WSJ : China Likely to Name U.S. Specialist as Next Ambassador to Washington

China Likely to Name U.S. Specialist as Next Ambassador to Washington
Expected appointment is part of gradual effort by Beijing to dial back aggressive diplomacy, improve global image

China is likely to nominate Xie Feng, a vice foreign minister and a U.S. specialist, as its new ambassador to Washington, according to people familiar with the matter, continuing a gradual tempering of the abrasive “Wolf Warrior” style that has defined Chinese diplomacy in recent years.

Beijing has been recalibrating its foreign policy in a bid to stabilize fraught ties with Washington and mitigate damage done to China’s global standing by its handling of the Covid-19 pandemic and forceful pursuit of security, industrial and territorial interests, according to people working inside the Chinese Foreign Ministry. The hard-charging ethos that took hold among Chinese diplomats during the Trump administration, when Beijing saw itself as being under assault from the West, needs to be adjusted to reflect a changing international environment, they said.

The shift has begun to show up in recent and coming foreign-policy appointments, which put veteran diplomats—known for their ability to balance combativeness with cordiality—in key positions to manage Beijing’s foreign relations.

Mr. Xie, 58 years old, is regarded by both colleagues and foreign counterparts as a firm and even-handed conduit between China and the U.S. He helped arrange a high-profile summit between Chinese leader Xi Jinping and President Biden in November, and served as Beijing’s point man in complex negotiations on a 2021 prisoner-exchange deal that yielded China’s release of two Canadian citizens in return for ending U.S. efforts to extradite a well-connected Chinese executive detained in Canada.

A decision to name Mr. Xie envoy to the U.S. hasn’t been formalized, but there are no other strong candidates, said the people familiar with the matter. Beijing would need to submit Mr. Xie’s name for Washington’s agreement before officially appointing him.

Naming Mr. Xie envoy to the U.S. “could be a signal that Beijing wants to better manage the rivalry with Washington,” said William Klein, a consulting partner at the communications advisory firm FGS Global and a former U.S. diplomat with extensive experience in China affairs. Nonetheless, any shifts in foreign policy will be driven by Beijing’s priorities rather than any individual diplomat, Mr. Klein said.

If appointed, Mr. Xie would replace Qin Gang, a trusted Xi subordinate who won promotion to foreign minister in late December. Mr. Qin is in contention to take a concurrent post as a state councilor, a senior government rank that would put him in the upper tiers of national leadership and give him the status to deal more equally with the U.S. secretary of state, according to people familiar with the matter.

Mr. Qin has been a leading proponent of a truculent approach to foreign policy that Mr. Xi favors, though people who have dealt with him say he is a more nuanced operator than some of his openly caustic subordinates.

Some foreign-policy analysts say the appointments represent a tactical shift by Beijing, rather than a complete pivot away from Mr. Xi’s forward-leaning style. “Strategically, they are still going to cajole, bully, arm-twist wherever they can, but perhaps a tad more politely,” said Dylan Loh, an assistant professor at Singapore’s Nanyang Technological University who studies China’s foreign policy.

The Chinese Foreign Ministry didn’t immediately respond to a request for comment.

Mr. Xi returned to the global stage in recent months after more than two years of self-imposed isolation under China’s strict pandemic controls—during which Beijing’s relations with Western powers and some Asian neighbors soured over issues spanning trade and technological competition, human rights, and territorial disputes.

Since making his first overseas trip since early 2020 last fall, Mr. Xi has presented a friendlier face in meetings with international counterparts, including President Biden at a summit in Indonesia, and other Western leaders.

Chinese officials will still act firmly to counter what they perceive as foreign attacks against their country, especially with regard to China’s core interests, people familiar with Beijing’s diplomatic thinking said. In recent days, for instance, Chinese authorities suspended the issuance of short-term visas to South Korean and Japanese nationals in response to travel restrictions that those countries have imposed on travelers from China to curb the spread of Covid-19.

