FT : Is M&A back in the US?

Is M&A back in the US?
We’ve all been consumed by Elon Musk buying Twitter, but zoom out and it’s obvious that dealmaking is down globally this year — by about a third compared to 2021, according to Refinitiv data.

The end of cheap cash to finance takeovers, Russia’s invasion of Ukraine, and a steep drop in equity valuations are all contributing factors.

Now there are signs that dealmakers are finding ways to get transactions through again. Just this week, we’ve seen three deals announced that are each worth more than $10bn.

Here’s a quick list of recent mega-transactions either in the works or agreed:

Johnson & Johnson agreed to buy cardiovascular technology group Abiomed for $16.6bn including debt.

Blackstone has agreed to acquire a majority stake in Emerson Electric’s climate technologies business in a deal that values the unit at $14bn.

Marine and energy asset owner Atlas Corp has accepted an $11bn take-private offer from Poseidon Acquisition Corp, the investment vehicle backed by Atlas’s chair David Sokol.

US grocer Kroger has agreed to acquire rival Albertsons for $24.6bn.

Rupert Murdoch’s proposal to merge Fox and News Corp after nearly a decade apart would result in the combination of the groups’ $17bn and $9bn market capitalisations, respectively.

And then there’s Musk’s $44bn Twitter takeover (DD broke down the latest in the saga yesterday.)

The common denominator of these megadeals? They’re all made in the USA.

Bankers told DD’s Ortenca Aliaj and James Fontanella-Khan that the US economy and consumer have remained robust. “There is a bifurcation between those companies that raised capital and those that didn’t,” said Stephan Feldgoise, co-head of M&A at Goldman Sachs. “Companies with cash can more easily make moves that will enhance their portfolio.”

At our DD Live conference in London last month, Centerview’s Blair Effron said he didn’t see M&A activity falling in the long term and emphasised the growing importance of private equity takeover activity.

An executive at a large buyout firm recently told DD they were growing increasingly aggressive, fearing that a market ripe with attractive valuations won’t persist for long. The bullishness was echoed by KKR on Tuesday.

“[The] overall mood and sentiment across KKR is quite positive,” said chief financial officer Robert Lewin on an earnings call. “In private equity, oftentimes, our best vintages result from investments made during periods of market distress . . . We think 2023 could present such an opportunity.”

Yet all this requires a dose of reality.

Unlike previous downturns, this one is happening at a time of rising interest rates that make private equity dealmaking more expensive.

Antitrust has been a concern for many dealmakers as Joe Biden’s watchdogs prioritise private equity regulation. Most of the heat remains on Big Tech groups, with Microsoft’s proposed takeover of Activision Blizzard still running through regulatory clearances.

Much of Wall Street expects the economy to go into a recession next year. While there are busier spots, such as in the energy and utilities sector, private equity firms, which have been large contributors to overall deal numbers, have pulled back.

A look at the Blackstone/Emerson deal shows how buyout groups can arrange large and complex transactions without broadly syndicated loan markets as banks all but stop funding leveraged loans.

While Blackstone was able to overcome major hurdles, there aren’t that many other firms with the size and scope to arrange a deal of that size on their own.

FT : Qatar Investment Authority plans to raise Credit Suisse stake

Qatar Investment Authority plans to raise Credit Suisse stake
Deal will see up to a quarter of the Swiss bank being owned by Middle Eastern investors

The Qatar Investment Authority plans to increase its stake in Credit Suisse by investing in a share sale alongside the Saudi National Bank, according to people with knowledge of the talks.

The deal will result in up to a quarter of Credit Suisse stock being owned by Middle Eastern investors, as the scandal-plagued lender seeks to raise SFr4bn ($4bn) to fund a radical restructure.

Last week, the Swiss bank announced it would strip back and spin off its investment bank, reduce its global workforce by 9,000 and cut SFr2.5bn of costs in a three-year strategic revamp aimed at moving on from a succession of crises and quarterly losses.

The SNB — whose own largest shareholder is the Public Investment Fund, the Saudi sovereign wealth fund — has agreed to invest SFr1.5bn in Credit Suisse for a 9.9 per cent stake.

While the majority of the investment will be made through a SFr1.76bn initial share placement, to be signed off at an extraordinary general meeting on November 23, the SNB will also take part in a SFr2.24bn rights issue later in the year.

