have launched distressed funds, which makes sense.”

Kehr is cautious, by contrast, on India. “More progress is needed on institutional frameworks to make sure the gains achieved so far in India won’t be lost,” he says.

Pay your money, take your chances.

Les propos d’Emmanuel Macron sur l’envoi éventuel de renforts militaires ont implicitement levé le voile sur la présence déjà effective de membres de divers services occidentaux sur le sol ukrainien.

Trois jours après les propos d’Emmanuel Macron, à l’issue d’une conférence sur le soutien à l’Ukraine, convoquée à l’Elysée, dévoilant des réflexions en cours sur l’envoi de renforts militaires en Ukraine, les divisions demeurent fortes au sein des alliés sur ce sujet sensible. Après le tollé provoqué, Emmanuel Macron a assuré, jeudi 29 février, que chacun de ses mots était « pesé » et « mesuré ». Le fait que le chef de l’Etat prenne soin, lundi 26 février, de préciser que les discussions concernaient seulement l’envoi de troupes « de manière officielle, assumée et endossée », a aussi implicitement levé le voile sur la présence déjà effective de professionnels de divers services occidentaux sur le sol ukrainien.

Les allers et retours en Ukraine de nombreux acteurs étatiques appartenant à la sphère des services de renseignement occidentaux, souvent avec un statut militaire, sont, depuis le début du conflit ukrainien, une évidence inhérente à la conduite de la guerre, qu’il s’agisse de membres du personnel diplomatique sous couverture, de « conseillers » insérés au sein des états-majors ukrainiens ou de forces spéciales de tous types. « L’action de ces services est par nature clandestine donc en dehors du droit de la guerre », rappelle Vincent Crouzet, ancien collaborateur de la direction générale de la sécurité extérieure (DGSE), reconverti dans l’écriture et le conseil.

La polémique a toutefois libéré la parole sur ce que d’aucuns considèrent comme un « secret de Polichinelle ». « Tous les Etats alliés sont présents en Ukraine. Il ne s’agit pas d’unités de combat, mais il y a par exemple des représentants de tous les services de renseignement », témoigne une source diplomatique ukrainienne, qui se félicite que le renforcement de la présence militaire alliée dans son pays soit « dans l’air » depuis le mois de décembre. « S’il y a des livraisons d’armes, il doit y avoir des gens qui donnent des informations pour utiliser les équipements sur place », observe-t-elle encore. L’Ukraine sert aussi de terrain d’essai de nouveaux matériels. Des drones sont ainsi testés sur place. Ce genre de professionnels sont sur le terrain, bien sûr. »

Douze bases secrètes de la CIA

Les plus transparents dans ce domaine, dans la foulée des déclarations d’Emmanuel Macron, ont été les Britanniques. « Au-delà du petit nombre de personnes que nous avons dans le pays pour soutenir les forces armées de l’Ukraine, nous n’avons aucun plan de déploiement à grande échelle », a ainsi déclaré, lundi, un porte-parole de Rishi Sunak, le premier ministre britannique.

Fin 2022, un ancien commandant général des Royal Marines, Robert Magowan, avait déjà admis, lors d’un entretien accordé à une revue officielle des marines – intitulée Globe & Laurel –, la participation de 350 soldats, entre janvier et avril 2022, à des opérations spéciales comportant un « haut niveau de risques politiques et militaires ». Des propos jamais démentis par Londres, et en ligne avec la présence ancienne de nombreux instructeurs britanniques au sein des états-majors ukrainiens, en raison d’une coopération amorcée dès 2014 et l’annexion unilatérale de la Crimée par la Russie.

Les Américains, de leur côté, se sont officiellement désolidarisés, il y a quelques jours, de la déclaration d’Emmanuel Macron. Mais le 25 février, le New York Times a publié une longue enquête dévoilant l’existence de douze bases secrètes de la CIA, le long de la frontière entre la Russie et l’Ukraine. La construction de ce réseau de bases aurait, elle aussi, débuté à partir de 2014. Celles-ci auraient servi à voir venir l’invasion de l’Ukraine et permettraient aujourd’hui d’aider les Ukrainiens à organiser leurs « opérations commando et secrètes », affirme le quotidien américain qui s’est rendu dans l’une d’entre elles.

La pression grandissante de Moscou

Cette opération de transparence maîtrisée du renseignement américain – appelée campaigning (« faire campagne ») – fait partie de la manœuvre de renforcement de la posture d’« ambiguïté stratégique » amorcée par la réunion des alliés, lundi, à Paris, ont assuré au Monde plusieurs sources proches du dossier. Même si les Etats-Unis n’ont pas été associés à l’élaboration précise de ce que M. Macron allait dire, et ont pu être surpris par sa sortie, ils avaient été consultés en amont, et ils avaient envoyé un représentant à Paris, la pression grandissante de Moscou sur le flanc est de l’Europe les inquiétant tout autant que les autres participants.

