Virgin Media O2 buys Russian-backed broadband provider
Investment company LetterOne was forced to sell the business on national security grounds
Virgin Media O2 has struck a deal to acquire UK broadband provider Upp that oligarch-backed investment company LetterOne was forced to sell on national security grounds.
The UK telecoms group will initially buy the business before selling it on to a joint venture called Nexfibre between its owner Liberty Global, Spain’s Telefónica and InfraVia Capital Partners within the next year.
The British government ordered the sale of Upp late last year after deciding LetterOne’s ownership of the company was a “risk to national security”.
LetterOne is not the subject of sanctions but some of its founders, including Russian oligarchs Mikhail Fridman and Petr Aven, have been under sanctions in various jurisdictions.
Proceeds from the sale of the business, which was announced on Wednesday, will not go to any individual under sanctions. The deal has been struck in the “high tens of millions of pounds”, according to people familiar with the terms, although the companies declined to provide a value.
LetterOne moved swiftly to sever links to its owners, including freezing their shares and dividends, after Russia invaded Ukraine, to prevent similar action against the investment company.
LetterOne acquired Upp in 2021 with plans to create a £1bn broadband network to compete with BT. LetterOne has continued to invest in the business despite the sanctions on some of its founders, but was taken by surprise with the order to sell the business last year.
The order was one of the few uses so far of the UK’s National Security and Investment Act, which came into effect last year. The government has told Upp to complete a security audit of the broadband network prior to sale.
LetterOne said: “We strongly disagree with the government’s decision to force the sale of Upp and we will continue to challenge it. But we have always been committed to safeguarding the future of Upp.”
The deal is one of the first big signs of consolidation among “altnet” broadband providers by the large infrastructure groups that many analysts have been predicting.
Upp has about 4,000 retail and business customers and offers broadband services to about 175,000 premises in the east of England.
Virgin Media O2 and Nexfibre said that more than £350mn would be invested to build out the network to more than 500,000 premises by 2026.
Lutz Schüler, chief executive of Virgin Media O2, said that it and Nexfibre had a “clear strategy in place to be the biggest fibre challenger in the country, offering greater choice and competition to the BT status quo”.
- Siemens Energy (ENR TH) +1.9%
- Siemens Energy Rated New Overweight at Barclays; PT 19 euros
- Alten (AN3 TH) +0.9%
- Air Liquide (AIL TH) +0.7%
- Telefonica Deutschland (O2D TH) +0.5%
- Lufthansa (LHA TH) -0.7%
- Bechtle (BC8 TH) -0.7%
- Axa (AXA TH) -0.8%
- BP (BPE5 TH) -0.9%
- Saudi Cut Extension Beats Expectations, Reinforces Price Floor
- FUCHS SE (FPE3 TH) -1.4%
- Eurofins Scientific (ESF0 TH) -1.6%
- Hybrid Extension Risk Red Flags for Eurofins, SES and OMV
- Nel (D7G TH) -1.7%
- Randstad (RSH TH) -1.9%
- Randstad Rated New Sell at SocGen; PT 45 euros
- JDE Peet’s (JDE TH) -2.5%
- JDE Peet’s Cut to Hold at Deutsche Bank; PT 28 euros
DAX:
- Siemens Energy (ENR TH) +1.4%
- Siemens Energy Rated New Overweight at Barclays; PT 19 euros
- Daimler Truck (DTG TH) -0.5%
MDAX:
- Krones (KRN TH) +0.9%
- Krones Raised to Buy at HSBC; PT 124 euros
- Evotec SE (EVT TH) +0.6%
- Telefonica Deutschland (O2D TH) +0.5%
- TAG Immobilien (TEG TH) -0.8%
- Hensoldt (HAG TH) -1.3%
- FUCHS SE (FPE3 TH) -1.4%
- Jungheinrich (JUN3 TH) -1.6%
- Jungheinrich Cut to Hold at HSBC; PT 33 euros
- Hochtief (HOT TH) -2%
- Hochtief Cut to Hold at HSBC; PT 109 euros
SDAX:
- United Internet (UTDI TH) +1.6%
- DEUTSCHE BOERSE: UNITED INTERNET TO BE INCLUDED IN MDAX
- Heidelberger Druck (HDD TH) +1%
- Suess MicroTec (SMHN TH) +0.9%
>>> Up
* Allegro Raised to Overweight at Morgan Stanley; PT 39 zloty
* First Solar Raised to Equal-Weight at Morgan Stanley
