FT : Dealmaking languishes at decade low on private equity drought

Dealmaking languishes at decade low on private equity drought
Worst third quarter for M&A since 2012 tops a dire year so far

Global dealmaking is languishing at a 10-year low as high interest rates chill private equity activity and a more hostile antitrust environment deters companies from pursuing rivals.

At $2tn, the value of merger and acquisition deals announced in the first nine months of the year was the lowest since 2013 and down 28 per cent on the same period in 2022, data from the London Stock Exchange Group shows.

The fall in big deals worth $10bn or more has been particularly stark, dropping 42 per cent over the first nine months of the year compared with the same period last year.

A slow start to the year was capped with the worst third quarter since 2012 with $616mn of deals.

US banks have retrenched as M&A has slowed from the post-pandemic frenzy of 2021. Worldwide investment banking fees have slipped 12 per cent from this time last year to $76bn, with fees for the third quarter at their lowest quarterly level since the start of 2016.

A trio of potential blockbuster deals unveiled since the start of September has raised hopes among bankers and lawyers of a revival in the market, as uncertainty around the economic outlook starts to lift.

“In the last two weeks I’ve received calls from big [strategic bidders] looking at multibillion transactions in their sectors, and those are phone calls I didn’t get six to 12 months ago,” said Bill Curtin, global head of M&A for the law firm Hogan Lovells.

Last week the US technology company Cisco agreed its largest ever acquisition, a $28bn deal to buy US software maker Splunk, while Norwegian classifieds business Adevinta confirmed it had received a non-binding approach from private equity houses Permira and Blackstone, pushing its enterprise value up to about $14bn including debt.

Earlier this month two of the world’s largest packaging companies, WestRock of the US and Ireland’s Smurfit Kappa, entered into a tie-up to create a global group worth almost $20bn.

“On balance boards feel they have managed the challenges of the last year and a half and are now focused on how to stay competitive and relevant for the next five to 10 years,” said Jan Weber, head of M&A for Europe, Middle East and Africa at Morgan Stanley.

But dealmakers warn they are not expecting activity to roar back. This is the second year in a row that global M&A declined by a double-digit amount, the first time that has happened since the aftermath of the financial crisis in 2008-2009.

“It’s hard to see any one big driver for a slew of upcoming M&A. While momentum is building, deals in the $1bn-$5bn territory are going to be the mainstay of the bigger-end of the market,” said JPMorgan’s co-head of M&A for Emea, Dwayne Lysaght. “People are still relatively inwardly focused.”

Interest rate rises and a tougher regulatory environment also make a rapid rebound challenging.

Higher rates have driven up the cost of borrowing to fund acquisitions. That has taken a particular toll on private equity buyers, an engine for M&A in recent years.

“Private equity activity levels are still down and that is primarily due to the debt financing markets and the cost of financing remain high, certainly compared to prior years when sponsor activity was much higher,” said Krishna Veeraraghavan, a partner at Paul Weiss.

PE transactions totalled $393bn so far this year, a 41 per cent decrease compared with the same period last year.

Would-be buyers have also been put off by a more muscular approach from antitrust regulators to acquisitions. Microsoft’s $75bn takeover of Activision Blizzard was initially blocked by the UK competition regulator, which only approved the deal after the terms were significantly reworked, while in the US, the Federal Trade Commission has launched a lawsuit challenging serial acquisitions by private equity firms on antitrust grounds.

“Most deals are being cleared despite the negative attitude of some regulators,” said Frank Aquila, senior M&A partner at Sullivan & Cromwell. But he added that getting the necessary antitrust approvals was still a challenge, as was financing.

“Tighter credit has led many buyers to increasingly tap the private debt market,” he said. That has made doing the largest deals more difficult because it is trickier to assemble such sizeable debt packages.

FT : National Grid explores paying UK households to turn down heating

National Grid explores paying UK households to turn down heating
Energy network operator to run a trial to reduce gas demand if shortages loom

Households in Britain could be offered payments to turn down their heating if needed to prevent gas shortages, under plans being considered by the UK’s biggest network operator. 

National Gas, which owns Britain’s main transmission network, is exploring plans for a similar scheme to one introduced for electricity customers last year after market turmoil triggered by Russia’s war on Ukraine. 

Under the proposals, households could volunteer to be offered payments to cut gas usage if shortages loomed, as one of many tools available to the network operator to help manage demand.

