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French group benefits from uptick in military spending

French aviation and defence electronics group Thales expects supply chain problems to hold back growth again this year, despite it having a record high order book as countries boost military spending to face rising geopolitical tensions. 

“Last year was a bumpy journey in terms of managing the supply chain, particularly in our defence business, and it is hard to predict if we will see significant progress on the matter,” said chief financial officer Pascal Bouchiat on a call to investors.

The Paris-based maker of radar systems for civil and military aircraft, satellites and drones, cited printed circuit boards and hardware as two areas where its own suppliers were struggling to produce enough. 

The group forecast “mid-single digit” growth for its defence and security business this year — its largest and most profitable unit — although Bouchiat said given its record high order book at €45bn it could have delivered at a quicker pace if supply chain problems were not an issue. 

Thales benefited last year from both the recovery in commercial aviation after the trough of travel during the Covid-19 pandemic and a ramp up in military spending in the US and Europe sparked by the war in Ukraine. It has also been expanding via acquisitions in the cyber security market, and remains interested in deals.

It reported that operating profits were 11 per cent higher at €2.1bn last year, while sales rose by 8 per cent to €18.4bn, slightly ahead of expectations in a company-compiled consensus. Next year, Thales predicted comparable sales growth of 4 to 6 per cent. 

The company’s order intake stood at €23.1bn in 2023, roughly stable from the previous year. It will raise its dividend to €3.40 per share, up from €2.94 in 2022, but Bouchiat said it did not plan to immediately extend a share buyback programme that will expire this month given other demands on its cash such as pensions charges.

Thales’s shares were up 8 per cent in midday trading on Tuesday, reaching record highs.

“Strong orders bode well for growth and cash beat is always appreciated,” Citi analysts wrote in a note.

To keep up with demand, Thales has been on a hiring spree to add about 11,500 people in 2022 and 10,900 in 2023, but will temper the pace this year to around 8,500. The hiring slowdown can be attributed to lower attrition with more employees choosing to stay. 

Some 1,300 job cuts are planned at the Thales Alenia Space unit because of a reduction in demand for telecommunications satellites, although some employees will be offered other posts in the group. The market for large satellites in geostationary orbit has dropped to about half to 10 a year, the company said, because of technology changes to smaller satellites. 

Airbus, the other European maker of large satellites, has also reported pressure on this part of its business and took €600mn in impairment charges on it in mid-February.

Thales supplies electronics for Dassault Aviation’s Rafale jet, as well as communications equipment for armies, radars for surface-to-air missiles, and shoulder-fired missiles known as NLAWs that have gained in popularity on the battlefield in Ukraine.

Thales’s shares are up about 80 per cent since February 2022, compared with a 32 per cent rise for the MSCI global aerospace defence index and a 13 per cent rise for the French blue-chip CAC 40 index.

Deal would remove another UK-listed business from London market

US technology specialist Viavi Solutions has made a £1bn takeover offer for telecoms testing group Spirent Communications, in a deal that would remove another UK-listed business from the London market.

The US company on Tuesday offered 175 pence per share for Spirent, a 61 per cent premium to the closing price on Monday.

Oleg Khaykin, chief executive of Viavi, said the deal would “deliver enhanced product solutions and applications, accelerate growth in new markets and strengthen innovation through expanded engineering and design capabilities”.

If the deal goes ahead, Spirent would be the latest company to delist from London. Flutter, the gambling group that owns Paddy Power, said in January that it was planning to move its primary listing to New York, while shareholders in Tui, Europe’s largest travel company, last month overwhelmingly approved its proposal to ditch its London listing.

Other companies including miner BHP, building materials group CRH, packaging business Smurfit Kappa and plumbing supplier Ferguson have already left.

Nasdaq-listed Viavi provides network testing and monitoring to industries including telecommunications, the military and aerospace. Spirent also tests 5G and WiFi networks, “internet of things” devices and cloud computing networks.