* Krones Raised to Buy at HSBC; PT 124 euros
* Stellantis Raised to Outperform at BNPP Exane; PT $23.60
* UCB Raised to Buy at Deutsche Bank; PT 100 euros
>>> Down
* UCB Raised to Buy at Deutsche Bank; PT 100 euros
>>> Down
* Accentro Real Estate Cut to Hold at SRC Research; PT 1.50 euros
* Genmab Cut to Sector Perform at RBC; PT 2,900 kroner
* Hikma Cut to Sector Perform at RBC; PT 2,150 pence
* Hochtief Cut to Hold at HSBC; PT 109 euros
* Jungheinrich Cut to Hold at HSBC; PT 33 euros
* Jungheinrich Cut to Hold at HSBC; PT 33 euros
* PolyPeptide Group Cut to Sell at Mirabaud Securities
* SynAct Pharma Cut to Hold at ABG; PT 17 kronor
>>> Initiation
>>> Initiation
* Adecco Rated New Hold at SocGen; PT 37 Swiss francs
* Amgen Rated New Buy at HSBC; PT $320
* Biogen Rated New Buy at HSBC; PT $360
* Bluebird Bio Rated New Buy at HSBC; PT $4.21
* Diploma Rated New Overweight at Morgan Stanley; PT 3,725 pence
* Gilead Rated New Reduce at HSBC; PT $71
* J&J Rated New Hold at HSBC; PT $175
* JDE Peet's Cut to Hold at Deutsche Bank; PT 28 euros
* Randstad Rated New Sell at SocGen; PT 45 euros
* Randstad Rated New Sell at SocGen; PT 45 euros
* Sartorius Rated New Hold at Jefferies; PT 345 euros
* Sartorius Stedim Biotech Rated New Buy at Jefferies
* Siemens Energy Rated New Overweight at Barclays; PT 19 euros
* Zoetis Rated New Buy at HSBC; PT $230
>>> Call
>>> Call
* Allegro Raised at Morgan Stanley, Deliveroo Food Delivery Pick
* Genmab, Hikma Both Downgraded at RBC With Shares at Fair Value
* Goldman Seeing Some Opportunities in China-Exposed Global Stocks
* JPMorgan’s Kolanovic Keeps S&P Year-End Price Target at 4,200
* JPMorgan’s Kolanovic Keeps S&P Year-End Price Target at 4,200
* Sartorius Stedim Initiated at Buy, Sartorius a Hold at Jefferies
The greenback rose for a second day as a rally in oil reignited concerns over inflation, putting pressure on policymakers to keep rates high. A gauge of dollar strength climbed to the highest since March on the back of elevated Treasury yields, which pushed up across tenors as at least 40 businesses tapped high-grade markets around the world Tuesday. About half of the corporate deals — or over $36 billion of new bonds — were sold in the US. The greenback strengthened against most major peers and prompted Japan’s top currency official Masato Kanda to say Wednesday he wouldn’t rule out any options if currency moves continue. The Japanese currency strengthened following the comment, but has since pared its gain. The Chinese central bank also moved Wednesday with another strongest daily yuan fixing on record. Still, the currency extended its drop against the US currency into a third day. Meanwhile, West Texas Intermediate held near the highest since November and Brent stayed past above $90 a barrel — after breaching the level Tuesday — as the largest OPEC+ producers extended their supply cuts to year-end. Oil’s recent gains pose a headwind for much of Asia, threatening economic growth and risk keeping interest rates high. Asian stocks traded mixed, with benchmark indexes falling in Hong Kong and mainland China, but rising in Japan for an eighth day. Chinese property developers gained, with Sunac China Holdings Ltd. up as much as 34%, after Securities Times in a front-page commentary called for more cities to drop home-buying restrictions. US equities edged lower following the decline in the S&P 500 to below 4,500 in the previous session while an index of small caps slid about 2% and a gauge of homebuilders sank 5.5%. Traders will be monitoring consumer price index figures in Taiwan later Wednesday. More broadly, they are also looking to this month’s key economic data from the US and clues as to the Federal Reserve’s next rate decision. JPMorgan Chase & Co.’s Marko Kolanovic reiterated Tuesday that investors should fade the artificial-intelligence induced stock-market rally, arguing that he would turn more optimistic on equities if interest rates begin falling globally in the near term. Meantime, Morgan Stanley’s Michael Wilson said US equity investors are in for disappointment as economic growth is set to be weaker than expected this year. Elsewhere, gold was little changed after declining the most in more than a month in the previous session. US after Hours MITK +11.2%, AVAV +10.3%, GTLB +4.5% up on earnings; ENB -6.8% sliding on M&A announcement; ASAN -2.5%, ZS -1.1% down on earnings
