FT : SEC disclosure changes press activists to reveal big stakes faster

SEC disclosure changes press activists to reveal big stakes faster
Investors with ‘control intent’ will have to report holdings over 5 per cent within five days

Hedge funds and other activist investors looking to sway US public companies will have to report large stakes they have built within five days rather than 10, in the first overhaul to disclosure timelines in decades.

The rules adopted by the Securities and Exchange Commission on Tuesday will apply to investors amassing stakes of more than 5 per cent in a company. The SEC said its reporting timelines for investors with and without the intent of influencing control of a business had not been amended since 1968 and 1977 respectively.

The rules, which come as the SEC heightens scrutiny of the ballooning private funds industry, will most heavily affect activist investors such as Elliott Investment Management and Trian Partners. Shorter deadlines could hamper such investors’ ability to build stakes above the 5 per cent mark in secret and diminish the profits they often gain once their positions become public.

The SEC said the updated disclosure process was aimed at informing investors and the market more quickly in the wake of technological changes that have swept across Wall Street in the intervening decades. 

“Frankly, these deadlines from half a century ago feel antiquated,” Gary Gensler, SEC chair, said in a statement. “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company.”

The agency has halved the deadline for investors with “control intent” to reveal a stake of more than 5 per cent to five business days. Such investors will have to file disclosure amendments within two business days, up from the one business day the SEC initially proposed. 

The rules have also shortened deadlines for investors with no “control intent”, such as qualified institutional investors. These must now report significant stakes within 45 days after the end of a calendar quarter rather than a calendar year. Passive investors, meanwhile, must make disclosures within five business days, down from 10.

The SEC said it would extend its “cut-off” filing times from 5:30pm to 10pm Eastern Time to “ease filers’ administrative burdens”.

Under the rules, investors crossing the 5 per cent threshold will now have to disclose all their interests in a company, including security-based swaps, which is how activist investors tend to build stakes secretly. 

Hedge funds warned that the rule would make activist investing less attractive because other investors would jump in and drive up the price of companies while funds were building their positions.

“The shortened deadlines will reduce market efficiency as investors now have less incentive to identify and fix mismanaged companies,” the Alternative Investment Management Association said.

But Stephen Hall, legal director and securities specialist at Better Markets, a financial reform advocacy group, on Tuesday said the final rule was a “welcome step” that would “increase transparency and fairness for all market participants”.

FT : Lower sales of spirits and handbags hit LVMH growth

Lower sales of spirits and handbags hit LVMH growth
World’s biggest luxury group says it remains confident despite ‘uncertain’ environment

Sales growth at luxury conglomerate LVMH slowed in the third quarter, as demand for handbags moderated and that for spirits fell after several years of stellar growth.

The French group, controlled by Bernard Arnault, said sales grew 9 per cent in the third quarter to €19.9bn, down from a 17 per cent rise in the preceding quarter, reflecting softer luxury sales worldwide, notably in the US and Europe.

Sales in Asia excluding Japan grew at 11 per cent in the quarter, down from 34 per cent in the previous three months, while the US continued the trend of low single-digit growth from earlier in the year as aspirational consumers pulled back on spending. In Europe, most countries were now growing in the mid single-digit range, according to LVMH chief financial officer Jean-Jacques Guiony.

Guiony said there had been “no marked change in the business we do with the Chinese clientele” in the most recent quarter, but he noted that people were travelling abroad more and could be shopping there.

However in Europe he said “we’ve seen slight drops in the third quarter compared to mid single-digit growth in the first half of the year . . . time will tell, depending on the depths and lengths of the cycle, whether it was a [change] in consumption or merely a blip after three extraordinary years”.

Sales at LVMH’s fashion and leather goods division — its biggest — grew 9 per cent in the third quarter, a slower pace than the 21 per cent growth in the second quarter. Selective distribution, which includes travel retail and Sephora, had the fastest growth at 26 per cent this quarter.

However, wines and spirit sales fell 10 per cent, which LVMH said was linked to a post-Covid normalisation of demand and the tougher economic environment in the US, particularly for cognac sales. 

“In an uncertain economic and geopolitical environment, the group is confident in its continued growth . . . LVMH is counting on the dynamism of its brands and the talent of its teams to further strengthen its lead in the global luxury market in 2023,” the company said.

The headline figure comes in below Visible Alpha’s consensus estimate of 11.5 per cent sales growth in the quarter for LVMH, which owns 75 brands ranging from fashion houses Louis Vuitton and Dior to beauty retailer Sephora. 