Mr. Xie, a veteran diplomat, is well acquainted with Western officials through past roles handling U.S. and North American affairs, including two stints at the Chinese Embassy in Washington. He served as China’s envoy to Indonesia and the foreign ministry’s top representative in Hong Kong before his promotion to vice foreign minister in 2021. Mr. Xie also spent time as an exchange fellow in North Carolina in 1999.

Mr. Xie is a close protege of Yang Jiechi, who retired in October as China’s top diplomat. The two forged a strong relationship while working together at the Chinese Embassy in Washington, according to people familiar with Mr. Xie.

People who’ve met Mr. Xie say he is a low-key and cautious official. “Charming or tough, his tone and pitch depend on the overall atmosphere of the relationship,” the priorities set by the top foreign-policy leadership, “as well as the setting, audience and timing,” said Mr. Klein, the former U.S. diplomat.

When antigovernment unrest rocked Hong Kong between 2019 and 2020, Mr. Xie, as Beijing’s top diplomat in the city, often criticized the U.S. for allegedly interfering in Hong Kong affairs, even as he tried to maintain cordial relations with foreign diplomats and businesses, the people said.

Zhao Lijian, a Chinese foreign ministry spokesman considered one of Beijing’s most prominent wolf warriors, was recently reassigned internally to a department that oversees issues related to China’s borders and maritime claims.

Known for his abrasive rhetoric against the West, Mr. Zhao retained his existing rank after transferring to the foreign ministry’s Boundary and Ocean Affairs Department, where he is now the most senior deputy director general, according to the ministry’s website. Though Mr. Zhao’s new role carries a lower public profile, the position would involve frequent dealings with foreign officials on contentious border and maritime issues, including territorial disputes that have intensified under Mr. Xi, current and former Beijing-based diplomats say.

“His new job, while not as publicly visible as that of deputy spokesman, nonetheless plays a vital outward-facing role in China’s diplomacy,” Mr. Klein said. “There is no shortage of examples of Chinese diplomats making such lateral moves before going on to more senior assignments.”

>>> US Gapping down

Gapping down
In reaction to earnings/guidance:

  • ICHR -11.3%, HALO -5%, CVLT -4.2%, AHCO -2.8%

Select Airline related names showing early weakness following FAA computer outage:

  • LUV -1.7%, JETS -0.8%, AAL -0.8%, UAL -0.6%

Other news:

  • PLMR -4.2% (enters into new arrangement with Advanced AgProtection)
  • WHD -3.7% (prices offering of 2,803,739 shares of common stock for gross proceeds of ~ $150 mln)
  • WFG -1% (will indefinitely curtail its Perry Sawmill in FL later this month)

Analyst comments:

  • ALGT -1.6% (downgraded to Neutral from Positive at Susquehanna)
  • STM -1% (downgraded to Sell from Neutral at Goldman)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

  • AXNX +5.7%, VSCO +5%, PI +4.6%, INMD +1.7%, TNDM +1.3%, DNA +1.3%, XRAY +1%

Other news:

  • PROK +25.4% (announces publication of trial design for Phase 2 trial of REACT)
  • MASI +7.5% (ITC Judge rules Apple violated U.S. Trade Laws by infringing Masimo Pulse Oximeter Patent)
  • HKD +5.9% (receives further confirmation that parties will not sell shares before Aug 2024)
  • WWE +5.3% (Board of Directors unanimously elects Vince McMahon Executive Chairman)
  • FFIN +5% (names new CFO)
  • BTAI +3.4% (top-line data from its Phase 2 trial of BXCL701 in combination with KEYTRUDA in small cell neuroendocrine metastatic castration-resistant prostate cancer patients)
  • BLND +2.9% (announces strategic and financial initiatives to achieve path to profitability)
  • VSAT +2.9% (awarded China certificate to install satellite connectivity system on Boeing 737 series)
  • MNOV +2.9% (receives a notice of allowance for a new patent covering MN-001 and MN-002)
  • GATO +2.7% (reports record silver production and exceeds 2022 production guidance)
  • TSLA +2% (files for $717 mln expansion of Gigafactory Texas according to Electrek)
  • CONN +2% (FRG is considering going private also eyeing potential deal to acquire CONN both according to WSJ) 

Analyst comments:

  • CC +2.2% (upgraded to Buy from Neutral at BofA Securities)
  • BX +1.9% (upgraded to Overweight from Equal Weight at Wells Fargo)
  • WBD +1.8% (upgraded to Buy from Neutral at Guggenheim)

FT : Activist Jeff Ubben discovers a ‘jewel’ at Bayer

Activist Jeff Ubben discovers a ‘jewel’ at Bayer
Also in today’s newsletter, the ‘new normal’ of huge natural disaster losses

A significant number of funds have recently shed their Article 9 status — the EU’s designation for investment vehicles with the most robust green attributes. But Goldman Sachs appears to be bucking the trend.

Goldman said yesterday that it closed a $1.6bn private equity fund with the Article 9 badge. Goldman’s new fund will invest in everything from agriculture to waste and materials solutions. The announcement is notable considering that asset managers such as BlackRock and Invesco have downgraded some of their funds to the less demanding Article 8 category, blaming regulatory confusion around the EU’s Sustainable Finance Disclosure Regulation.

In today’s newsletter, we stay in the EU with two pieces centred on German companies, striking very different tones.

After years of poor performance at Bayer, activist investor Jeff Ubben sees an opportunity for the German conglomerate to earn more from its crop sciences division as the world focuses on the need for food security. Smarter farming is essential and this human need plays well to Bayer’s strength. Ubben paints a hopeful picture.

Our second story today is more troubling. Munich Re told Simon that for the second year in a row, global insured losses from natural disasters had exceeded $100bn — a “new normal”. (Patrick Temple-West)

Activist investor Jeff Ubben launched an impact investing firm in 2020 to show the financial world that money could be made by combining sustainability with profits.

Two years later, Ubben found his biggest opportunity: Bayer, the German conglomerate that makes everything from aspirin to weedkillers. This week, his firm Inclusive Capital Partners revealed a more than €400mn stake in Bayer — and sought to shake things up by pushing for radical change at the top.

Ubben’s main interest is Bayer’s crop sciences business, in which he sees significant profit opportunities as the world advances precision agriculture and genetic editing. Climate change imposed stress on food security well before Russia invaded Ukraine to exacerbate the problem, he added.

“The crop science business is a jewel of a business,” Ubben said. Food security concerns will only intensify in the years ahead, and Bayer’s crop sciences business is well positioned to serve this market. “Businesses that solve these massive problems deserve high multiples,” he said.

As a separate company, Ubben reckons, Bayer’s crop sciences business could achieve valuation multiples similar to Corteva, which was Dow Chemical’s agriculture business before it was spun off. Now it sells seeds, herbicides and fertilisers. Corteva trades at a lofty 20 times earnings, and shares surged 30 per cent in 2022 as much of the stock market suffered declines.

To advance sustainability goals, investors need to pry open balance sheets at the biggest companies, Ubben said. Investing in start-ups sounds exciting, but investors should focus on where the money is: at the world’s largest companies. Bayer has about €120bn in assets. If Bayer’s crop sciences division were to trade on its own, he said, it could have a valuation similar to Corteva’s.

Ubben’s appetite for Bayer stock might seem questionable to some given the company’s continuing struggles with lawsuits over glyphosate, a weedkiller developed by Monsanto that has been linked to cancer. But US courts in 2022 have ruled in favour of Bayer in up to six recent cases, suggesting the litigation bonanza is running out of gas. Bayer has previously said it will phase out glyphosate in US retail products this year. And most big agriculture companies — including Corteva — sell glyphosate weedkillers.

Inclusive Capital says it wants to mobilise the private sector to create a more sustainable and trusted economic system. Its big bet at Bayer will be closely watched by other investors at the intersection of impact and activism, who may hope to replicate Ubben’s strategy at other companies. (Patrick Temple-West)

Taking stock of a brutally expensive year for natural disasters
Munich Re, the giant German reinsurance company, has just come out with its annual assessment of natural disaster losses in the past year. As you can probably guess, it makes for an ugly read.

Altogether, these losses came to $270bn, of which $120bn was covered by insurers. This is the second year in a row that global insured losses have hit the triple-digit billions, a once unthinkable level.