The SNB will be joined by two other investors in the share placement, including QIA, which already owns 5 per cent of Credit Suisse stock.

One person with knowledge of the deal said the third investor was a Swiss group, though not a rival bank.

Credit Suisse’s largest investor, US investment group Harris Associates, will not take part in the share placement, but is expected to buy more stock as part of the rights issue, according to people with knowledge of the deal.

Olayan Group, an investment company owned by a wealthy Saudi family, is also not expected to take part in the share placement, but would retain its stake of about 5 per cent in the bank by participating in the rights issue.

After the share sales, SNB, QIA and Olayan will own between 20 and 25 per cent of Credit Suisse stock. SNB is keeping its stake in the bank at less than 10 per cent to avoid complications with the Swiss regulator, according to people with knowledge of the plans.

The QIA and Olayan both started investing in Credit Suisse during the financial crisis.

Credit Suisse is acting as global co-ordinator on the rights offering and has enlisted Deutsche Bank, Morgan Stanley, RBC Capital Markets and Société Générale as lead underwriters. Over the weekend, Credit Suisse added 14 other banks to the syndicate.

“This was done as a show of strength to give comfort to the market,” said one of the bankers involved in the discussions.

Credit Suisse executives had been in discussions with some banks over the summer about a potential capital raise, according to people with knowledge of the plans. But those talks were formalised at the start of October as the bank fought back against social media rumours about its financial strength and new chief financial officer Dixit Joshi started his job.

Credit Suisse and the QIA declined to comment.

FT : Engine trouble: shortage of precision parts hampers aviation recovery

Engine trouble: shortage of precision parts hampers aviation recovery
Aerospace companies struggle to meet demand from carriers clamouring for new planes

At a shopping mall near Clackamas, Oregon, a new recruitment centre is trying to sign up workers for a Warren Buffett-owned company that makes jet engine parts.

Two years after Precision Castparts laid off 40 per cent of its workers in response to a coronavirus pandemic-induced collapse in aeroplane demand, the company is back in hiring mode. It is making too few castings and forgings for engine makers, which in turn are struggling to satisfy the demands of the world’s biggest plane makers, Airbus and Boeing.

A lack of workers at the Berkshire Hathaway subsidiary is but one factor fuelling a global shortage of engines and the high-precision parts needed to make them, which is hampering the recovery of the global aviation industry just as passengers flock back to air travel.

“When the business downturns, the easiest call to make is to cut heads with no thought at all as to what I’m losing,” said Dave Coates, a former human resources manager at Precision Castparts who retired last year.

The attempt to attract recruits would not improve production any time soon, Coates added, given that it takes up to three years for production line workers to hone their skills.

Persistent supply chain disruptions were on display during recent third-quarter earnings updates from aerospace and defence companies, which were described as “a ride on the struggle bus” by Melius Research analyst Rob Spingarn.

Although shortages of parts and workers had “modestly improved”, Spingarn wrote in a note to clients, “it still seems that most companies are playing whack-a-mole”, leading to delayed sales and higher costs.

Boeing’s top executives told investors last week that a paucity of engines was the main thing preventing it from delivering much more than 20 of its 737 Max planes each month — even though airlines are clamouring for them.

The jet maker said production would speed up late next year and promised more details at Wednesday’s investor conference, which is seen as a test of the company’s ability to restore credibility with Wall Street in the wake of two fatal Max crashes.

“I am confident the industry will step up,” chief executive David Calhoun said last week. “But it will take more time than I probably had hoped.”


The situation at Airbus has improved since the summer, when chief executive Guillaume Faury said the company still had 26 “gliders”, newly built planes without engines. Now the number sits at fewer than 10.

But Faury said he expects the supply chain bottlenecks, which forced Airbus to scale back plans to increase production of the A320 family, to last well into next year.

Deliveries of Leap engines made by CFM International, a joint venture between France’s Safran and the US’s GE Aviation, are still behind schedule, executives said last month. The Leap engine powers Boeing’s 737 Max and is also an option for Airbus’s A320neo jets. Shipments rose to 347 in the third quarter, up 54 per cent on the previous three-month period but still lower than originally planned.

CFM had not yet made up for delays and is still “struggling on castings, especially in the US”, said Safran chief executive Olivier Andries.