LVMH is the luxury industry’s biggest group by far and regarded as a bellwether given its size and influence. Luxury companies had already reported a slowing pace of growth in the US, the industry’s largest market, last quarter. Tighter economic conditions in China, which has been the motor for the luxury industry’s record sales from early 2020 onwards, have also set the stage for the sector to experience more moderate growth.

“We expect a broad-based growth normalisation in the third quarter, with demand from European locals normalising, and less support from tourism flows,” wrote analysts at HSBC. “The performance in the US is unlikely to have improved despite facing an easier basis of comparison.

“China is [also] facing a tougher basis of comparison, and the macro environment is unsupportive, likely leading to a sequential slowdown,” they warned.

“Contrary to past quarters such as Q2, where the sluggishness in the US was more than offset by a rebound in China, this time we do not see any compensating factor; but rather, a broad-based normalisation of growth across all geographies,” HSBC wrote. 

Shares in LVMH have risen around 20 per cent in the past 12 months despite falling by around 12 per cent in the past half year, as investors worried the luxury boom had faded.

FT : Private equity groups face investor scrutiny over tactics for returning cap

Private equity groups face investor scrutiny over tactics for returning capital
LPs worry that use of NAV and margin loans relies on financial engineering rather underlying portfolio performance

Investors are stepping up scrutiny of private equity firms’ use of debt and complex financial engineering to generate returns from companies they own, demanding disclosure about the costs and risks.

Private equity groups have been increasingly using margin loans and net asset value financing — secured against shares in their listed companies or their asset portfolios — to boost returns and fund distributions to investors, after a slowdown in dealmaking reduced their options for selling businesses on.

But some investors worry they have tilted returns too far towards financial engineering, rather than companies’ underlying performance.

The Institutional Limited Partners Association, an industry body representing private equity investors, is examining borrowing strategies and drafting detailed recommendations. These will call for the industry to provide justification for the loans and more disclosure of their costs and risks to investors, said two people familiar with the details. 

Advisers to large investors have also been checking contracts to assess whether they can stop firms from using NAV loans to return cash to investors without their consent, other people close to the situation told the Financial Times.

Investors have also begun demanding restrictions that force firms to seek approval for such borrowing when they raise a new fund, the people said. 

In July, the FT reported private equity firms including Vista Equity Partners, Carlyle Group and Hg Capital had used NAV loans to finance cash distributions to investors.

“I’ve heard a lot of reasons why [using NAV loans] has created a lot of concern,” said Andrea Auerbach, partner at Cambridge Associates, a US group that advises institutions on private investments.

“One of my concerns is that this will become a part of the fund management toolbox,” she added, noting the rise in NAV financing could make it harder for investors “to understand the percentage of the return that comes from fund finance versus the actual investment return”.

In addition to NAV loans, private equity firms are also using margin loans to raise cash. According to securities filings reviewed by the FT, many of the industry’s biggest names, including Blackstone, Apollo Global, Warburg Pincus, and General Atlantic, have taken out such loans in recent years.

A margin loan involves pledging shares to a bank as collateral for a loan. In the private equity industry, this typically amounts to 20 per cent of the total shareholding. The cash is then distributed to investors, creating an investment gain without selling stock.

Generally, private equity firms earn profits for their investors by listing or selling businesses. But this can be a slow and volatile exit pathway, while selling down shareholdings can take years and depress the price.

Margin loans can improve an investment’s internal rate of return by realising profits more quickly and can have tax benefits, said executives working on such transactions.

But they can also be risky because a large share price fall can trigger a collateral call, something buyout firms are not well set up to deal with.

Blackstone, the world’s largest private equity firm, has been a major user of margin loans in recent years. Securities filings show that in 2021, it pledged all of its shares in dating app Bumble, which it listed the same year, to secure an $860mn loan from Citibank to return capital to investors.

After Blackstone took out the loan in June 2021, Bumble’s shares dropped from nearly $60 per share to just over $30 by the end of the year, before falling further.

A disclosure this March showed Blackstone had sold millions of Bumble shares and repaid some of the loan, leaving it with outstanding borrowing from Citi of $455mn. Bumble’s stock has fallen more than 40 per cent since early March.

Other firms are common users of margin loans. Over the past six years Apollo has borrowed against shares in five companies it listed, including ADT, Rackspace, Hilton Grand Vacations, TD Synnex and OneMain Financial, according to securities filings.

Since Apollo borrowed against all of its Rackspace shares in December 2020, the software company’s stock has fallen more than 90 per cent.

Blackstone and Apollo declined to comment.

While margin loans have been used by the industry for more than a decade, bankers and lawyers who spoke to the FT said they are being used more frequently to allow firms to extract cash from investments they do not want to sell or cannot sell at a profit.