National Gas already has such a scheme for large industrial users, but any extension to households could be controversial given the importance of gas for heating homes and cooking food. 

The company, which is majority-owned by Australian bank Macquarie, expects to run a “small-scale” exercise this year to see if it is something it wants to introduce in the long term. 

Glenn Bryn-Jacobsen, head of energy resilience for National Gas, said: “We could end up in a situation where households can effectively say, ‘I’ll turn down my heating by two degrees today and make that saving’.”

But he cautioned the current effort was “more of an information gathering exercise to understand whether or not it should be part of any future balancing arrangements”.

The trial comes as energy network operators said Britain is heading into winter in a more resilient position than last year, but still warned energy shortages cannot be ruled out. 

Russia’s cuts to European gas supplies, combined with outages on France’s nuclear power fleet, threw energy markets into turmoil last year and led to warnings in the UK about blackouts.  

This year, the EU has managed to fill its gas storage sites to more than 90 per cent ahead of November, while EDF expects its French nuclear power stations to be running at much higher capacity. 

European supplies affect Britain because it relies on imports of gas and electricity at peak times, and also exports both back to Europe. 

National Gas has also revised up its assessment of the maximum amount of liquefied natural gas the UK can import in shipments from around the world, having seen the system operating close to capacity last winter. 

However, cold weather combined with the potential further loss of Russian gas to Europe could put the system under strain. 

“Whilst we are, collectively, in a better place than we were last year, it’s important to remain aware of the risks that are present,” Radley said.  

National Grid’s electricity system operator said it expects there to be “sufficient operational surplus” but warned “risks and uncertainties remain in global energy markets”. 

The ESO added it was able to take emergency measures such as planned, controlled blackouts in individual areas if needed to prevent uncontrolled shutdowns.  

The electricity operator also plans for the second year to have the option to call on households and businesses to cut their usage if needed at peak times to help manage the system. 

Under the “demand flexibility service”, households and businesses can voluntarily sign up to be paid by National Grid to cut usage for an hour or two, for example by delaying the washing machine, if shortages loom.

>>> US After Hours Summary: MU -4%, JEF -3.4% lower on earnings; PTON +16.8% pop

After Hours Summary: MU -4%, JEF -3.4% lower on earnings; PTON +16.8% pops on partnership with LULU; JCI -1.2% ticks lower on cybersecurity incident

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: None

Companies trading higher in after hours in reaction to news: GRTS +42.9% (awarded BARDA contract to conduct Phase 2b study for COVID-19 valued at up to $433 mln), PTON +16.8% (PTON and LULU announce partnership; PTON to become content provider for LULU, which will become primary athletic apparel partner to PTON), SLNO +4.2% (stock offering), FTI +0.8% (awarded large contract by EQNR for its Rosebank project), PTVE +0.6% (collaborating with XOM to provide packaging technologies to major food brands), TAK +0.6% (FDA approves subcutaneous administration of ENTYVIO), UBER +0.4% (names new CFO), UPS +0.4% (discusses automation improvements), LULU +0.3% (PTON and LULU announce partnership; PTON to become content provider for LULU, which will become primary athletic apparel partner to PTON; LULU to discontinue its Studio Mirror), PINE +0.1% (files for $350 mln mixed securities shelf offering)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: MU -4%, JEF -3.4%, NAPA -2.2% (also CEO to retire), CNXC -2% (also increases dividend)

Companies trading lower in after hours in reaction to news: OPRA -6.1% (ADS offering by pre-IPO shareholder), JCI -1.2% (reports cybersecurity incident), CTVA -0.5% (files suit against Inari Agriculture), INTC -0.1% (starts high-volume plant in Ireland), KRP -0.1% (unit offering by selling unitholders)

Reuters : Apple is ordered to face Apple Pay antitrust lawsuit

Apple is ordered to face Apple Pay antitrust lawsuit

Sept 27 (Reuters) - Apple (AAPL.O) was ordered on Wednesday to face a private antitrust lawsuit by payment card issuers accusing the company of thwarting competition for its Apple Pay mobile wallet.

U.S. District Judge Jeffrey White said the plaintiffs could try to prove that Apple violated the federal Sherman antitrust law by enforcing a 100% monopoly over the domestic market for tap-and-pay wallets for iPhones, iPads and Apple Watches.

