TheChek News Flow

By accepting an offer without putting it to shareholders, TI is storing up trouble

Does the end justify the means? That question has long preoccupied theologians and philosophers. It may also have been weighing on the minds of Telecom Italia’s board members this weekend.

Their decision to press on with the sale of TI’s network to KKR — valued at up to €22bn — makes good business sense. Yet, by accepting the offer without putting it to shareholders including Yannick Bolloré’s Vivendi, TI is storing up trouble. The French group has already said it will contest the move in court.

It is not hard to see why TI is so keen on the bird in its hand. The group is highly leveraged, with almost €26bn of net debt before adjusting for leases, or 4.4 times expected 2023 ebitda. The transaction will bring debt down to manageable levels. That should be around twice the ebitda that remaining activities — the so-called ServiceCo — are expected to generate. 

Despite its air of desperation TI has squeezed a respectable sum out of KKR. The transaction with the US buyout group values NetCo at a floor price of €18.8bn. This might rise to €22bn if conditions are met. That implies ebitda multiples in double digits, according to analysts at New Street. Not bad, considering the need for huge network investment. 

Yet, while this looks like the right deal for TI, the manner of its execution is troubling. By pushing the transaction through without a shareholder vote, it has denied a say to Vivendi, which controls 24 per cent of the stock and 17 per cent of the voting rights.

This would not be permissible in the UK. Deals that are a quarter or more of a company’s size by assets, profits, market capitalisation or capital, automatically require a vote.

In Italy, rules appear hazier. The board believes it has acted within its rights. It argues that the sale and leaseback of an asset, even a big one, does not fundamentally change the nature of the company. Vivendi clearly disagrees.

Law courts will decide the point. Given the uncertainty the legal process creates, it would have been better if TI had polled its shareholders in the first place.

Palo Alto Networks has just confirmed one more major piece of security startup M&A out of Israel: it has acquired Talon Cyber Security, a specialist in building enterprise browsers for securing distributed workforces sources. Source say the deal is valued at $625 million.

This is PA’s second Israeli security acquisition within a week: last Tuesday, Palo Alto Networks announced that it was scooping up cloud data specialist Dig Security, for a price that sources close to the deal tell TechCrunch was around $400 million. As with Dig, Talon will be integrated with Palo Alto’s Prisma cloud security division.

We first reported that the two deals were in the works in September, after hearing for weeks beforehand that it was about to make some big acquisitions to beef up its security bench.

Talon — cofounded by Ofer Ben-Noon and Ohad Bobrov — had raised around $143 million, with its investors including Team8 (a specialist cyber investor in Israel), Entrée Capital, Evolution Equity, LightSpeed, and Cyverse Capital. Sources tell us Talon was approached proactively and was not int he market to be acquired.

Today’s acquisition, along with last week’s for Dig, are significant developments in the Israeli technology ecosystem, where right now it is anything but business as usual.

The current war between Israel and Gaza — which kicked off after terrorists from the latter territory busted through the wall separating the two, killed some 1,400 civilians and took hundreds more back to Gaza as hostages — has, unsurprisingly, had a strong chilling effect on the region’s technology industry, which has in many ways come to a standstill in the last month.

As we have reported previously, tech accounts for 18% of Israel’s GDP, and some 14% of all people in the country work directly for the tech industry (with many others indirectly). A number of those civilians have either been called up for duty, or are involved in volunteer efforts, effectively putting a lot of their regular working lives on hold.

At the same time, the conflict and instability is having a big knock-on effect for investors, partners and would-be customers to want to do business in the region, something that is impacting both Israeli and Palestinian companies. (That’s not to mention the interruptions in supply chains and logistics, as well as even more basic needs.)

Some investors are even looking to step up by creating emergency impact funds specifically to fund startups that have had to pause their activities due to the situation.

Aside from this, there is also the image of public perception outside of the region: as shown by the recent blow-up around Web Summit and the departure of the founder from executive roles after comments he made about the situation, and a backlash against that, some of the most public efforts of energy that we are seeing coming out of the Israeli tech ecosystem right now are focused on that conflict and how that’s being represented. M&A does not feel like a top of mind concern in that regard.

To be clear, this deal for Talon, along with the one for Dig, were very much already in the works before the surprise attack by Hamas. That they managed to close them during the turmoil is notable, but what remains to be seen are how M&A activities, along with funding, and business for startups overall, will develop as the conflict wages on.