“I have seen a pick-up of margin loans over the past six months,” said one private equity adviser, adding that firms were using the loans in part for “distributions for [investors]”.

Some industry executives consider margin loans too risky. “I told our team, don’t do that,” the managing partner at one large private equity firm said. “It is a real short-term opportunity.”

Another executive said: “I don’t think it would be attractive to do this, unless you have a burning desire to return capital.”

FT : Czech minister warns over attacks by newspaper co-owned by Daniel Křetínský

Czech minister warns over attacks by newspaper co-owned by Daniel Křetínský
Jozef Síkela accuses billionaire of using his media assets to criticise government’s acquisition of gas pipeline operator

The Czech energy minister has warned that attacks on him by a newspaper owned by the billionaire Daniel Křetínský should raise questions about how the businessman uses his media assets in other countries.

Jozef Síkela told the Financial Times that he found it “strange” that Blesk newspaper had run a series of stories criticising the Czech government’s acquisition of NET4GAS, a gas pipeline operator that Křetínský’s EPH Group had also bid on.

“If [Křetínský and his business partner Patrik Tkáč] will act in the same way also in the countries where they have a business and they own some media . . . It will be an interesting question for me,” he said.

Křetínský, who built up his fortune in the energy business, made record profits last year as a result of Europe’s gas crisis and has been expanding his empire into media and retail.

The Czech tycoon sold his stake in Le Monde last month but still owns several radio stations and magazines, including Elle.

He has recently expressed interest in buying the UK’s Daily Telegraph, the Financial Times has revealed.

EPH Group said: “We strictly and unequivocally reject the accusations made by minister Síkela. We fully respect the independent editorial policy; we do not determine topics but will not suppress them either.”

“The media’s interest in the suspicious purchase of gas pipelines is certainly not determined by the ownership structure but by a natural curiosity about this massive state deal,” added Martina Říhová, chief executive of Czech News Center, publisher of Blesk.

Opposition politicians and other media, including the website newstream.cz and weekly Echo24, have also criticised the deal.

NET4GAS was bought by the Czech government through the state-owned energy company ČEPS for about €205mn plus debt in September. The company declared pre-tax profits of about €314mn in 2022 on €5.3bn revenue. It reported €13.6bn debt.

Following the completion of the sale, Blesk ran several stories criticising Síkela for overspending on the indebted energy business, putting taxpayers on the hook for billions of Czech koruna due to the structure of the transaction.

Other bidders, including Křetínský, offered significantly less than the government for the energy business, according to one person close to the deal.

Blesk is the Czech Republic’s best read daily newspaper selling more than 600,000 copies per day on average, according to the Czech media agency MediaGuru.

Síkela defended the deal as being crucial for the Czech Republic’s energy security.

The country has historically had one of the most liberalised energy markets in the EU, which the government feared could be weaponised following Russia’s full-scale invasion of Ukraine.

NET4GAS operates about 4,000km of pipelines transporting gas to and from Germany and Slovakia and into the Czech Republic for domestic use.

It previously had a contract with Gazprom that accounted for about three-quarters of its prewar revenues but the Russian energy group stopped making payments in January.

Síkela said private ownership of the pipeline network made it vulnerable to similar moves.

“I want to act in the best interest of Czech people. The best interest of the country must not be the same as the best interest of billionaires,” he said.

Simone Tagliapietra, senior fellow at the think-tank Bruegel, said that several EU governments had intervened in energy markets as a result of the crisis.

But, he warned, deals should “remain limited to matters of clear national security concern, so not to disrupt the efficient allocation of resources that markets can provide”.

EPH previously bid for NET4GAS when it was sold by the German utility RWE in 2013 but was outbid by the German insurer Allianz and Canadian pension fund OMERS.

FT : US auto salvage industry braces for impending bounty of junk EVs

US auto salvage industry braces for impending bounty of junk EVs
Companies that wrench apart and shred old cars prepare for ‘fundamental shift in recycling’

The electrification of the auto industry affects more than the workers and companies that build cars. It ripples out to the ones wrenching them apart.

The auto salvage and scrap industries have spent decades processing petrol-powered cars, harvesting pieces from camshafts to hubcaps for resale as spare parts or scrap metal. Now they are contemplating how to process a wave of battery-powered cars when they reach the end of the road. 

Volumes of EVs being recycled are small. Besides the odd Nissan Leaf that turns up, most models have years of life left. EVs comprised just 9.1 per cent of US new car sales in the second quarter of this year.

But as EVs sales grow, they will gradually change flows into salvage yards. About 5 per cent of the 285mn cars on the US roads reach their end of their lives each year. 