Castings are made by pouring molten metal into moulds to form parts such as engine blades and “structural” elements that hold an engine together. The process is difficult to master. Even experienced workers can be forced to throw away 5 per cent of a production run, and for newer products, the proportion can be as much as half.

Indy Rattu, vice-president for European operations at UK-based Doncasters, said the high levels of qualification and certification needed in the industry were a challenge.

The high-precision manufacturer, which traces its roots to the city of Sheffield in 1778, makes blades and structural castings for engine makers. But it has found that some of its suppliers either did not survive the pandemic or are struggling to source materials and parts.

Although the number of suppliers that folded was relatively small, Rattu said that “many are qualified for very specific products, so when they disappear . . . it makes the job of finding an alternative extremely challenging”.

On an earnings call last week, Greg Hayes, chief executive of Raytheon, which owns engine maker Pratt & Whitney, said the lack of castings stemmed from labour shortages.

Ron Epstein, analyst at Bank of America, said: “Aerospace has had, on average, an older workforce. If you accelerated your retirement because of Covid, a lot of those folks are just gone. And it’s highly skilled labour. You can’t just take someone off the street and have someone do this.”

Companies are also reluctant to start making castings and forgings because the list of potential customers is limited, added Epstein, unlike, for instance, the auto industry.

The next six months will be critical as the industry navigates the recovery at a time of persistently high inflation.

A push by Boeing and Airbus to boost production will continue to put strain on the inherently tricky relationship with their suppliers. There is always “tension” between the two, said Nick Cunningham, analyst at Agency Partners in London.

“The airframers can probably often add more capacity by hiring some more assembly labour and working more shifts, but the suppliers may need to add hard tooling and skilled people and don’t want to invest big dollars to meet a brief peak in demand.”

Frank Perryman, chief executive of a privately held titanium mill in Pittsburgh that sells metal products to parts makers, said aerospace suppliers had reduced headcount and needed to see more orders before stepping up recruitment. “You can’t slow the world down and expect it to speed back overnight.”

>>> US After Hours Summary: ROG -39.9% falls as DD terminates deal; MTCH +16.9%, CRUS +5.7%, CZR +4.8%, AMD +4% higher on earnings; ZI -20.4%, CDLX -13.7%, FRPT -7.4%, ABNB -7.1%, CAKE -6.5% lower on earnings


After Hours Summary: ROG -39.9% falls as DD terminates deal; MTCH +16.9%, CRUS +5.7%, CZR +4.8%, AMD +4% higher on earnings; ZI -20.4%, CDLX -13.7%, FRPT -7.4%, ABNB -7.1%, CAKE -6.5% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: BAND +19.1%, CHGG +18.5%, MTCH +16.9%, QUAD +13.1%, OSPN +12.8%, SMCI +8.5%, SCI +7.8%, FRSH +6%, CRUS +5.7%, CZR +4.8%, UNVR +4.8%, YUMC +4.3%, AMD +4%, MDLZ +3.9%, OI +3.6%, ZETA +3.6%, INTU +3.6%, CRSP +3.4%, PSA +2.8%, MSTR +2.3%, WU +2.3%, MGY +1.8%, AYX +1.2%, EHAB +1%, EIX +0.9%, THG +0.4%, BTG +0.3%, CHK +0.3%, CLX +0.3%, AMK +0.2%, CRK +0.2% (also reinstates dividend), MIR +0.2%, PEAK +0.2%, AIZ +0.1%, PRO +0.1%, UNM +0.1%, VOYA +0.1% (also to acquire BNFT)