The bigger cyber picture, and how Talon fits in

The deal, Palo Alto said, will help address the rise of different devices and apps that are being used in organizations, some of which are not provisioned by the organizations themselves.

“The average enterprise uses hundreds of SaaS and web applications, meaning that most work is now done primarily via the browser,” said Lee Klarich, Chief Product Officer for Palo Alto Networks, in a statement. “Talon enables organizations to secure all work activity via an Enterprise Browser, without touching the personal usage of the device or impacting user privacy. Integrating Talon with Prisma SASE will enable Palo Alto Networks to securely connect all users and devices to all applications, including private applications, and apply consistent security no matter who the user is and what device they use for work. Today’s announcement underscores our continued belief in the strength of the Israeli cybersecurity ecosystem and our commitment to our growing team in Israel.”

“While BYOD offers an advantage for productivity, it is also a source of significant security risk,” added Anand Oswal, its SVP and GM. “Talon’s Enterprise Browser empowers security teams with deep visibility and control over all work-related SaaS and web activity on all devices, including personal and unmanaged endpoints. SASE solutions must evolve to secure unmanaged devices with the same consistent security applied to managed devices so that users can securely access business applications using any device from any location. The unique combination of Prisma SASE and Talon will transform how organizations navigate the challenges of today’s modern and connected digital environments.”

Like Dig, Talon is working in a newer area of the wider cybersecurity market, which would make it attractive to Palo Alto as it looks to keep up with the evolving threats in the market.

Talon’s focus on the concept of an enterprise browser — a platform for large organizations to operate all of their apps and services, built from the ground up with security in mind — is still a relatively new concept in the market. As we have previously noted, though, it has already started to catch on big with customers and competitors: Island is another company in the same space.

“They’re creating a new category that has the potential of being bigger than endpoint security altogether,” a source told us in September. “They’re reinventing the operating system.”

Even as a lot of funding and M&A continues to remain largely stagnant in the current market, and Israel in particular is facing some big geopolitical barriers to activity, security continues to be a huge priority for enterprises and smaller businesses.

That is because of the cost of not managing it well. A McKinsey report from last year noted that organizations would have to spend up to $10.5 trillion annually to deal with breaches by 2025, a 300% increase from 2015. So while a lot of companies have clamped down on spending and IT budgets over the last couple years, security is one area where they have returned to spending even when other categories have remained frozen or constrained.

“For end customers, security is still a big business risk, so budgets are back in action and we’re seeing sales picking up in Q3 and Q4,” one investor told us. “Security companies will want to tap into this opportunity aggressively.”

Second, cybersecurity remains a moving target. Malicious hackers are turning to technologies like AI to break into networks, so, as smaller startups come up with new techniques to tackle the problem, they become acquisition targets for larger companies looking to stay ahead of the curve. This is where this Talon acquisition fits in.

Other examples of this include CrowdStrike acquiring security startup Bionic for $350 million, and IBM buying Polar earlier this year for $60 million — a deal IBM made, we understand, partly in response to Palo Alto buying Cider Security in 2022.

There are mega deals in this trend, too, such as Cisco’s plan to buy Splunk for $28 billion.

For security companies, it becomes a question of competitive edge both against malicious hackers and other security companies. “Palo Alto is buying partly in reaction to these deals,” one source said.

Analysis will add to pressure on institutions accused of placing financial concerns ahead of academic quality

Students from outside the EU at universities in the UK are much less likely to obtain top grades than their British counterparts, according to data that will add to pressure on institutions accused of putting financial concerns ahead of academic quality.

A total of 28 per cent of non-EU international students received a lower-second (2.2) or third-class degree in 2021-22, compared with 20 per cent of domestic students, according to a Financial Times analysis of figures from the Higher Education Statistics Agency.

The findings come after funding pressures have left UK universities increasingly reliant on fees from international students — who on average pay about twice what domestic students pay each year — to balance the books. Fees from non-EU students now account for one-fifth of universities’ income, double what it was a decade ago.

The quality of the international student intake came under fresh scrutiny last month when Lord Jo Johnson, former Conservative universities minister, warned that rising numbers of foreign students were “reaching the political limits” of tolerance because too many were dropping out of courses or lacked the means to support themselves. He called for urgent action needed to “weed out” weak applicants.