The deal will be funded by the US group’s existing cash, a $800mn loan from Wells Fargo and a $400mn investment in Viavi by US private equity group Silver Lake.

Khaykin said Silver Lake had an “outstanding track record” of supporting technology companies through organic growth investments and acquisitions. Ken Hao, Silver Lake chair and a managing partner, will join Viavi’s board as part of the investment.

Sir Bill Thomas, chair of Spirent, said its board intended to unanimously recommend the offer.

Spirent shareholders will receive 172.5p per share in cash and a special dividend of 2.5p per share in lieu of a final dividend.

Spirent chief executive Eric Updyke said the company had “endured significant challenges due to the macro backdrop” and that these conditions were “likely to continue for some time”. He added the deal brought “together a highly complementary product offering, which can be marketed globally”.

The FTSE 250 company on Tuesday also reported an 80 per cent drop in reported profit before tax to $22.9mn in 2023. It said inflation and higher interest rates had hit customer demand.

Viavi added it expected operational efficiencies from the deal, which is anticipated to close in the second half of the year, subject to shareholder approval and other conditions.

Monzo secures $5bn valuation as it prepares return to US

London-based digital bank raised $430mn from investors including CapitalG and HongShan

Monzo has secured a fresh round of funding that has boosted its valuation to $5bn, as the London-based fintech prepares a second attempt to break into the US market.

The digital bank on Tuesday confirmed it had raised $430mn from new and existing investors in a fundraising led by Alphabet’s investment fund CapitalG. HongShan, the Chinese venture capital investor that split from Sequoia Capital last year also contributed, alongside existing backers including Tencent and Passion Capital.

The raise values Monzo more richly than the $4.5bn price tag it secured in 2021 from investors including Tencent, the Abu Dhabi Growth Fund, Coatue and Accel. The valuation bump comes as higher interest rates and weakening investor confidence have led many other high-profile start-ups to suffer significant down rounds in the past two years.

“Banking is still in the infancy of its transformation and we are seen as an outlier in pole position to win,” said chief executive TS Anil. “I think of this as a race to transform how customers interact with their money, to win at a global scale.”

Those leading the round “are sophisticated global tech investors, very discerning”, he added. “Through much of last year inbound interest was incredibly strong, so towards the end of the year we decided to crystallise it.”

Anil said the capital would allow Monzo to crack the US market after a previous foray was curtailed when US regulators told the company it was unlikely to receive a banking licence, prompting it to retreat in 2021.

The fintech last year hired a new US chief executive and has announced plans to re-enter the US, this time via a banking partnership that will allow it to bypass a licence application.

“We feel like we have earned the right to dream bigger and invest in the US as well,” Anil said. “American banking is ripe for reinvention and the American customer needs a Monzo-like product, a financial control centre that helps them manage their money.”

Anil also hinted at later plans to expand in European markets including Germany and France. “There are large, large revenue pools in banking and customers are massively dissatisfied [in Europe],” he said. “I’ve always believed that some of the most exciting innovation happens at the intersection of those two things.”

The latest funding round marks a stark reversal in fortunes for the start-up, best known for its bright coral-pink cards. In 2020 and 2021 as earnings from card transactions plunged during the pandemic, its auditors warned of a “material uncertainty” over its ability to continue to operate as a going concern. At that time the Financial Conduct Authority also opened an investigation into potential breaches of anti-money laundering laws.

While Monzo made a pre-tax loss of £116mn in 2023 — largely because of a surge in loan impairments stemming from the rapid growth of its buy now, pay later product — Anil said he expects to turn a profit this year.

While the $5bn valuation is far less than the $33bn UK rival Revolut achieved in 2021, Monzo has steadily worked through its issues and has a full banking licence. Revolut, by contrast, is still going through a protracted and distracting saga as it attempts to gain a licence from UK regulators.