Nikkei +0.61% Hang Seng +0.05% CSI -0.16% Shanghai +0.15% Shenzen +0.03%
Eur$ 1.0735 CNH 7.3134 CNY 7.3108 JPY 147.41 GBP 1.2574 CHF 0.8888 RUB 97.5709 TRY 26.7955 WTI$ 86.68 Gold 1,927.32 BTC 25,750 +0.17% ETH 1,630+0.06%
S&P -0.08% Nasdaq -0.17% EuroStoxx -0.30% FTSE -0.38% Dax -0.15% SMI -0.46%
Macro :
- Goldman Seeing Some Opportunities in China-Exposed Global Stocks
- JPMorgan’s Kolanovic Keeps S&P Year-End Price Target at 4,200
- Euronext Leaves AEX Index Unchanged in September Review
- Euronext Leaves AEX Index Unchanged in September Review
- EU Antitrust Chief Vestager Steps Aside Amid Bid for Top EIB Job
- Bank of Canada Poised to Hold, Keep Hawkish Bias: Decision Guide
Keep an eye on :
Keep an eye on :
- ANIM IM : Anima Holding Aug. Net Inflows EU256M
- ARM LN : Arm’s $55 Billion Valuation Falls Short of Lofty Expectations
- ARM LN IPO : TSMC Will Decide This Week Whether to Buy Into Arm’s IPO
- AZE BB : Azelis Holder Offers 406,488 Shares via Goldman Sachs, Prices at EU18.94/Share: Terms
- BARN SW : Barry Callebaut to Invest CHF500M Over Two Years in Core Areas
- BP/ LN : Sixth Street Injects $400 Million More Into BP Pipelines Venture
- BIDU US : Baidu’s $23 Billion Rally May See Boost on AI Launch: Tech Watch
- BPSO IM : UnipolSai Could Boost Pop. Sondrio Stake to 20%: Repubblica
- CLASB SS : Clas Ohlson 1Q Sales Matches Estimates
- GAM SW : NewGAMe Welcomes GAM Board Approval for EGM Proposals
- IDIA SW : Idorsia Reacquires Aprocitentan Rights for Up to CHF306M
- INPOST NA : InPost 2Q Adjusted Ebitda Beats Estimates
- ONTEX BB : Ontex Says CFO Peter Vanneste to Leave Early Oct.
- ORSTED DC : Orsted Ready to Abandon US Wind Projects Without Help
- ORSTED DC : Orsted Ready to Abandon US Wind Projects Without Help
- SALM NO : SalMar Sees Growth Potential to Total Harvest of 362,000 Tonnes
- SCHOTT Pharma IPO :
- SOF BB : Sofina 1H Net Asset Value per Share EU276.79
- SLHN SW : Swiss Life 1H Net Income CHF630M
- Techem : Blackstone, Macquarie Vie for €8 Billion Metering Firm Techem
- TEF SM : Saudi Telecom Buys 9.9% Telefonica Stake in $2.25 Billion Deal
- TSLA US : Tesla Shelves Expansion Plans on Overcapacity Fears: Panjaitan
- UBSG SW : UBS’s Ermotti Calls for Changes to Swiss Regulatory Framework
- VK FP : Vallourec Appoints Bertrand Frischmann as COO of the Americas
- VOLVB SS : Polestar Plans Smartphone Launch in Dec, First EV in China: CNBC
- VNA GY : Vonovia Preparing Partial Sale of Kiel, Lübeck Portfolio: HB
- VOW GY : VW Plant in Portugal to Suspend Production Due to Lack of Parts
Is Goldilocks out of the woods?
Rob wrote yesterday that in the face of nicely balanced economic data, it was time to smile, dammit. And we are smiling. Finding reasons to worry takes work right now. But if we were to worry about something — we are financial journalists, after all — it would be that today’s Goldilocks combination of good growth, low unemployment and falling inflation may be an unstable equilibrium.
The economy looks like it is getting back to normal, with inflation and employment close to their pre-pandemic levels. Booming consumption, on the other hand, does not look quite so normal. If people are spending loads more on real resources, one of three things has to happen: either the supply of those resources has to rise, inflation has to go up, or consumption must cool off. Which will it be?
Start with some facts. The reliably informative quits rate, at 2.3 per cent, is right back where it was in 2019. Labour force participation has recovered, too. The gap between the number of jobs (employment + job openings) and available workers is shrinking rapidly. Goldman Sachs’s measure of this “jobs-workers gap” is less than 1 percentage point above late 2019 levels, compared with a peak of 3 percentage points last year. Wage growth is elevated but slowing.