“To have insured losses above $100bn is the new normal,” Munich Re’s chief climate scientist Ernst Rauch told me. The fingerprints of global warming, he warned, were everywhere.

To a large extent, Rauch said, the worsening losses reflected the increasing incidence of the most powerful class of hurricanes in the north Atlantic, pummelling expensive (and, by global standards, very well insured) real estate on the US east coast. A case in point was last year’s Hurricane Ian, which smashed into Florida to cause insured losses of $60bn — one of the biggest single loss drivers in history.

The causes of insurers’ rising payouts go far beyond the US. Last year brought a brutal wave of flooding in Australia, with insured losses of $4.7bn. Freak hailstorms in France cost insurers another $5.6bn.

What made me do a grim double-take, however, was not one of the biggest insured loss figures — quite the opposite. It was a line in Munich Re’s report dealing with last year’s appalling flooding in Pakistan, which inundated a third of the country, killed more than 1,700 people, and displaced millions.

The Pakistan floods caused damage worth $15bn — a huge sum for that nation, and far higher than the total bill for any other disaster last year except Hurricane Ian. And the insured losses? Munich Re assessed them as “minor” — too low for the company to give a meaningful estimate.

This reflects a much wider problem: as people in developing nations fall victim to increasingly costly natural disasters, they are far less likely than counterparts in the rich world to have insurance coverage. Even middle-income nations exhibit this problem. In China, for example, flooding losses last year came to $5bn, yet only $300mn of that was covered by insurance.

At COP27, we covered the controversy around the Global Shield initiative, spearheaded by the German government, which aims to assist developing countries to access insurance to help cover the costs of disasters. Critics called this a distraction from efforts to set up a loss and damage facility, through which rich nations would fund disaster recovery.

But Rauch insisted that insurance access for developing nations had to be a central part of the answer, warning that it would take years before the international loss and damage facility was up and running.

Meanwhile, Munich Re has joined other insurance companies, government institutions and civil society groups in the Insurance Development Forum, a body aiming to extend access to insurance. The IDF has developed initiatives such as the Global Risk Modelling Alliance, which helps climate-vulnerable nations come up with risk-management systems.

To really move things forward, Rauch said, multilateral institutions such as the World Bank and UN bodies would need to help establish how this wider insurance access would be paid for.

“Insurers do have an interest, a risk appetite, as we call it, to also cover risk from flooding and other natural perils in countries like Pakistan. And natural catastrophe insurance makes a lot of sense from an economic development point of view,” he said. But, he warned, “we can’t do it alone, because someone by the end of the day has to pay the insurance premiums”

WSJ : FAA Suffers Glitch to Crew Alert System, Potentially Affecting Flights in

FAA Suffers Glitch to Crew Alert System, Potentially Affecting Flights in U.S.
Agency reports an outage of its system that alerts pilots and crew to advisories and flight information

The Federal Aviation Administration said it suffered an outage of its system that alerts pilots and crew to advisories and information for flights, a move that could affect operations across the U.S.

The agency, which oversees and manages the aviation network in the U.S., said it is working to restore its so-called Notice to Air Missions System. “Operations across the National Airspace System are affected,“ the FAA press office said. It said it was performing final checks to get the system back up and running.

Passengers on social media were reporting delays early Wednesday, citing the outage, but the scale of the impact wasn’t immediately clear. Some U.S.-bound flights from international destinations such as London and Tokyo were still taking off.

WSJ : LVMH Shuffles Leadership at Louis Vuitton, Dior

LVMH Shuffles Leadership at Louis Vuitton, Dior
Luxury giant’s brands have been riding a postpandemic boom

PARIS— LVMH LVMUY 1.10% Moët Hennessy Louis Vuitton SE, Europe’s most valuable company, is embarking on one of its biggest management shake-ups in years, elevating Pietro Beccari to lead Louis Vuitton and tapping Delphine Arnault, daughter of Chief Executive Bernard Arnault, to run Christian Dior. CDI 1.95%

The changes announced Wednesday, effective Feb. 1, involve two of the luxury giant’s largest brands and some of its best-known managers. Both Louis Vuitton and Dior have been on a tear, most recently riding a postpandemic boom in luxury spending that so far has shown little sign of easing.