Companies trading higher in after hours in reaction to news: BNFT +47.6% (VOYA to acquire BNFT), ARCT +28.7% (collaboration and license agreement with CSL Seqirus), DD +6.5% (DD terminates deal to acquire ROG), TRQ +5.6% (RIO reaches agreement with certain shareholders of TRQ), BMBL +4.8% (in sympathy with strong MTCH earnings), EDAP +3% (Focal One HIFU reimbursement raised under CMS), LIAN +2.8% (first patient dosed in the Phase 3 LIBRA trial of TP-03), PRGO +2.6% (announces $170 mln investment to expand US infant formula manufacturing), EBS +1.2% (announced results from Phase 2 study evaluating its single dose chikungunya), AROC +0.1% (announces successful completion of a field pilot of its methane capture technology), DK +0.1% (increases dividend)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: ZI -20.4%, CDLX -13.7%, CACC -8.7%, BGFV -8.1%, IRTC -7.7%, ENVX -7.7% (also signs MoU with one of the largest consumer electronics companies; also announces advancements to its laser technology program and bolsters team), FRPT -7.4% (also names new CFO), ABNB -7.1%, CAKE -6.5% (also authorizes additional 5 mln shares to repurchase program), CNDT -6.3%, CWH -5.7%, ANDE -5%, SKY -5%, VRAY -4.5%, SPNE -3.9%, VRSK -3.6%, PUMP -3.5%, LTHM -3.1%, LFUS -3%, SIMO -2.8%, DENN -2.7%, NMIH -2.4%, PRU -2.4%, DVN -2.1% (also lowers dividend), AEIS -2%, AIG -2%, ET -1.8%, TSLX -1.7% (also increases dividend), OKE -1.6%, MCK -1%, REZI -0.9%, ATEN -0.9% (also increases dividend), PAYC -0.5%, ATCO -0.4%, APAM -0.2%, EA -0.2%, RNR -0.2%, INSP -0.1%, INST -0.1%, KAI -0.1%, ADC -0.1%

Companies trading lower in after hours in reaction to news: ROG -39.9% (DD terminates deal to acquire ROG), PUMP -3.5% (acquires Silvertip Completion for $150 mln in cash and stock), RYI -2.1% (acquires Excelsior), PAAS -0.5% (expands high-grade silver zone at the La Colorada Skarn project), RIO -0.3% (RIO reaches agreement with certain shareholders of TRQ), RKLB -0.2% (confirms that it will attempt to catch an Electron rocket with a helicopter)


FT Lex : Italian corporates: Meloni’s turn to ride the not-so-merry-go-round

Italian corporates: Meloni’s turn to ride the not-so-merry-go-round
Premier is unlikely to prove radical on state ownership

Fans of such searing Italian screen classics as ‘La Strada’ care little for the cosy charms of ‘Groundhog Day’. Yet the Hollywood time loop comedy has greater relevance for many Italian businesses. Their turnround efforts have been as continual and unsuccessful as weatherman Bill Murray’s dates with producer Andie MacDowell.

Foreign investors hope new prime minister Giorgia Meloni will be bold in ending these longstanding sagas. Bitter experience is tempering their expectations.

Business headlines feature the usual suspects. ITA, the airline formerly known as Alitalia, has been nationalised and is seeking a buyer. Telecom Italia Mobile, labouring under the debt load of past acquisitions, is embroiled in a longstanding attempt to merge its grid with Open Fiber. Monte dei Paschi di Siena is proceeding with the most vital capital raising since the last one.

These soap operas are expressions of Italy’s peculiar take on capitalism. Jobs are rigorously protected and M&A is correspondingly rare. That has fostered subscale, strategically challenged groups with bloated cost bases and lean and hungry rivals.

Consolidation is required. ITA needs to join an international network of long-haul routes. MPS should plug into a bigger banking network. Two broadband grids only makes sense to duplicate employees.

The chances of Meloni’s new government seizing the nettle?

ITA is a lighter version of Alitalia, having dropped ballast en route. But privatisation momentum has stalled alongside talks with Delta-KLM and private equity group Certares. Monte dei Paschi di Siena has announced 3,500 job losses, but potential acquirers remain wary. Over at Telecom Italia Mobile, shareholders in Open Fiber have just asked for an extension to make an offer.

A change of government always brings uncertainty. Given the regularity of that occurrence in Italy, uncertainty is the only thing you can bank on. The flipside of Meloni’s reassuringly moderate line on purely political issues is that she is unlikely to prove radical on state ownership.

Her successor can also expect to wrestle with an airline, a Sienese bank and a couple of telecom networks.

WSJ : Before OPEC+ Production Cut, Saudis Heard Objections From a Top Ally, the

Before OPEC+ Production Cut, Saudis Heard Objections From a Top Ally, the U.A.E.
Emirati officials echoed American concerns about the timing of the decision

ABU DHABI—The United Arab Emirates sent its national security adviser to Riyadh in September on a secret mission to dissuade Saudi Arabia’s crown prince from pushing an oil-production cut that would anger the U.S. and risk painting oil producers as Russian allies, people familiar with the trip said.