Spending, meanwhile, is charging rabidly ahead. Real consumption is growing at 3 per cent year on year. Services spending keeps growing steadily. Real spending on goods, which has been flat for a year after the pandemic goods binge, appears to be rising again:
This dynamic — a slowing labour market and strong consumption — can be read at least three ways:
- Consumer spending must deteriorate. Consumption rose faster than disposable income in July, and borrowing is on the rise. Car loan and credit card delinquencies are surging. That is happening from historically low levels, but what’s to stop a further rise? Student loan payments will kick in soon, too. As the job market cools off, spending will fall.
- A gentle normalisation process is happening. Supposed signs of deterioration in labour markets and consumer health are just reversions to 2019. This includes rising delinquencies, slowing payrolls growth and a falling number of temporary workers. Today’s slowing labour market plus sturdy consumption is the opposite of a normal late-cycle story (where a weakening economy foretells troubles in the labour market), points out Omair Sharif of Inflation Insights. More plausible, he thinks, is an unwinding of pandemic employment anomalies.
- The risk of inflation getting stuck above 2 per cent is growing. The labour market, though cooling, is by most measures strong, adding fuel to the spending fire. Rising consumer debt burdens don’t look like a big threat, either. For example, the return of student loan payments will shave just 0.3 per cent (or $70bn) off disposable income, estimates Goldman. Broad measures of financial stress remain near all-time lows. The real risk is that hard-charging consumers push through these mild headwinds, overwhelming supply in areas such as cars. Inflation might then stay too high.
Interpretation 3 worries us most because it rhymes with what has already happened this cycle. It doesn’t require you to bet against the consistently resilient US consumer, or against labour market strength. Rather, it’s a bet that the inflation regime changes more slowly than any of us would like. Interpretation 2, we admit, looks attractive. But the risk of wishful thinking remains. (Ethan Wu)
Industrial stocks’ remarkable run
I find this chart pretty remarkable:
Since the market bottomed last October, industrials have slightly outperformed the wider US stock market (this is not a calendar anomaly: the performance of industrials has kept pace with the wider market since the start of the pandemic).
Why is this remarkable? Reading financial headlines over the past year or so, you would have thought that any sub-index that did not contain Nvidia and the other big tech stocks would have to underperform. But a bunch of big industrial stocks including GE, FedEx, Parker Hannifin and Caterpillar have staged remarkable runs (those four have returned 126, 73, 70 and 64 per cent since last October 10 2022, respectively). The strong performance is broad-based: of the 75 stocks in the S&P 500 industrials sub-index, 45 have returned 20 per cent or more, and only eight have posted negative returns.
It makes perfect sense that economically-sensitive industrials would outperform in the period when the recessionary narrative was giving way to expectations of a soft landing. But it is surprising — it surprises me, at least — that the performance has remained strong in recent weeks, as evidence has mounted that the economy, while not dropping into recession, is cooling. A note from Jason Draho at UBS yesterday sums up the sentiment nicely:
Regardless of what 3Q GDP tracking estimates say, inflated as they are by Barbenheimer, Taylor and Beyoncé, the US economy is slowing. The most compelling and relevant evidence for that claim is from the labour market, and the data last week makes it hard to dispute. Monthly job growth has been gradually declining for more than two years, while the fall in job openings appears to have picked up pace. Other data tell a similar story of a cooling labour market. Given these trends, any thoughts of a “no landing” can be put to rest.
That’s the mood. And yet industrial stocks, which are cyclical enough to come down with a thump even in a soft landing, have churned ahead. What to make of this? Are industrials telling us that fears of an economic slowdown have been over-egged? Or are the stocks riding on momentum and set to disappoint?
The financial performance of the group has returned to something like normal since the pandemic. Margins never blew out, as they did for some other groups, and revenue growth in the latest quarter was about 6 per cent (on a non-weighted average of all the companies), in line with both nominal GDP and pre-pandemic levels.
Yin Luo of Wolfe Research, who focuses on quantitative analysis of factor and sector performance, has been surprised by how well cyclicals in general have held up. He thinks economic growth that continues to surprise, strong company fundamentals, and reasonable valuations have all helped — but the macro slowdown will tell on the sector eventually. He therefore has doubts about the strong relative performance continuing. This view has the advantage of simplicity: industrials are economically sensitive, the economy is slowing, so the strong relative performance probably won’t last.