According to the FT analysis, the attainment gap was largest at top universities, where international students are squeezing the number of places for Britons. Undergraduates from outside the EU enrolled at the research-intensive universities in the Russell Group were twice as likely as UK students to receive a 2.2 or third-class degree in 2021-22. 

The Russell Group said there was a “degree of adjustment” for international students and that universities had put in place a range of support to ease the transition. 

Some universities with large international intakes have a much larger attainment gap than the sector as a whole. At Queen’s University Belfast and the University of Sussex, the share of non-EU students obtaining the lowest grades in 2021-22 was more than three times higher than for UK students.

At Nottingham Trent University, more than half of non-EU students received a 2.2 or third, compared with a quarter of UK students.

Universities UK, the sector lobby group that represents more than 140 universities, said language barriers and different education systems partly explained the attainment gap. 

“The UK has a global reputation for the quality of education and rigorous quality assurance,” it said. “Universities are keenly aware of these challenges and provide a range of services to support their transition to studying in the UK. This is an area of ongoing research.”

Students from the EU perform better than other international students and in some cases better than UK students, but they make up a small proportion of the undergraduate intake. In 2021-22, more than 90 per cent of first-year international students came from outside the EU.

Students from China, India and other Asian countries are driving the rise in international student numbers. Dropout rates and non-completion for these students are bigger issues for the sector, according to Johnson.

“The real issue to focus on is the rising dropout rate of international students from India and Bangladesh,” he told the Financial Times. “It is essential universities and government forge a compact whereby all institutions will require tuition fees to be paid upfront.”

There is only a marginal difference in dropout rates for UK and international students, according to data from the Office for Students, England’s higher education regulator. A breakdown for specific countries is not available.

Nottingham Trent University said the discrepancy partly reflected its determination to root out the problem of grade inflation in higher education, for which it had been “widely recognised”.

“It is important to note that 2.2 is a good degree, and highly valued by employers both in the UK and abroad. For the skills-based recruiter, academic qualification levels are becoming less significant,” it added.

Sussex university said recent internal data pointed to a narrowing attainment gap between international and domestic students, but acknowledged that it could do more to ensure all students achieved their potential. 

“We’re working hard to continue this progress through greater investment in academic support, from intercultural awareness to further language support,” it added.

Queen’s University Belfast also said it was working hard to support international students and had recently put in place additional measures to help them succeed.

ADELAIDE, Australia—The world’s biggest gold miner just got bigger. That has left a Colorado mine with its origins in the gold-rush era facing an uncertain future.

Newmont hasn’t NEM 2.79%increase; green up pointing triangle decided whether to sell the Cripple Creek & Victor gold mine following its $15 billion takeover of Australia’s Newcrest Mining NCM -1.27%decrease; red down pointing triangle, the largest transaction in gold-mining history. But Chief Executive Tom Palmer said the mine was smaller than many of the operations that Newmont now owns, and the company wants to raise some $2 billion from selling mines and rescheduling developments.

Cripple Creek “is certainly in that category of operations you debate around their fit,” Palmer said in an interview.

Mining has deep roots in Cripple Creek, located in Teller County, southwest of Pikes Peak. The town’s logo features a speculator with a pick leading a donkey. Residents can pitch up for coffee and food at the Gold Camp café. The local gold deposit, according to Newmont, was created by a volcanic eruption tens of millions of years ago.

Newmont, based in Denver, acquired the Cripple Creek mine from AngloGold Ashanti for $820 million eight years ago. It marked another step on Newmont’s road to building a business that outgrew rivals, including Barrick Gold, in terms of size.

The acquisition of Newcrest, which was completed on Monday and brings the company’s value to around $50 billion, advances that strategy still further. It adds five active mines and two advanced projects to Newmont’s existing global footprint.

But many of the mines that Newmont is getting as part of the Newcrest deal are richer in gold and cheaper to mine than Cripple Creek. Some also come with copious stores of copper, which Newmont increasingly wants to focus on, given its use in manufacturing electric vehicles and renewable-energy infrastructure.