Auto salvage is a fragmented industry, with players ranging from family-owned businesses to publicly traded companies valued in the billions. Among the bigger companies are Copart and Insurance Auto Auctions, which auction off junked cars; LKQ, which sells salvaged parts to repair shops and retail customers; and Boyd Group Services, which buys from companies such as LKQ to supply their network of collision repair shops. Together those four companies brought in more than $21bn in revenues last year. 

EVs will require salvage businesses to find new buyers for the battery, the most valuable part of the vehicle, and develop new ways to determine its vigour and safely handle it.

Since the bulk of the value of an EV was contained in the battery, it “leads to potential different market dynamics” in recycling them, said John Kett, a former chief executive of IAA. Auction houses might sell batteries separately from old cars for use in new purposes like powering appliances. 

“It’s going to be a fundamental shift in recycling,” Kett said. “What the process is going to be, it’s not defined yet. It’s a lot of people trying a lot of different things.”

It takes about two decades to turn over every car on US highways, so the question of how to handle batteries is not urgent. Still, executives are thinking about it. This year LKQ signed a memorandum of understanding with Seoul-based smelter Korea Zinc. The plan, said chief executive Dominick Zarcone, was to “work towards a potential large-scale joint venture” to recycle EV batteries.

“This is not a play for 2023 or even 2025 for us,” he said. “This is a 10- to 15-year play . . . The combination of their ability and process technology on the one hand, with our ability to source cores and batteries on the other hand — it could be a great partnership.”

US salvage companies might learn lessons from Norway, where nearly four in five new cars sold last year were electric, the highest share in the world. Tom Grønvold, chief executive at salvage company Grønvolds Bil-Demontering in the Scandinavian country, said the first electric wreck showed up at his yard eight years ago and they now constituted 12 to 15 per cent of his volume. His company advertised to find buyers for batteries that could be converted to power agricultural equipment or boats.

EVs, with fewer moving parts, generally undergo less wear and tear than internal combustion vehicles. But Grønvold said they still generated demand for salvaged parts.

“We were told that these electric engines that they would never break because they would run very easy, but it turns out, especially on the first ones, they break also,” he said.

Companies that already process junked cars were well positioned to play a role in handling batteries, said Jefferies analyst Bret Jordan. Specialist battery recycling specialists such as Redwood Materials and Li-Cycle needed to secure a steady supply, particularly when the main source of EV batteries became old cars rather than duds from battery-makers’ assembly lines.

“At the end of the day, it’s going to be the people who have the ability to collect and distribute and sell those cars,” he said. “They physically have the yard space and the buyer network . . . The guys who are doing the actual grinding down and doing the refining of the component parts aren’t in the business of running 17,000 acres of auction yard like Copart is.”

But EVs require changes in how auto salvage yards operate. Jonathan Morrow, chief executive of M&M Auto Parts in Virginia, said that EVs were physically separated from other cars in the yard to reduce the risk of fire and marked with a sticker to indicate it was not safe to yank parts from them. When it is time for disassembly, technicians use grounded tools to reduce the risk of electrocution.

Morrow, the third generation of his family to run the business, said that relatives had worried in the past that changes to vehicle construction might make cars and trucks harder to repair, dampening the market for salvaged parts. So far their worries have not come to pass.

“Now we’ve come to this EV crossroads,” he said. When the auto industry shifts, “we have about 10 years to truly transition our business models”.

The end of the line for retired vehicles is the scrap metal market. EVs “definitely present a different opportunity”, said Steve Skurnac, interim chief financial officer of metal and electronics recycler Sims Ltd. While many petrol-powered cars were 60 per cent steel, EVs contained more aluminium and copper, which is harder to extract than shredding a car and selling the resulting ferrous scrap to a steel mill, Skurnac said.

“It raises costs if you have to spend more time taking things out rather than chucking it all in a shredder,” Skurnac said. “However, you’re dealing with much higher value materials, so that hopefully is what’s driving the economics.”

Sims’s feedstock would continue to be traditional cars for the better part of the decade, Skurnac said, but “as the tide turns, we will have to understand how we’re going to participate in that end-of-life electric vehicle marketplace”.

Morrow, too, is thinking about the future. Despite the difficulty of change, businesses in auto salvage “are going to see it through. Sticking our nose in the sand like an ostrich is not going to work”.

>>> US After Hours Summary: NVO +2.8% to stop kidney related FLOW trial; AZZ +4.