LVMH emerged from the pandemic as Europe’s largest company by market value, far ahead of the continent’s industrial stalwarts such as Shell PLC, Airbus SE and Volkswagen AG . Mr. Arnault, meanwhile, has recently usurped Elon Musk as the world’s richest person.

This year, loosened Covid-19 restrictions in China—one of the luxury industry’s biggest markets—have further boosted LVMH’s shares, which rose 1.6% on Wednesday, bringing year-to-date gains to 11%.

In taking the helm of Louis Vuitton, Mr. Beccari succeeds Michael Burke, who has led the fashion brand for a decade. Mr. Burke is one of the most trusted lieutenants of Mr. Arnault—LVMH’s CEO and controlling shareholder—having worked with him since the 1980s. LVMH said Mr. Burke, 66 years old, would now assume new duties, reporting directly to Mr. Arnault.

Mr. Beccari currently leads Dior, where he will be succeeded by Delphine Arnault, the eldest of Mr. Arnault’s five children.

The management changes mark a homecoming of sorts for Ms. Arnault, who worked for 12 years at Dior before joining Louis Vuitton as No. 2 in 2013. It is also the first time she takes on a CEO job at one of LVMH’s brands. At Louis Vuitton, Ms. Arnault was in charge of all product-related activities. She was recently responsible for a collaboration between the brand and Japanese artist Yayoi Kusama for a major new collection.

Ms. Arnault’s elevation will be closely watched in Paris business circles, where monitoring the progress of Mr. Arnault’s children with a view to potential succession is a favorite pastime. All of Mr. Arnault’s children have responsibilities at the luxury conglomerate that he has built over decades. Last month, Mr. Arnault named his eldest son, Antoine Arnault, CEO of the family holding company that owns the bulk of the family’s stake in LVMH.

The challenge for both Ms. Arnault and Mr. Beccari will be to keep the growth humming at Louis Vuitton and Dior as the global economy confronts challenges ranging from high inflation to Covid-related disruption in China and the war in Ukraine. In November, consulting firm Bain & Co. forecast that sales of personal luxury goods would rise between 3% and 8% in 2023, a sharp slowdown on last year’s growth that it estimated would be 22%.

The strength of Louis Vuitton and Dior, which in recent years have both proved popular with shoppers regardless of the fashion trends of the day, have been instrumental in helping LVMH become the world’s biggest purveyor of luxury goods, extending its lead over rivals such as Gucci-owner Kering SA and Cie. Financière Richemont SA, which owns Cartier.

In returning to Louis Vuitton, Mr. Beccari rejoins a leather-goods juggernaut that he first joined in 2006. In recent years, the Italian executive has overseen remarkable growth at Dior, where analysts estimate revenue has more than tripled over the past five years. At Dior, Mr. Beccari’s achievements include the opening of a huge new flagship store in Paris’s luxury shopping district that extends over five levels.

Mr. Beccari has also become known for pushing an array of high-visibility projects around the globe. Recent examples include a fashion show last month in front of Egypt’s ancient Giza pyramids as well as a major partnership with Harrod’s, the luxury British department store, for the Christmas season.

Mr. Beccari now takes responsibility for LVMH’s biggest brand. LVMH doesn’t disclose revenue for individual brands, though analysts at Citi estimate that revenue at Louis Vuitton rose to 21.8 billion euros, equivalent to $23.40 billion, last year. “Vuitton has become one of the strongest and most resilient luxury brands,” they said Wednesday.

That rise has come under the leadership of Mr. Burke, whose tenure at Louis Vuitton included the brand’s much-hyped collaboration with cult streetwear brand Supreme in 2017 as well as tapping the late Virgil Abloh as menswear artistic director the following year.

On Wednesday, Mr. Arnault credited Mr. Burke with extending Louis Vuitton’s lead over its competitors and promoting the brand’s heritage while anchoring it in modernity.