Cripple Creek was once so rich with precious metal that it was nicknamed the world’s greatest gold camp. In the early 1900s, there were more than 500 mines worked by thousands of miners. That activity has left its mark on the area and its identity, but Palmer said it also means that much of the mine’s bounty has been dug up and the operation could struggle to compete inside Newmont with newer mines around the world.

Newmont produced 134,000 troy ounces of gold from Cripple Creek in the nine months through September. While that was 7% higher than a year earlier, the operation was one of the smallest contributors to overall output.

Still, there are reasons to hang on to the mine, said Palmer, a fourth-generation miner from the Australian mining town of Broken Hill.

“It’s literally an hour and a half up the road from headquarters,” Palmer said.

That means it could be a good learning ground for future mine managers and a testbed for new technologies, particularly as the company works to cut emissions from its operations, he said.

Cripple Creek isn’t alone in facing a debate about whether it belongs in the new Newmont.

There are also mines in Canada, Australia and Ghana whose futures will be scrutinized in the months ahead. No decisions have been made about those most likely to be sold, said Palmer.

“You may find that Newmont keeps a number of those in our portfolio over the long term because they’re generating good cash” and offer other benefits, Palmer said.

Part of the rationale for buying Newcrest was to strengthen Newmont’s footprint in favorable mining jurisdictions, he said, as a resurgence in resource nationalism becomes a problem again for the industry.

Executives will need to determine which operations can maintain sufficiently attractive profit margins, he said.

Already buyers are circling for some assets. Palmer said deal interest has been logged by Newmont’s corporate-development team of about 10 employees. That team managed a string of sales in-house after Newmont bought Goldcorp in 2019—bringing in close to $2 billion—and again might run deal negotiations without appointing an investment bank, he said.

“That team has a fairly full inbox,” said Palmer. “But they’re not under any pressure to be trying to get a quick sale out the door.”

Recession fears mount as elevated interest rates take toll on economy, figures for October show

UK construction activity contracted in October, according to a data published on Monday, driven by the 11th consecutive monthly fall in housebuilding on the back of higher borrowing costs.

The S&P Global/Cips UK construction purchasing managers’ index rose slightly to 45.6 last month from 45 in September but remained below the 50 point mark, indicating that most businesses reported a contraction.

The reading, the second lowest since May 2020, was driven by a sharp contraction in housebuilding, which stood at 38.5. It also provides further evidence of the slowdown in demand sparked by higher interest rates.

Since November 2021, the Bank of England has raised rates from a record low of 0.1 per cent to 5.25 per cent in a push to bring inflation back to its 2 per cent target. As a result, activity in sectors that are sensitive to higher rates, such as housing, has weakened sharply.

Tim Moore, of S&P Global, said the survey’s results showed the impact of “elevated borrowing costs and a wait-and-see approach to new projects”.

Data last month from the Office for National Statistics, showed that construction output contracted in July and August, and Monday’s PMIs suggest the downturn has continued.

Thomas Pugh, economist at consulting group RSM UK, said: “The economy probably contracted in Q3 and, at face value, the PMIs are pointing to another contraction in Q4, which would mark the start of a recession.”

The latest S&P Global/Cips survey showed that new work in the construction sector fell for the third successive month in October, and that the rate of contraction was the joint sharpest since May 2020.

Many survey respondents reported a lack of tender opportunities and lengthier decision making among clients amid concerns about the broader economic outlook. The data for October also pointed to a slowdown in job creation to its weakest since June.

John Glen, Cips chief economist, said: “High interest rates and low consumer demand for new homes continue to drag down the UK construction sector, with a lack of new tender opportunities and a cutback of existing projects.”

In a sign that higher borrowing costs are having the effect the BoE intends, survey respondents also reported lower price pressure in October. Input prices in the sector fell at the fastest rate since August 2009, while the rates charged by subcontractors declined for the first time since July 2020.

Glen said that while suppliers were previously able to lift prices in response to soaring demand, “falling construction activity has now tilted the negotiations in favour of buyers and suppliers are having to pass on lower prices for raw materials like timber and steel”.

As demand has fallen, supply-side constraints have also continued to ease, with improved subcontractor availability and shortened suppliers’ delivery times.

Civil engineering activity was the second-worst performing sector, with a reading of 43.7, indicating the fastest rate of decline since July 2022.

Commercial building, meanwhile, showed signs of stabilisation, rising to 49.5 in October from 47.7 in September, indicating only a marginal fall in activity.