The Emirati official, Sheikh Tahnoun bin Zayed Al Nahyan, a brother of the U.A.E.’s president, met with Saudi Crown Prince Mohammad bin Salman and echoed Washington’s view that reducing output wasn’t economically necessary and warned of geopolitical fallout, the people said.

Prince Mohammad was unmoved, they said.

Saudi Arabia persuaded the OPEC+ group of 23 oil-producing countries at an Oct. 5 meeting to slash the amount of crude it pumps by 2 million barrels a day starting this month. Oil prices rose to $97 a barrel. On Tuesday they traded around $94, about 15% higher than before news of the planned cut spread in late September.

Washington—contending with high inflation and eager to starve Russia of income from petroleum, a critical export—made clear its displeasure. President Biden warned of unspecified consequences.

An Emirati spokesperson said the information about Sheikh Tahnoun, the Saudis and production cuts wasn’t accurate, without elaborating.

The divide between the Emiratis and Saudis, who have long cooperated closely on energy and security, is a sign of discomfort among some members of the Organization of the Petroleum Exporting Countries who worry the cut will damage their own relations with the U.S.

Sheikh Tahnoun’s trip also shows the rising ambition of the U.A.E. as an oil producer that can challenge the Saudis on policy, if not always successfully.

Saudi officials have said the production cut wasn’t political but was an economic necessity, not just for Saudi Arabia but for the global energy market.

With the global economy sputtering over inflation and a China slowdown, the Saudi energy minister, Prince Abdulaziz bin Salman, said any delay in making the production cut would have been wasted time, citing his experience in previous market crashes in 2008 and 2020.

“When you forfeit that opportunity, you lose time, you lose chances,” Prince Abdulaziz told a conference last week.

As Western criticism of the production cut mounted, and word that there was dissension within OPEC, Saudi Arabia pressed the U.A.E. and others to issue statements backing the production cut.

The Emiratis publicly declared their support for the deal. But Emirati officials also have indicated to Washington that they could supply the market with more crude, if needed.

The U.A.E. president, Sheikh Mohammed bin Zayed al Nahyan, has tried to chart a less confrontational posture with the U.S. than his counterpart in Riyadh, even as both men continue to cultivate relations with American rivals like Russia and China.

The Emiratis also have moved more quickly than the Saudis to patch up regional relationships with Iran, Turkey and Syria.

The two countries have also become economic rivals in recent years, as Prince Mohammed tries to lure more foreign companies away from the region’s international finance hub, Dubai, in the U.A.E., to Riyadh and eventually to Neom, a futuristic city the Saudi crown prince is building in the desert.

The ramifications of the dispute are likely to play out for months. The Biden administration is consulting with U.S. lawmakers as it considers what steps it should take to reshape its relationship with Saudi Arabia.

Saudi officials expressed shock at the Biden administration contention that they were siding with Moscow and vowed to reassess their relationship with Washington as a result.

In an effort to stave off a production cut and assuage Saudi fears of a sharp drop in petroleum prices, U.S. officials had told the Saudis they would buy oil on the market to replenish Washington’s strategic stockpiles if the price of Brent, the main international benchmark, fell to $75 a barrel, according to U.A.E. and U.S. officials and people inside the Saudi government.

According to people inside the Saudi government, Prince Mohammed was alarmed by an economic analysis from his energy minister, Prince Abdulaziz, that warned oil could fall below $50 a barrel, imperiling the kingdom’s expansive budget and an ambitious slate of economic reforms, known as Vision 2030, aimed at freeing the country from its dependence on oil revenues.

Saudi officials told both their Emirati and American counterparts that they believed the oil market could collapse if they didn’t act, said people familiar with the matter.

This isn’t the first time the U.A.E. has clashed with Saudi Arabia over oil policies.

Under OPEC’s complex quota system, the U.A.E. is obligated to hold its crude production to no more than 3.018 million barrels a day. State-owned Abu Dhabi National Oil Co., which produces the vast majority of the U.A.E.’s output, has an output capacity of 4.45 million barrels a day and plans to accelerate its goal of reaching 5 million barrels of daily capacity by 2025. Abu Dhabi has long pushed for a higher OPEC quota, only to be rebuffed by the Saudis, OPEC delegates have said.