A dual French-U.S. citizen, Mr. Burke has worked for Mr. Arnault since graduating from business school, initially on real-estate investments in the U.S. before taking the helm of Christian Dior USA in 1986.

He also oversaw the integration of U.S. jeweler Tiffany’s into LVMH. As part of the organizational changes announced on Wednesday, Tiffany’s—which LVMH bought for more than $15 billion in 2021—will now be housed in the group’s watches & jewelry division.

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • PROK +54.4%, WWE +7%, CONN +6.4%, BLZE +5.8%, HKD +5.7%, GATO +5.7%, FFIN +5%, PI +4.9%, MASI +3%, BLND +2.9%, FTI +1.7%, AHCO +1.5%, VSAT +0.8%, MNOV +0.8%, ITRI +0.7%, TNDM +0.7%, TSLA +0.6%, AMZN +0.5%
  • Gapping down:
    • ICHR -16.8%, PLMR -4.2%, CVLT -3.5%, WHD -3.2%, HALO -3.1%, BBY -1.4%, WFG -1%

FT : Cellnex chief resigns as tower deals bonanza draws to a close

Cellnex chief resigns as tower deals bonanza draws to a close
Mast companies under pressure as rapidly rising interest rates drive up cost of capital

The founder and chief executive of the largest mobile tower company in Europe resigned on Wednesday after the three-year dealmaking spree that transformed it into one of the biggest players in the sector came to an end.

Tobias Martínez, who has been at the helm of Cellnex for eight years in which time it also became Spain’s largest telecoms group, will step down on June 1, the company said.

“It is a very thoughtful decision, in which various factors — professional and personal — come together,” Martínez told the Financial Times.

Martínez’s departure comes at a time of retrenchment for tower groups around the world. When debt was cheap, masts — the metal structures on which radio antennas sit — were some of the most valuable assets in telecoms, trading at high multiples and offering private investors attractive returns.

But for several months rapidly rising interest rates have driven up the cost of capital for these heavily indebted businesses, causing their share prices to tumble. Cellnex’s share price has fallen about a quarter over the past year.

Cellnex announced in November its ambition to gain an investment grade rating, which would mean reducing its leverage from eight times earnings before interest, tax, depreciation and amortisation to below seven times.

At the time, Martínez told the FT that mergers and acquisitions in the European market — that allowed Cellnex to amass 130,000 towers across a dozen European countries and grow its market capitalisation to €23bn — was “over”.

Cellnex will focus its attention on reducing debt and limiting capital expenditure over the next two years, he said.

Cellnex was not involved in either of the two largest transactions in European towers, when two of the biggest operators — Deutsche Telekom and Vodafone — sold stakes in their masts businesses to private equity groups that were able to offer attractive valuations.

Deutsche Telekom agreed in July to sell a majority stake in its towers business to Brookfield Asset Management and private equity group DigitalBridge, valuing the business at €17.5bn, or 27 times ebitda.

And in November, Vodafone agreed to sell up to 50 per cent of its masts business to KKR and Global Infrastructure Partners, bankrolled by Saudi Arabia’s Public Investment Fund, which valued the company at €16.2bn, or 26 times ebitda.

Even if credit became cheaper again, there are few attractive assets left to acquire.

Martínez, whose current contract would have ended in December 2024, said on Wednesday: “The current economic and financial context demands that we open a new chapter in Cellnex’s story . . . based on maximising organic growth, consolidating the industrial project in the countries where we operate today and focusing on balance sheet management.”

Chair Bertrand Kan said: “During his time at the helm of Cellnex, Tobias has shown vision, energy and expertise in leading Cellnex’s transition from a national operator, focused on the Spanish market, to a European company with a presence in 12 countries.”

FT : UK commercial property dealmaking at lowest level in over a decade

UK commercial property dealmaking at lowest level in over a decade
Prices have fallen more than 15 per cent since summer with further drop expected

Commercial property deals have collapsed to their lowest level in more than a decade as investors reckon with higher interest rates, the prospect of a lengthy recession and the fallout from the Liz Truss “mini” Budget.