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The Oakland, California-based judge also dismissed a "tying" claim, which accused Apple of requiring purchasers of iOS devices to buy Apple Pay or forego purchases of competing wallets.

Apple, based in Cupertino, California, did not immediately respond to requests for comment.

"We are happy with this ruling," Steve Berman, a lawyer for the plaintiffs, said in an email. "There are billions at stake so getting by the motion (to dismiss) largely intact was huge for the class."

The proposed class action is led by Illinois' Consumers Co-op Credit Union, and Iowa's Affinity Credit Union and GreenState Credit Union.

They said Apple "coerces" people who use its smartphones, tablets and smart watches into using its own wallet for tap-and-pay transactions, unlike makers of Android-based devices that let people choose wallets such as Google Pay and Samsung Pay.

According to the complaint, Apple's conduct forces more than 4,000 banks and credit unions that use Apple Pay to pay at least $1 billion of excess fees, and harms consumers by minimizing the incentive to make Apple Pay safer and easier to use.

White said the plaintiffs plausibly alleged that Apple allow alternatives to Apple Pay, and that more competition would spur innovation and reduce prices.

In seeking a dismissal, Apple said it charged "nominal" fees to even smaller card issuers, and that the plaintiffs ignored the "competitive reality" that consumers could still pay with cash, credit and debit cards, and other means.

European Union antitrust regulators accused Apple in May 2022 of abusing its dominance in iOS devices and mobile wallets. The regulators have since continued their investigation.

The case is Affinity Credit Union et al v Apple Inc, U.S. District Court, Northern District of California, No. 22-04174.

>>> Micron sliding lower after memory chip maker issues mixed guidance for Q1 (6

Micron sliding lower after memory chip maker issues mixed guidance for Q1 (68.21 +0.27)
  • MU has now posted back-to-back quarters in which it beat EPS and revenue expectations. Encouragingly, gross margin continues to trend in the right direction, coming in at (9.1%) compared to (16.1%) in Q3. That also surpassed the midpoint of its guidance of (10.5)% +/- 2.5%. The upward trend is also expected to continue with MU guiding for non-GAAP gross margin of (4.0%), +/- 2%.
  • Offsetting that good news was MU's soft Q1 EPS guidance of ($1.07), +/- $0.07, which fell short of expectations. It's also notable that CEO Sanjay Mehrotra's commentary wasn't as upbeat as it was in last quarter's earnings press release. Recall that Mr. Mehrotra provided a lift for the industry last quarter when he stated that the memory industry has passed through a trough in revenue and that PC and smartphone OEMs have largely worked through their inventory. This time around, he didn't really provide an update regarding the recovery of the memory market.
  • So far, fellow memory stocks Seagate Technology (STX) and Western Digital (WDC) are little changed in the wake of MU's report.