Last year, the country was the lone holdout on a deal to boost crude output in OPEC+, saying it would agree only if allowed to boost its own production much more than other members. The public standoff inside OPEC was the first sign that the U.A.E. has adopted a new strategy: Sell as much crude as possible before demand dries up.

For years, the region’s oil-producing governments have said they aren’t worried about finding crude buyers far into the future. The U.A.E., which holds some of the world’s largest untapped crude reserves, is breaking from that orthodoxy, according to people familiar with the strategy. The country wants to pump and sell as much as it can now, when demand and prices are strong. Proceeds will help it wean its economy off oil.

>>> US Close Dow -0.24% S&P -0.41% Nasdaq -0.89% Russell +0.25% VIX 25.81 -0.27%

Closing Stock Market Summary

The stock market kicked off November on an upbeat note. The S&P 500, Dow, and Nasdaq were up 1.0%, 1.5%, and 0.7%, respectively, at this morning's highs. The initial upside push was driven by some optimism about China potentially entertaining a shift in coming months to its zero-COVID policy, falling Treasury yields, and some M&A buzz after Johnson & Johnson (JNJ 173.09, -0.88, -0.5%) said it would acquire Abiomed (ABMD 377.82, +125.74, +49.9%) at a 47% premium over yesterday's closing price.

The market quickly shifted to retreat mode, though, after the release of economic data at 10:00 a.m. ET. That data included a weaker-than-expected ISM Manufacturing Index for October, a stronger-than-expected Construction Spending Report for September, and a stronger-than-expected JOLTS - Job Openings Report for September.

The main sticking point in the data was the elevated JOLTS number, indicating the labor market remains strong and that wage-based inflation pressures are likely to continue. That understanding created some concerns that the Fed might not soften its rate hike approach following the November meeting. 

Both the stock and Treasury markets saw buyers step away in the wake of the data and retreat to lower price levels. The 10-yr Treasury note yield, which was below 4.00% while stocks rallied, settled at 4.05%. The 2-yr note yield, at 4.43% earlier, settled at 4.51%.

After the dealing with the initial retreat, the stock market reverted to wait-and-see mode and stuck to a fairly narrow trading range for the remainder of the session. This come ahead of the FOMC decision tomorrow at 2:00 p.m. ET followed by Fed Chair Powell's press conference at 2:30 p.m. ET. 

Notably, small and mid cap stocks fared better than their larger peers today. The Russell 2000 (+0.3%) and S&P Mid Cap 400 (+0.4%) sported a modest gain while the three main indices closed below the flat line. 

Semiconductor stocks were a specific pocket of strength today. The PHLX Semiconductor Index (SOX) closed up 0.7% after some pleasing earnings news from Lattice Semi (LSCC 52.58, +4.07, +8.4%) and NXP Semi (NXPI 151.85, +5.77, +4.0%). 

On an individual basis, Uber (UBER 29.75, +3.18, +12.0%) was a winning standout for growth stocks after posting quarterly results and raising its Q4 adjusted EBITDA guidance.

Roughly half of the 11 S&P 500 sectors suffered a loss today with communication services (-1.3%) buried in last place. Meanwhile, energy (+1.1%) sat atop the leaderboard while oil prices rose in response to the prospect of China "reopening" in coming months. WTI crude oil futures rose 2.2% to $88.40/bbl.

Ahead of Wednesday's open, Brinker (EAT), C.H. Robinson (CHRW), Canada Goose (GOOS), CVS Health (CVS), Dine Brands (DIN), DISH Network (DISH), Estee Lauder (EL), Ferrari (RACE), Generac (GNRC), Humana (HUM), New York Times (NYT), Paramount Global (PARA), Rockwell Automation (ROK), Scotts Miracle-Gro (SMG), Vulcan Materials (VMC), Yum! Brands (YUM), and Zimmer Biomet (ZBH) are set to report earnings.