Dans ce contexte, des déclarations du chancelier allemand, Olaf Scholz, lundi, peu avant la clôture de la conférence à Paris, dans un entretien à l’agence de presse allemande DPA, ont également jeté le trouble. Interrogé sur son refus d’envoyer des missiles de longue portée à l’Ukraine, comme le font déjà la France et le Royaume-Uni, le chancelier a précisé que l’envoi de ces armes – des Taurus – d’une portée de plus de 500 kilomètres, « serait irresponsable », car « ce qui est fait concernant l’accompagnement du ciblage de la part des Britanniques et des Français ne peut pas être fait en Allemagne », sous-entendant une présence des deux alliés sur le sol ukrainien. Des affirmations démenties par Londres, mais pas par Paris.

Côté français, seule la présence en Ukraine d’agents de la DGSE, issus en partie des services spécialisés dans les opérations en zone de crise, est tacitement admise. Mais ni les effectifs ni les missions n’ont fait, depuis le début de la guerre, l’objet d’une quelconque communication publique. Même la mort possible de certains d’entre eux est restée, pour l’heure, dans le domaine du déni plausible.

Poser un « dilemme stratégique » à la Russie

La présence de forces conventionnelles françaises en Ukraine, en uniforme ou pas, même de manière embryonnaire, pour protéger l’ambassade par exemple, comme le font les Britanniques, a aussi toujours été niée – dans le cas français, cette fonction de protection de l’enceinte diplomatique est dévolue à des gendarmes. Officiellement, les forces spéciales françaises – qui ne sont pas des agents clandestins et sont sous le commandement de l’état-major des armées – se sont toujours arrêtées à la frontière ukrainienne, que ce soit pour la formation des soldats de Kiev, en particulier en Pologne, ou l’encadrement de livraisons d’armes.

L’idée de pouvoir autoriser ces instructeurs militaires à franchir la frontière ukrainienne, avec, éventuellement, d’autres unités conventionnelles, est toutefois au cœur des réflexions françaises, d’après les informations du Monde. Une option présentée comme très prudente, loin de l’envoi massif de troupes, et avant tout pensée comme un moyen de poser un « dilemme stratégique » à la Russie.

La formation que les Français aimeraient pouvoir dispenser aux Ukrainiens concerne notamment la défense sol-air : des installations particulièrement ciblées par les Russes. La présence de militaires français ou d’autres nationalités sanctuariserait potentiellement certaines zones du territoire ukrainien, et contraindrait fortement le ciblage aujourd’hui débridé de Moscou. Une capacité qui devrait s’avérer aussi essentielle pour permettre l’arrivée annoncée des F-16 de fabrication américaine en Ukraine, courant 2024.

Crypto bulls gleefully expect an increase but their target of $100,000 seems over-optimistic

Bitcoin prices are at fresh record highs in many currencies. In dollars the cryptocurrency is up more than 40 per cent over the past month. The $69,000 intra day high set in 2021 is within reach. Excitement is being fuelled by the approval of spot exchange traded funds in the US. Expected changes to the way bitcoins are created or “mined” due at the end of April are adding to the frenzy. 

The “halving” event which happens about every four years was written into bitcoin code by its creator as a means to enhance scarcity. It means that the number of coins a miner gets as a reward for completing each calculation will fall from 6.25 to 3.125. This mechanically raises the production cost and reduces supply at the same time.

Regardless of whether you believe bitcoin has any real value, prices remain tied to these underlying fundamentals. Opinions on the former are shifting as mainstream adoption grows; some $70bn has flowed into spot bitcoin exchange traded funds since they first went live in January, according to data from The Block. Rising demand from buyers anticipating the next halving explains why crypto bulls now gleefully predict bitcoin prices will soon exceed $100,000.

Look closer and this bullish target seems suspect. The current cost of production — largely the electricity required by computers making the calculations for mining — is currently about $27,000, thinks JPMorgan. This offers a sense of the price floor for bitcoin. Immediately after the halving this will jump short term to around $50,000.

Costs are also a function of the hashrate. This reflects the amount of processing power devoted to mining coins. The higher the hashrate — currently at a record high — the longer it takes to mine each coin. That in turn means higher costs for all involved, offering some comfort to buyers.

Yet, the recent surge has taken bitcoin prices far above the cost of production. For bitcoin in the past that has not been sustainable. Moreover, these costs should start falling shortly after the halving as less efficient miners drop out, unable to keep up. As older machines are retired, the hashrate should fall and with it production costs.

At some point the price rally will lose steam. Assume mining processing power falls by one-fifth then the cost of production will fall correspondingly to around $43,000. That offers a useful guide to where prices might find a floor once the current bout of mania subsides.

Executive at fraudulent German financial services company led a double life

Wirecard fugitive Jan Marsalek was recruited by Russian intelligence at a meeting on a yacht in July 2014, sparking a decade-long association with the country’s security services, according to new reports.

An investigation by The Insider, Spiegel, ZDF and the Austrian Standard found that Marsalek’s entanglement with the GRU, Russia’s notorious military intelligence service, long predated Wirecard’s June 2020 collapse.

Marsalek was the group’s chief operating officer, responsible for the elaborate arrangements with business partners used to fabricate the sales and profits that made Wirecard Germany’s most valuable fintech before it was exposed as a fraud.