After Hours Summary: NVO +2.8% to stop kidney related FLOW trial; AZZ +4.4% higher on earnings; ETWO -11.9% lower on earnings

After Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: AZZ +4.4%, LUNG +1.5% (also CFO steps down; co guides Q3 revs above consensus)
Companies trading higher in after hours in reaction to news: VOXX +10.4% (GNTX to purchase 15.1% stake in VOXX from Avalon Park), SANA +5.3% (to increase focus on Hypoimmune-Related Pipeline), NVO +2.8% (to stop kidney related FLOW trial, FLOW, based on interim analysis), THO +2.2% (increases dividend), IVZ +1.7% (reports Sept AUM), SILV +1.5% (provides Q3 operational results), VKTX +1.2% (to highlight data from Phase 1 trial of VK2735), BEN +0.8% (reports Sept AUM), LSCC +0.1% (FPGAs chosen for Mazda's new CX-60 and CX-90 models)

After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: SILK -34.4% (guides Q3 and FY23 revs below consensus; also CEO to retire), ETWO -11.9% (also CEO steps down), RYAM -0.2% (outlines financial growth strategy during its Investor Day)
Companies trading lower in after hours in reaction to news: DVA -11.8% (possibly related to NVO news), MOB -11.2% (files for $50 mln mixed securities shelf offering), HYLN -8.4% (hires advisors to explore options for its powertrain business), PSNY -6.9% (files $1 bln mixed shelf offering), NOG -3.4% (stock offering), IRON -2.3% (to sell up to $59.7 mln of its common stock), OBIO -1.9% (stock offering by selling shareholders), NGMS -1.2% (issues statement regarding Israel: entire business in region continues to operate normally), SNX -1% (stock offering by selling shareholders; also announces 6.75 mln share offering by Apollo, authorizes repurchase of 2.75 mln shares as part of offering), DHT -0.4% (provides business update for Q3), CSCO -0.3% (names PYPL exec to its board), HON -0.1% (to work with GranBio Tech on clean aviation fuel)

>>> US Close Dow +0,40% S&P +0,52% Nasdaq +0,58% Russell +1,14%

Closing Stock Market Summary
The stock market closed with gains, bolstered by lower market rates, lower oil prices, and a weaker dollar. Those factors rose to the forefront in the absence of worst-case scenarios unfolding in the Israel-Hamas conflict.

The major indices spent most of the morning rising steadily, but dipped from their highs around 1:00 p.m. ET. That move coincided with Apple (AAPL 178.39, -0.60, -0.3%) and Microsoft (MSFT 328.39, -1.43, -0.4%) taking a turn lower and a $46 billion 3-yr note auction that was met with some relatively soft demand.

The 2-yr note yield settled seven basis points lower at 4.99% and the 10-yr note yield fell 12 basis points to 4.66%. These moves were partially a safe-haven bid related to the Israel-Hamas conflict, but they were also being fueled by a technical rebound from an oversold position. Gains in the Treasury market were also supported by assumptions that the jump in long-term rates has effectively tightened financial conditions enough to leave the Fed inclined to keep its policy rate on hold at the October 31-November 1 FOMC meeting.

The U.S. Dollar Index fell 0.3% to 105.76 and WTI crude oil futures fell 0.6% to $85.89/bbl.

Many stocks participated in today's rally, as evidenced by a 0.8% gain in the Invesco S&P 500 Equal Weight ETF (RSP). The market-cap weighted S&P 500 closed with a 0.5% gain. Ten of the 11 S&P 500 sectors closed with a gain while the energy sector (flat) closed just below the unchanged mark. The utilities (+1.4%), consumer discretionary (+1.1%), materials (+1.1%), and consumer staples (+1.1%) sector all jumped more than 1.0%.

The consumer staples sector was partially supported by a gain in PepsiCo (PEP 164.40, +3.04, +1.9%) after its better than expected earnings report and outlook.
The Russell 2000 was a relative outperformer, rising 1.1% today, which brings the index back into positive territory for the year (+0.8%).

Today's economic data featured the September NFIB Small Business Optimism survey, which fell to 90.8 from 91.3 in August, and the August Wholesale Inventories report, which reflected a 0.1% decline ( consensus -0.1%) following a revised 0.3% decline in July (from -0.2%).

  • Nasdaq Composite: +29.6% YTD
  • S&P 500: +13.5% YTD
  • S&P Midcap 400: +2.8% YTD
  • Dow Jones Industrial Average: +1.8% YTD
  • Russell 2000: +0.8% YTD

Looking ahead, Wednesday's economic calendar includes:
  • 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -6.0%)
  • 8:30 a.m. ET: September PPI ( consensus 0.3%; prior 0.7%) and core PPI ( consensus 0.2%; prior 0.2%)
  • 2:00 p.m. ET: September Treasury Budget (prior $89.2 billion) and FOMC Minutes from September 19-20