Looking ahead to Wednesday, market participants will receive the following economic data:

  • 7:00 ET: Weekly MBA Mortgage Index (prior 1.7%)
  • 8:15 ET: October ADP Employment Change (Briefing.com consensus 198,000; prior 208,000)
  • 10:30 ET: Weekly crude oil inventories (prior +2.59 mln)
  • 14:00 ET: November FOMC Decision (Briefing.com consensus 3.75-4.00%; prior 3.00-3.25%)

Reviewing today's economic data:

  • The October ISM Manufacturing Index dropped to 50.2% ( consensus 50.0%) from 50.9% in September. A number above 50.0% is indicative of expansion, yet the lower reading versus September points to a deceleration in overall manufacturing activity. October marked the 29th consecutive month of expansion in the manufacturing sector, yet it was the lowest reading since May 2020.
    • The key takeaway from the report is that it connotes a moderation in manufacturing activity that is bordering on a contraction in manufacturing activity, which hasn't been seen since the pandemic-led contractions in April and May 2020. The tepid reading will raise concerns about the U.S. economy being at risk of experiencing a recession.
  • Total construction spending increased 0.2% month-over-month in September (consensus -0.5%) following an upwardly revised 0.6% decline (from -0.7%) in August. Total private construction was up 0.4% month-over-month while total public construction spending was down 0.4%. On a year-over-year basis, total construction spending was up 10.9%.
    • The key takeaway from the report is that new single-family construction (-2.6%) continues to be a major drag on overall construction spending, reflecting the adverse impact of the spike in mortgage rates, higher building costs, and weakening homebuilder sentiment.
  • JOLTS Job openings totaled 10.717 million in September from the prior revised total of 10.280 million (from 10.053 million).

Dow Jones Industrial Average: -10.1% YTD
S&P Midcap 400: -14.1% YTD
S&P 500: -19.1% YTD
Russell 2000: -17.5% YTD
Nasdaq Composite: -30.4% YTD

WSJ : Saudi Arabia, U.S. on High Alert After Warning of Imminent Iranian Attack

Saudi Arabia, U.S. on High Alert After Warning of Imminent Iranian Attack
Saudis said Tehran wants to distract from local protests, and the National Security Council said the U.S. is prepared to respond

Saudi Arabia has shared intelligence with the U.S. warning of an imminent attack from Iran on targets in the kingdom, putting the American military and others in the Middle East on an elevated alert level, Saudi and U.S. officials said.

In response to the warning, Saudi Arabia, the U.S. and several other neighboring states have raised the level of alert for their military forces, the officials said. They didn’t provide more details on the Saudi intelligence.

Saudi officials said Iran is poised to carry out attacks on both the kingdom and Erbil, Iraq, in an effort to distract attention from domestic protests that have roiled the country since September.

The White House National Security Council said it was concerned about the warnings and ready to respond if Iran carried out an attack.

“We are concerned about the threat picture, and we remain in constant contact through military and intelligence channels with the Saudis,” said a National Security Council spokesperson. “We will not hesitate to act in the defense of our interests and partners in the region.”

Iran has already attacked northern Iraq with dozens of ballistic missiles and armed drones since late September, one of which was shot down by a U.S. warplane as it headed toward the city of Erbil, where American troops are based. Tehran has publicly blamed Iranian Kurdish separatist groups based there for fomenting the unrest at home.

Iranian authorities have also publicly accused Saudi Arabia, along with the U.S. and Israel, of instigating the demonstrations.

FT : Russian oil exports will fall despite growing ‘dark fleet’, Vitol chief say

Russian oil exports will fall despite growing ‘dark fleet’, Vitol chief says
Supplies will drop by up to 1mn barrels per day when new sanctions come in, according to Russell Hardy

Russia’s oil exports are set to decline by as much as 1mn barrels a day this winter even as the country expands its “dark fleet” of tankers, according to the world’s biggest independent energy trader.

Russell Hardy, chief executive of London-based Vitol, said that while Russia had made progress in shielding itself from the effects of tougher sanctions affecting its seaborne crude that come into effect from December, exports are still likely to fall by 500,000 b/d to 1mn b/d this winter.

“The expectation is that nearly all European companies will turn their back on business that is not compliant,” Hardy told the Financial Times. “We think [Russia’s] logistical solutions are growing, they’re eating away at the problem. But whether or not they’ve eaten away at the whole problem we don’t know.”

Western countries are torn between trying to restrict Moscow’s revenues following its invasion of Ukraine and concerns that losing Russian oil could cause a price surge when countries are already grappling with energy-driven inflation.