Conflict in the Middle East is bad news for liberals and helpful for Putin and Trump

“Things can only get better” felt like the anthem for the 1990s. Released in 1993, four years after the fall of the Berlin wall, the song was the perfect soundtrack for a decade in which apartheid ended, democracy came to eastern Europe, peace came to Northern Ireland and the Oslo accords promised an end to the Israel-Palestine conflict.

In the 1990s, the spirit of the age favoured peacemakers, democrats and internationalists. Today, it is nationalists, warmongers and conspiracy theorists who have the wind in their sails.

There is a growing danger that Russia will gain the initiative in its war with Ukraine over the coming year. In the Middle East, the tentative optimism fostered by the Abraham peace accords between Israel and several Arab states has been shattered by the Hamas attacks and the Israeli invasion of Gaza. A wider Middle Eastern war currently looks more plausible than a reinvigorated peace process.

In the US, Joe Biden’s presidency is in deep trouble. Donald Trump is now the favourite in the betting markets to win the presidency in 2024. Recent polls show him comfortably ahead in most of the swing states that will decide the election.

All of these malign developments contribute to a darkening global political mood. They also feed on each other directly.

The Gaza war has forced the US to divert time and resources away from Ukraine. In some cases, there is direct competition for munitions. Ukraine has been desperately short of shells and now is competing with Israel for scarce supplies. Air defence systems are also needed by both Ukraine and Israel.

The west’s already weak ability to rally global support for Ukraine is further damaged by anger in the “Global South” about US support for Israel. Efforts to press the argument that Russia is committing war crimes in Ukraine will now be met with renewed charges of double standards.

These developments came at a time when the Ukrainian war effort was already faltering. The Kyiv government’s counteroffensive has largely failed.

Volodymyr Zelenskyy, Ukraine’s president, has angrily dismissed the idea that the war is turning into a stalemate. But predictions of a stalemate could actually prove over-optimistic. Russia has turned itself into a war economy and will probably have a growing edge in armaments and troop numbers next year. Russian forces are likely to hammer Ukrainian cities and infrastructure, once again, over the coming months.

A battered Ukraine remains heavily dependent on the west for armaments and financial support. But Kyiv’s western backers have failed to ramp up their weapons production to match the Russian war machine. Meanwhile, continued funding for Ukraine has got stuck in the US Congress as Trump-supporting Republicans turn against the war.

Vladimir Putin has even more reason to keep fighting hard over the next year, given the growing prospect that Donald Trump will return to the White House and abandon Ukraine to its fate.

A Trump victory has become more likely because of the Gaza conflict. Biden needs young voters, progressives and Arab-Americans to turn out and vote for him. But many are furious about his administration’s support for Israel. If progressives stay at home or vote for fringe candidates, the election could tip towards Trump.

Of course, it would be absurd if pro-Palestinian sentiment indirectly put Trump back into the White House. The former president is once again threatening to ban Muslims from entering the US. But history abounds with absurdities.

The intense global spotlight on Israel and Gaza may also be providing cover for other human rights abuses to take place. In recent weeks, mass deportations and forced transfers of people have either taken place or been announced in Pakistan, Sudan and Nagorno-Karabakh.

Other urgent problems are also in danger of being left to fester. Climate change looks ever more ominous. But the COP28 summit that will begin later this month in Dubai will now take place with world leaders distracted by Gaza.

With America overstretched overseas and unstable at home, China may sniff an opportunity. There are currently some tentative signs of rapprochement between Beijing and Washington. But the big picture remains that China is intent on displacing the US as the dominant power in the Pacific, and perhaps the world.

The main focus of Xi Jinping’s ambitions is Taiwan. Analysts in Washington believe that he has told the Chinese military to be ready to invade the island by 2027. In an effort to deter China, Biden has repeatedly pledged to defend Taiwan. But, with America distracted and divided, Xi may see an opportunity to increase the pressure on the island over the coming year. That would add a security crisis in east Asia to the ones gripping Europe and the Middle East.

In retrospect, it seems appropriate that “Things can only get better” was put out by a band called D:Ream. Thirty years after the song’s release, the dream is definitely over.

It is too fatalistic to say that we are now in an era when things can only get worse. But it is simple realism to understand that the strongest trends in world affairs are malign and gathering momentum.