Among new details of his long-standing double life is that Marsalek subsequently took shelter in Moscow having adopted the identity of an orthodox priest.

According to the investigation, Marsalek’s early infatuation with Russia came in the form of a relationship with a Russian erotic actress connected to the country’s security services with whom he partied, travelled and took joyrides in MiG fighter jets.

At her 30th birthday party aboard a luxury cruiser in Nice, she introduced Marsalek to Stanislav Petlinsky, a Russian former special forces operative known as “Stas”. Spiegel reports he then told others he handed the enthusiastic Austrian over to the GRU to manage.

Petlinsky remained a close associate of the Wirecard executive for several years, part of a crowd of Libyan and Austrian spies involved in Marsalek’s schemes who congregated at a villa opposite the Russian embassy in Munich.

The Financial Times has previously reported that Marsalek used the villa to pitch a plan to use a humanitarian mission in Libya as cover to develop a militia force that could control the flow of migrants from north Africa towards Europe. A former colonel in the GRU was to act as a consultant in the venture.

Marsalek had obtained interests in Libyan cement plants, which became a local base of operations for the RSB mercenary group under a contract for mine clearing. According to the new investigation, Marsalek’s aspirations to control a militia force were more than aspirational: he secretly purchased the RSB organisation via shell companies, using cash delivered by private jet.

While the extent of Marsalek’s spying activities remains unknown, he used contacts in Austrian intelligence to investigate people likely to be of interest to the Russian state, while Wirecard also provided some payment services to German security services.

In 2017 Marsalek is said to have met a senior member of the Wagner mercenary group in Munich, before they flew to Syria for a sightseeing tour of Palmyra with Petlinsky, who said the Austrian guest was shown the correct technique for firing a rocket-propelled grenade towards positions held by Isis.

Certain relatives of Petlinsky are also said to have assisted Marsalek in attempts to protect Wirecard from scrutiny by the FT, whose reporting over several years exposed the group’s accounting fraud. According to The Insider, one relative oversaw a group of hackers targeting reporters, using the email address FTraid@gmail.com.

Wirecard collapsed into insolvency in June 2020 after it was forced to admit that €1.9bn in cash linked to its Asian operations did not exist, and Petlinsky is said to have orchestrated Marsalek’s subsequent escape.

The investigation said Marsalek flew from Vienna to Belarus, where he travelled into Russia and on to occupied Crimea, before the trail went cold.

According to British authorities, Marsalek continued to be useful. He is alleged to have directed the activities of six Bulgarian nationals resident in the UK who have been charged with spying for Russia.

Blackstone’s property fund meets redemptions for first time in over a year

Well . . . no, not really, but the deal still doesn’t make a ton of sense

Altice USA has a lot of debt. Like $25bn of net debt, or 6.7 times Ebitda.

This fact, in itself, wouldn’t normally be worth a blog post. But it provides helpful context for this week’s report that Charter Communications has been considering approaching Altice USA about a takeover.

The outlook for a deal warrants scepticism for a few straightforward reasons, argues CreditSights:

1) Regulators may not be eager for a tie-up of two companies with overlapping presences: Optimum Cable, owned by Altice, is a sizeable provider in the New York City area, as is Charter.

2) Any significant savings from a deal would first require “heavy upfront merger and integration costs,” so CreditSights analysts say they “would not be able to immediately bake in a chunky synergy number into our leverage and credit metric analysis” for their post-deal estimates, starting at $500mn.

3) Charter also has a lot of debt — $98bn — and the analysts say it’s “crucial” for the cable operator to keep an investment-grade rating on its $54bn of senior secured bonds.

But there’s another interesting wrinkle here.

The deal would need to be structured to avoid triggering change-of-control covenants on $17bn of Altice’s bonds, as Covenant Review points out in a separate note. (Both Cov Review and CreditSights are owned by Fitch Solutions.)

If all of the assets of the company are sold to people who aren’t “Permitted Holders” — ie billionaire Patrick Drahi and a handful of institutional investors/holdcos — and if a “person or group” ends up with more than 50 per cent of the voting rights, bondholders can redeem at 101.

This would be a hefty cost, to say the least, as Altice’s bonds were trading all over the map before the news (the lowest-rated were trading below 50c on the dollar before the deal).

It’s rare that a change-of-control clause acts as a significant barrier to a deal, but getting around this one could take a bit more effort than normal.

Charter would probably need to pursue a direct merger instead of pursuing the now-standard procedure of creating a subsidiary to buy it, says Covenant Review. That’s because a subsidiary would have more than half of Altice USA’s voting rights, whereas a merger directly into the parent would mean voting rights are distributed among Charter’s many shareholders.

That is doable, of course. But even if Charter jumps through that hoop, it still matters that both it and Altice USA have a lot of debt. (Have we mentioned that? There’s lots.) A tie-up could still easily breach other leverage covenants after completed, meaning it would still require bond redemptions. Covenant Review didn’t get too far into those, as it is also sceptical about the prospect of a deal going forward. This week’s report said it wasn’t clear if Charter had made any formal approach.

But until Charter “formally rules out M&A”, the CreditSights analysts write, “we think there may be a new floor for Altice USA bonds.” Good for them!?