Others think there is more to the story. Mike Wilson of Morgan Stanley suggests owning industrials. He, too, notes the strength of company performance and attractive valuations, but adds that late in economic cycles, industrials outperform other economically sensitive stocks in general, and consumer discretionary stocks in particular. This makes sense, inasmuch as industrial companies are more insulated from quick changes in consumer sentiment, and that late in a cycle people get jumpy. His chart:
There is, however, a sting in the tail of Wilson’s bull case for industrials. The circle will turn down eventually, and this is liable to happen suddenly:
It’s very difficult to call the end of the business cycle. These periods are elusive right until the moment when activity seems to stop on a dime. They are also typically accompanied by an “event” that is just too much for the economy to handle in its already weakened state.
The problem with industrials, in other words, is knowing when to sell (as the chart shows quite well). No one is going to ring a bell.
Scott Chronert of Citigroup is bullish on cyclicals broadly and industrials specifically. He thinks as the industrial economy incorporates more technology, it becomes less cyclical:
The US industrial economy will continue to incorporate technology, including artificial intelligence, robotics and automation, in ways that gradually lessen the inherent susceptibility to broader swings in economic activity and certain input costs.
Earnings declines of cyclical stocks during moments of economic contraction have been growing smaller, relative to the broad market, since the oil collapse of 2015. And in the post-pandemic boom, cyclicals’ profit margins have risen to the levels of the wider market, reflecting the changes wrought by technology.
I think Chronert’s thesis is intriguing, but I don’t buy it. I doubt that it is possible to see through the economic oddities of recent years to secular changes in the economy. I put my doubts to Chronert and he responded as follows:
No doubt, there is an element of lingering post-pandemic effects. It will be difficult to prove lesser cyclicality until we get through an entire cycle. Nevertheless, that margins have held this well even as industrial production is now at levels normally associated with recessions is a positive step.
As the second chart above shows, industrials’ margin steadiness in the face of slowing growth and higher input costs has been remarkable, and calls out for an explanation. But without other evidence, the default assumption has to be that a downturn will — in time — hit industrials’ profitability just as hard as it has in previous cycles.
To sum up. Industrials’ financial and market performance is another reminder that we are still in a remarkably strong economy; there is some reason to expect the solid performance to persist through the late part of the cycle; but cycles most often end with a bang, not a whimper.
SEC Fines Real Estate Private-Equity Firm Prime Group
Private-equity real-estate manager will pay $20.5 million over payments to an affiliated company
Real-estate investment firm Prime Group Holdings will pay $20.5 million to settle allegations of inadequate disclosures around brokerage fees it charged investors, U.S. regulators said Tuesday.
The Securities and Exchange Commission said Prime, a private-equity firm that buys and manages self-storage properties, didn’t disclose that millions of dollars in brokerage fees paid by fund investors between 2017 and 2021 went to a firm owned by Prime’s chief executive.
Prime agreed to pay a $6.5 million penalty and repay investors about $14 million, including interest, to settle the charges, the SEC said.
Prime neither admitted nor denied the charges as part of the settlement. A firm spokesman declined to comment.
Neither the firm’s founder and chief executive, Robert Moser, nor his affiliated brokerage firm were named in the SEC order or charged with any wrongdoing.
Based in Saratoga Springs, N.Y., Prime manages about $4 billion in investor capital, primarily to buy and manage self-storage facilities.
The storage sector has seen surging investor interest in recent years due to its typically recession-resistant profile and its strong performance during the coronavirus pandemic. Prime recently rode this investor demand to close the largest-ever fund dedicated to the asset class, raising $2.5 billion for its third self-storage fund.
The SEC order relates to a roughly $700 million fund formed in early 2017. The fund acquired properties through deal teams that sought out mom-and-pop storage operators and aimed to persuade them to sell their properties to Prime’s fund, according to the settlement.
These deal teams were compensated in part through a fee paid by the fund to the brokerage firm owned by Prime’s CEO. From 2017 through 2021 this company received nearly $18 million from the fund, according to SEC documents.
Prime’s fund documents didn’t tell investors that some fees would be paid to an affiliate of Prime, or that these payments could create the potential for conflicts of interest, the SEC said. As a result, the fund documents were inadequate and misleading, the regulator alleged.
“Information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions,” said Osman Nawaz, who heads the SEC enforcement division’s complex financial instruments unit.
Under Chair Gary Gensler, the SEC has been trying to increase scrutiny of the $27 trillion private-funds industry. The agency said that in its examination of private-fund managers it often encounters poor fee disclosure and hidden conflicts of interest, among other problems.
In late August the SEC proposed a broad slate of rules that would require private-equity managers to give investors more information about the fees they charge, among many other changes. Lobbyists for private-fund managers last week sued the agency to block those proposed rules.