The £7bn of deals transacted in the final three months of last year was the lowest quarterly total since at least 2010, according to real estate analytics company CoStar, which started collecting data that year.

Investors spent £21bn on UK commercial property in the first three months of 2022, £17bn in the second quarter and £11bn in the third. 

Commercial property landlords have suffered as interest rates have risen: investors now have to bear far higher borrowing costs and are unwilling to pay 2021 prices.



UK commercial real estate prices have fallen more than 15 per cent since June 2022, according to an index compiled by property agency CBRE, and most analysts expect them to keep falling in the near term.

Meanwhile, many investors have pulled back entirely while the market adjusts to higher rates, and the data from CoStar suggest that the desire to transact has gradually ebbed away over the course of the past 12 months. 

The lowly investment figures for the fourth quarter stand in stark contrast to early 2022, when commercial property estate agents were toasting the best start to a year since 2015 and looking forward to a period when overseas investors — particularly those from Asia — could once again travel freely. 

But hopes that post-Covid spending would be unleashed on the UK have been dashed since Russia’s invasion of Ukraine in February last year. 

The war accelerated inflation around the world and encouraged central banks including the Bank of England to raise interest rates far faster than expected, as well as increasing the prospect of a lengthy recession in the UK. 

Of the £56bn invested into UK commercial property through the year, around a third was spent on offices, with Asian investors particularly active according to CoStar.

But roughly 80 per cent of the £18bn in office investment came in the first six months of the year, with a handful of major deals for trophy assets struck in the first few weeks of 2022. 

There was also £13bn spent on warehouses, as investors bet that structural trends including the growth in ecommerce and a greater emphasis on stockpiling from companies caught short by the pandemic would inflate values.

That market has been hit hard by rising rates and signs that the runaway growth of the biggest ecommerce operators, such as Amazon, is going into reverse.

Across the board, dealmaking was already slowing when Liz Truss and Kwasi Kwarteng, the former prime minister and chancellor, unveiled their “mini” Budget in September last year. 

But their tax-cutting intervention sowed more uncertainty and was widely cited by investors as another reason to retreat.

Grant Lonsdale, director of market analytics at CoStar, said that dealmaking was likely to remain slow in the next few months. But, he added, “stabilising prices together with more clarity over interest rates and the economic outlook should stimulate activity in the second half of 2023.”

FT : The special purpose acquisition company fallout is going to be spac-tacular

The special purpose acquisition company fallout is going to be spac-tacular
Hail Mary passes coming

Last year may have been an annus horribilis for the IPO market, but it was an annus calamitosas for special purpose acquisition companies, or Spacs.

Spacs are blank-cheque vehicles designed as a backdoor way for a private company to list on the stock exchange without going through the expense and uncertainty of an initial public offering. But things have gone pear-shaped.

For one thing, investors have suffered bone-crushing losses, as companies merging with Spacs (inelegantly known as a “de-Spac transaction”) have vastly underperformed the stock market. The AXS De-Spac ETF fell almost 75 per cent in 2022. Several companies have missed their forecasts, restated their financials and even gone bankrupt. SPACs have in some cases incubated a unicorn-to-penny stock lifecycle — with companies having to launch reverse splits to avoid delisting.

Meanwhile, some Spac sponsors — who typically contribute 3-7 per cent of the listing proceeds upfront to cover underwriting and operating costs — have lost their entire investment because they haven’t been able to conclude a deal. Spacs typically have to be liquidated if they can’t complete a merger within 18-24 months, and when presented with a business combination, most Spac shareholders are now redeeming their shares to get their money back with interest. The average loss for Spac founders from liquidation has been around $9mn.

To make matters worse, sponsors incurred $750mn in losses last month alone, as they rushed to wind up Spacs before year-end, believing that a new 1 per cent federal excise tax on stock buybacks would apply to liquidations of US-domiciled Spacs starting in 2023. A whopping 85 Spacs were liquidated in December, only for the Department of Treasury to say at the very end of the month that the levy wouldn’t apply to liquidations after all. These sponsors acted in (understandable) haste and will now repent at leisure.