Anil said it was still “too early” to talk about the timing and location of a potential public listing. The issue is a fraught topic in the UK after many unicorn start-ups opted to list in the US, where market liquidity is greater and valuations often higher.

The chief executive, who took over from founder Tom Blomfield after he stepped down in 2020, said Monzo had been approached by smaller rivals hoping to be acquired.

“We are operating from a position of strength . . . our organic strategy is working but we are open to M&A,” he said.

High mortgage rates are creating a void for all but the wealthiest home buyers in the city

More than two-thirds of home sales in New York last quarter were cash purchases, a record, as high rates on mortgages deter all but the richest buyers.

As mortgage rates hover around 6 per cent, nearly 70 per cent of New York City homes purchased in the final quarter of 2023 were bought without a mortgage, according to Pamela Liebman, the chief executive of real estate brokerage Corcoran. Cash purchases jumped from just 55 per cent of transactions in the same period in 2022.

“High mortgage rates are creating a real void for people who don’t have the strong finances that are required to buy in cash,” she said in an interview with the FT.

“It’s driving people who would be home buyers in New York into renting.”

A Corcoran report found a 4 per cent increase in new leases in Manhattan and Brooklyn in January of 2024 compared with the previous year, while rents rose to an all-time median high of $3,950.

“It tells me that people are not willing to take on a certain level of debt in mortgages,” Liebman said. The high cost of borrowing for homebuyers had created a “void in the middle” of the property market, she said, as the rich got richer, while buyers who could not pay cash were sidelined as rents in the city continued to climb.

“Part of it is psychological, because everyone thinks rates are going to come down. So they’d rather pay cash now and refinance later,” she said.

The median sales price for a Manhattan apartment was $1.15mn in the fourth quarter, according to real estate agency Douglas Elliman. That was up 5 per cent from the same period a year earlier, and approaching the record $1.25mn median sales price reached in the second quarter of 2022 — just as the Fed was beginning to raise interest rates.

Buying in the city has slowed as a result. Liebman contrasted the market with more affordable cities such as Charlotte, North Carolina, where she said homes sold in days, often in a bidding war. But in New York, some of the best properties coming to market are now sitting for months. Last year, the US saw fewer than 4mn property transactions, down from a pandemic peak of 6mn, which is “not a good thing”, Liebman said.

Thomas Ryan, property economist at Capital Economics, said that despite a slight uptick in transactions in January the housing market across the US was “still practically frozen”, with transactions considerably lower than the 5.1mn average in the 2010s.

Cash purchases had already been on the rise in certain competitive markets in the US before interest rates began to rise, said Erin Sykes, a real estate agent in New York and Miami and economist for Nest Seekers.

“So many were in cash before because they needed to win the bidding wars and you couldn’t win with the loan contingency,” Sykes said. “So they would buy in cash and then get the loan afterwards.”

But the cash purchases in this higher mortgage rate environment were more opportunistic, she said. “The people aggressive enough to do a transaction now are the people who have liquidity or move counter to the market. They’re not afraid because they see the opportunity to make deals and get in at a lower price.”

Challenges facing buyers in New York have been exacerbated by a chronic shortage of housing that developers have blamed, variously, on regulations that have limited landlords’ ability to increase rents as well as the lapsing of a decades-old tax incentive that underpinned many new buildings. New residential construction project permits also fell sharply last year, according to the Partnership for New York City, down 55 per cent in the final quarter of 2023 from the same quarter of 2022.

Among other remedies, Mayor Eric Adams has supported the idea of converting obsolete office buildings into residential towers. But that is a technically challenging and costly endeavour that may yield a limited number of new apartments, according to architects and developers.

New York’s property supply crunch has brought vacancy rates down from almost 4.5 per cent in 2021 to 1.4 per cent, below the pre-pandemic rate of 3.6 per cent, according to the New York City Comptroller.

“The affordability in New York is rough right now,” Liebman said. “It’s taking a lot of people out of the market.”