>>> US Close Dow -0,20% S&P +0,02% Nasdaq +0,22% Russell +0,98%

Closing Stock Market Summary
Stocks were seemingly poised for a rebound in the early going following sharp losses yesterday and this month. Equities started to fade, however, as oil prices and market rates moved higher. The major indices ultimately settled off their lows thanks to a mega-cap powered climb in the afternoon trade.
Notably, the afternoon improvement happened despite yields and crude oil futures remaining elevated. The 10-yr note yield, which fell to 4.48% on no news shortly before the stock market opened, settled seven basis points higher at 4.63%. The 2-yr note yield hit 5.04% overnight, but settled unchanged from yesterday at 5.14%. The U.S. Dollar Index rose 0.4% to 106.70.
WTI crude oil futures jumped 3.8% to $93.93/bbl, which stoked lingering concerns about inflation expectations, rising gas prices, and a slowdown in consumer spending. That move helped drive a 2.5% gain in the S&P 500 energy sector.
The next best performing sector was industrials (+0.8%) followed by communication services (+0.5%) and information technology (+0.2%). The rate-sensitive utilities sector (-1.9%) saw the steepest decline.
Despite the mixed index level performance, breadth was positive this session. Advancers had a roughly 11-to-10 lead over decliners at the NYSE and the Nasdaq.
Mega caps, semiconductor stocks, and growth stocks outperformed and helped support the broader market. The Vanguard Mega Cap Growth ETF (MGK) rose 0.1% after being down nearly 1.0%, the Russell 3000 Growth Index rose 0.2%, and the PHLX Semiconductor Index rose 1.0%.
Separately, the Russell 2000 paced index level gains (+1.0%) thanks to its energy components.
  • Nasdaq Composite: +25.1% YTD
  • S&P 500: +11.3% YTD
  • S&P Midcap 400: +2.3% YTD
  • Dow Jones Industrial Average: +1.2% YTD
  • Russell 2000: +1.0% YTD
Reviewing today's economic data:
  • The weekly MBA Mortgage Applications Index declined 1.3% with purchase applications falling 1% and refinance applications dropping 2%.
  • Total durable goods orders increased 0.2% month-over-month in August ( consensus -0.2%) following a downwardly revised 5.6% decline (from -5.2%) in July. Excluding transportation, durable goods orders were up 0.4% ( consensus 0.3%) following a downwardly revised 0.1% increase (from 0.5%) in July.
    • The key takeaway from the report is that orders for nondefense capital goods excluding aircraft -- a proxy for business spending -- were up a robust 0.9% month-over-month, rebounding from a 0.4% decline in July.
Looking ahead to Thursday, market participants will receive the following economic data:
  • 8:30 ET: Q2 GDP -- third estimate ( consensus 2.1%; prior 2.1%), Q2 GDP Deflator -- third estimate ( consensus 2.0%; prior 2.0%), weekly Initial Claims ( consensus 215,000; prior 201,000), and Continuing Claims (prior 1.662 mln)
  • 10:00 ET: August Pending Home Sales ( consensus -1.0%; prior 0.9%)
  • 10:30 ET: Weekly natural gas inventories (prior +64 bcf)

FT : UK regulator to launch review of private market valuations

UK regulator to launch review of private market valuations
Financial Conduct Authority will examine ‘disciplines and governance’ as concerns over potential blow-ups increase

The UK’s top financial regulator is preparing to launch a sweeping review of valuations in private markets, according to people familiar with its plans, amid growing fears over the impact of higher borrowing costs on the sector.

The Financial Conduct Authority’s exercise, which follows a major review of asset managers’ liquidity in the aftermath of last year’s UK bond market turmoil, will look at the “disciplines and governance” over valuations, one of the people said.

That includes looking at who within a firm is accountable for valuations, how information about those valuations is passed upwards to the relevant management committee and board, and what other governance procedures are in place, the person said.

The exercise, to be kicked off by the FCA by the end of the year, comes as global regulators grow increasingly uneasy about the potential for blow-ups in private assets and other markets following the abrupt reversal of more than a decade of low interest rates.

The International Organization of Securities Commissions (Iosco), a global securities watchdog, recently warned the $13tn global private capital sector was too complacent about the possible risks, highlighting valuations as one of a number of areas where vulnerabilities could emerge.

Private assets such as real estate and unlisted shares and bonds are often valued using models that are typically slower to respond to deteriorating market conditions than listed assets.

Assets are usually valued on a quarterly basis, meaning a sharp market correction may not feed through to the valuations for weeks, if not months.

Fund managers who invest in private markets typically have greater discretion over the valuation of their own assets because their holdings are not subject to the daily swings of public market sentiment.

If the FCA does not feel that the governance processes are robust, it can call out failures. If a firm does not respond to that then it can be ordered to make improvements, because valuations are “part of the risk environment” for regulated firms, the person added.

The second person said the review had not yet been fully scoped out and would not begin until later this year. The number and type of asset management firms involved has not yet been finalised, the person said.

The FCA declined to comment.

About 2,600 firms are in the UK’s £11tn asset management industry, with the FCA acting as their primary regulator. They include hedge funds, venture capital and private equity, as well as large institutional asset managers.

Richard Olson, a valuations expert at investment bank Lincoln International, said the FCA’s probe could be a “wake-up call”, that could push some funds towards outsourcing valuations.

An executive at a large institutional asset manager welcomed the review. “Private markets can’t just mark to their own models, there needs to be an independent verification process,” he said.

In July, the FCA sharply criticised asset managers’ liquidity management, warning that some firms’ plans to deal with large-scale redemptions “lacked coherence”, and ordered them to make improvements.

US regulators have responded to fears about private markets by ordering private funds to make more extensive disclosures about their performance and expenses, an initiative that has prompted a lawsuit from a coalition of private equity, venture capital and hedge funds.