The US is leading the G7 group of countries in plans to initiate a price cap on Russian oil exports before an EU ban on insurance for tankers carrying Russian oil takes effect on December 5. That would allow companies shipping Russian oil to retain access to western markets and institutions if the oil is sold below market prices.

Russian president Vladimir Putin has said, however, that Moscow will not sell oil under the price cap plan.

Hardy said Russian oil companies would be “under the gun to find a solution” and he expected to see a growing number of ship-to-ship transfers and other methods used to mask Russian oil. The largest supertankers cannot access Moscow’s Baltic ports, but Hardy said he expected Russia to use its fleet of smaller vessels to ferry oil to waiting very large crude carriers (VLCCs) near EU waters, a potential environmental risk.

Russian oil exports have largely held up since the invasion even as many European buyers have turned their backs on Moscow, with India and China increasing imports.

Both India and China have state-backed fleets of VLCCs, though it remains unclear whether they will let Russia utilise them without access to western insurance and reinsurance markets.

Vitol was once one of the largest shippers of Russian oil but says it has stopped dealing in cargoes from companies such as state-backed Rosneft. Vitol traded 7.6mn b/d of oil globally in 2021, giving it good visibility of often opaque physical markets.

Bjarne Schieldrop, an analyst at Norway’s SEB, said he expected oil prices to average $115 a barrel in the first quarter of next year — up from $95 today — due to disruptions to Russian supplies, which comprise about 5.5mn b/d by sea and 2.5mn b/d by pipeline in a 100mn b/d global market.

Schieldrop said the existing “dark fleet” was estimated to total about 270 tankers, according to shipbroker BRS, many of these are tied up transporting Iranian and Venezuelan oil that is subject to sanctions. Traders suspect Russian companies have been looking to secure older tankers that are due to be scrapped.

“There will be a lot of friction. A lot of under the radar activity,” Schieldrop said. “And there will be disrupted flows of Russian crude oil to the market.”

Hardy said oil prices could remain under pressure this winter, however, despite the expected shortfall in Russian supplies and moves by the Opec+ group of big producers to restrict production to prop up the price.

He said Vitol’s estimates for oil demand in the fourth quarter were about 2mn b/d lower than earlier this year, reflecting weak demand in the aviation sector, the US petrol market, and in China.

“Our long-term view is still supportive of oil prices for the next five years,” said Hardy. “However, we’re fighting poor demand today and economic doom and gloom.”

FT : Adidas/fantasy M&A: Yeezy would make buyout groups queasy

Adidas/fantasy M&A: Yeezy would make buyout groups queasy
Only the boldest buyout fund would back a bid at present

Trip-ups by big public companies had until recently invited private equity bidding interest. Buyout specialists will be watching the woes of Adidas wistfully. The German sneaker giant has lately been as clodhopping as a jogger in wellies.

An exercise in fantasy M&A suggests a buyout would be no walkover. Big-ticket leveraged acquisitions are tougher to finance. With lower debt comes lower returns.

Adidas has some generic difficulties plus a specific problem called Kanye West. The company has broken with the rapper after he made odious anti-Semitic comments on social media. So much for the high-margin Yeezy sub-brand, accounting for an estimated 40 per cent of operating profits.

Shares in rival Nike are down just over a quarter in six months. Adidas has lost half its market value.

A buyout still looks tricky. At a 30 per cent premium to the stock price a private equity buyer would pay some €25bn for the equity. It would take on €4bn of debt for a total enterprise value of €29bn, about 14 times ebitda for this year.

How much buyout debt could Adidas carry? In the past 12 months, it made about €1bn in cash flow after capex. That would support some €11bn of debt at a yield of 6 per cent. But lenders are risk-averse. At a 10 per cent yield and with higher interest cover, debt capacity would fall to €5bn.

A buyer would have to finance three-fifths of the deal with equity at best. That is a far cry from 60-70 per cent leverage of the past.

There is a world in which an LBO still makes sense. Suppose a buyer raised €11bn of debt, doubled ebitda by 2025 in line with forecasts and offloaded Adidas at the purchase multiple. The annual internal rate of return would be almost 40 per cent.

But with €5bn of debt and an exit at 10 times ebitda, the current level, the IRR would be about 12 per cent, lower than the prospective threshold for most buyout groups.

Adidas is an attractive brand. But only the boldest buyout fund would back a bid at present.