And finally, as often happens when people lose a lot of money, lawsuits and investigations are in the offing. Aggrieved investors claim that Spac founders had a conflict of interest in pushing through a merger, and as a result skimped on due diligence, inflated forecasts and failed to disclose important business risks. Naturally, the SEC is revving its enforcement engines.

The cycle of loss, regret and recrimination arises in part due to the same factors that have buffeted financial markets more generally, such as central bank tightening, higher inflation and economic slowdowns. Companies that de-Spac’d are often in high-growth segments, and these have suffered disproportionately in the market downdraft.

However, many of the problems also stem from the way in which the Spac structure embeds a potential misalignment of interests between Spac sponsors and their shareholders. This in turn created a vulnerability that the gloomy market environment is mercilessly exposing.

Sponsors make their money from what is called the “promote” in the form of shares and warrants usually representing 20 per cent of the Spac. But they receive that promote only if they lock down a merger. Otherwise, after (typically) 24 months the Spac is liquidated, investor money is returned with interest, and the sponsors are out of pocket. The sponsors face the choice: either push through a merger (even a suboptimal one) or lose millions of dollars of paid-in capital.

This merge-or-lose dilemma creates a significant potential conflict of interest, even if the shareholder right to redeem is an important protection. Some sponsors care about their reputation and prefer to swallow the loss over pushing a bad deal, but for others there is arguably an incentive to rush due diligence, underplay the risks, and overpay. Around 300 Spacs with $700bn in trust have deadlines to invest in the first half of 2023, and the temptation is to throw a “Hail Mary” pass and hope to score a deal in time.

And the issue goes beyond just the potential conflict. As a 2022 paper in the Yale Journal on Regulation explains, the promote, the underwriting expenses (normally 2 per cent upfront and 3.5 per cent post-merger), and the dilution from warrants and redemptions all combine to create a sizeable gap between the market cap of the Spac at $10 per share and its intrinsic cash value. Just last week the Delaware Chancery Court upheld the legal sufficiency of a complaint alleging that the Spac in question had less than $6 per share in cash to contribute to a merger.

The question, then, is: how can the merger of an operating company and a cash shell create enough additional value to bridge this gap?

One way is for Spac sponsors to deliver some kind of synergy. In some cases sponsors may claim, Liam Neeson-style, to have a “particular set of skills, skills [they] have acquired over a very long career,” and so their ongoing involvement might generate enough value to compensate for the dilution cost embedded in the Spac. But the rapid collapse in de-Spac share prices suggests that such value-adding is more often an article of faith than empirical reality.

Another way to make the numbers work is to talk up the target and its prospects and find new buyers, thereby lifting the share price. Spacs have had a key legal advantage over an IPO to facilitate the marketing: because the deal involves a merger, the company could publish forecasts under the SEC safe-harbour rules. In effect, the more lenient Spac rules gave aggressive sponsors a licence to hype.

With the economics so dependent on promotion, the Spac structure created fertile ground for embellishment and puffery, which has in turn built a growing pipeline of lawsuits. Last spring, the SEC proposed new rules to remove these legal differences between a Spac and an IPO, and the rules are expected to be adopted.

But the litigation horse bolted long before this stable door will have been shut. Last year saw a sizeable increase in the number of lawsuits filed over de-Spac transactions, and 2023 promises a busy litigation calendar. In the meantime, courts are not giving Spac founders the benefit of the doubt, ruling that if the conflicts were significant enough, they would judge deals by their “entire fairness”, instead of deferring to the “business judgment” of the sponsors.

And the likely tsunami of SEC enforcement action has only just begun to build. Already, several cases have been filed alleging due diligence failures by Spac management, and many more are under investigation. Last September the SEC charged a major bioscience hedge fund with advising its clients to invest in Spacs in which its principals had a financial interest.

Spacs had developed as a way for smaller companies to go public when the IPO market was otherwise unavailable or difficult to access. But as they exploded in popularity, Spacs evolved from a useful niche product to a widely-used but problematic pathway for taking a company public.

Investors and sponsors have been caught in the blast radius of the Spac explosion, and courts and regulators will be overseeing the clean-up.