Draghi on brink after coalition partners withdraw backing
Italian prime minister set to quit as League, Forza Italia and Five Star say they will boycott confidence vote
Italian prime minister Mario Draghi’s government was unravelling on Wednesday evening as members of his national unity coalition walked out of parliament ahead of a vote of confidence in his leadership.
Matteo Salvini’s rightwing League, Silvio Berlusconi’s Forza Italia and the populist Five Star Movement said they would boycott the vote, saying Draghi had failed to give the Italian public adequate answers to pressing questions.
Draghi is expected to submit his resignation again to President Sergio Mattarella, which could trigger early elections and exacerbate a political crisis. This followed a previous offer to resign last week, which was rejected.
The bitter collapse of the government followed a rancorous parliamentary debate on Wednesday, with Draghi accusing members of his coalition of seeking to subvert his policy agenda, even as they claimed to profess loyalty.
He had demanded the members of his coalition recommit themselves to his reforms but his gamble backfired as the three biggest parties balked.
“We were expecting answers from you for businesses and households, for students facing rising petrol prices, workers paying higher utility bills, and even taxi drivers — but nothing,” Stefano Candiani, a senator from the League, told parliament, announcing the party’s decision to boycott the vote of confidence.
Italy’s latest political crisis comes as the country faces mounting economic and inflationary pressures, stemming from Russia’s invasion of Ukraine.
The prospect of protracted uncertainty is likely to unsettle financial markets, the EU and the European Central Bank, which is set to begin a tightening cycle on Thursday that will raise Italy’s borrowing costs.
It also increases doubts over Italy’s ability to fulfil conditions laid down by the EU for receipt of its €200bn share of the bloc’s €750bn coronavirus recovery fund. Italy has so far received €46bn, with a further €21bn tranche due in the coming weeks.
Draghi’s exit would leave an unfinished agenda of important economic reforms — including overhauls of the tax, justice and procurement systems — intended to make Italy a more attractive place to do business, and improve long-term growth.
“Pivotal structural reforms, necessary for the EU recovery fund’s next instalment to arrive, have not been completed,” said Giuliano Noci, a business strategy professor at Milan Politecnico. “This could realistically derail the recovery plan.”
Noci said that Draghi was also playing a key role in the western alliance against the Russian invasion of Ukraine, and his departure would have geopolitical implications. “He has become a reference point for Europe in the Nato camp, and without him the situation will complicate further.”
A former ECB president, Draghi was tapped to form a new national unity government in February 2021 as Italy reeled from Covid-19 and suffered one of western Europe’s biggest pandemic-related economic contractions.
Draghi and his team revived the faltering Covid vaccination programme and oversaw last year’s economic rebound, with gross domestic product growing 6.6 per cent.
But the invasion of Ukraine put more pressure on the prime minister, given Italy’s historically warm ties to Russia. Draghi took a tough line against the invasion, vigorously condemning Moscow for undermining the international order.
But his stance, and his promise of military support for Ukraine, unsettled members of his coalition, particularly Five Star, which has been traditionally sympathetic towards Moscow.
Canal Plus in Advanced Talks to Acquire Orange’s Film, Television, Pay-TV Divisions
Canal Plus Group is in advanced discussions to acquire the film, television, and pay-TV divisions of Orange, the leading French telco group.
Canal Plus Group, whose parent company is Vivendi, already owns 33.3% of OCS, the pay-TV arm of Orange, and has been distributing the service on its platform as part of its cable bundle since 2011. Canal Plus and Orange could enter into exclusive negotiations as early as September and would then be subjected to anti-trust approval, according to a pair of senior industry sources. Closing that pact could take another year.
The deal currently being discussed would also include the acquisition of Orange Studio, the content division in charge of co-producing, selling abroad and distributing select films in France. Recent movies released locally by Orange Studio include Florian Zeller’s “The Father.” The banner also has French rights to Zeller’s follow up “The Son.”
OCS, meanwhile, has been investing big bucks in premium content to recruit subscribers since launching in 2008, notably with its multi-year deal with HBO, but the banner has struggled to become financially viable. OCS has been weakened by the successive launches of competitive offers from rival SVOD services in France. On top of that, OCS’s exclusive multi-year deal with HBO, which was its biggest asset to lure new subs, is coming to an end in early 2023. Although Warner Bros. Discovery is now looking to delay the roll out of its combined HBO-Discovery+ service in France beyond 2023, OCS isn’t in a position to renegotiate another type of exclusive deal.
Canal Plus Plus, however, would have enough leverage to strike an exclusive distribution deal with this new HBO-Discovery+ service to aggregate it as part of its cable bundle in a pact similar to the one it signed with Disney + in France, according to Francois Godard at Enders Analysis. Godard also predicts such deal would have strong chances of being approved by the anti-trust board.
In 2011, the anti-trust board blocked Canal Plus Group’s attempt to merge with OCS and launch a premium pay TV channel, but Godard says “the world has changed and Canal Plus is no longer dominating the French market.” “Watchdog authorities are aware that Canal Plus must consolidate to face off global streamers like Disney which are spend €30 billion in content this year,” Godard continued. “Canal Plus’s strategy today is to increase their scale, they’re on a world market and they need to ramp up their worth and subscriber base to finance bigger productions,” the analyst continued.
As a pay TV service, OCS has to invest in local and European films, like Canal Plus, and benefits from an exclusive window set at six months after their theatrical release — way before global streamers like Netflix and Amazon which have a 15-month window. OCS signed last February a three-year pact with film orgs to invest at least €60 million on French and European film in the three years. But it’s uncertain OCS would continue operating as it does today under these obligations if it became fully owned by Canal Plus Group. For French producers looking to finance their movies, that could mean one less source of pre-financing to tap into. “Canal Plus is known for digesting its rivals — it did it with TPS, a pay TV group which merged with Canal Plus in 2007 and was dead by 2012 — and OCS’s fate could be identical,” said a source close to Orange.
Earlier this year, Vivendi was in discussions with Lionsgate to take a stake in Starz, but its unclear where those talks stand at this point. “Canal Plus had two targets, Starz and OCS/Orange Studio, but (Vincent) Bolloré (Vivendi’s boss) is afraid of Hollywood, and OCS/Orange Studio represent an attractive asset for Canal Plus Group because they have a fairly large library of films,” said an industry source. In addition, Canal Plus already has a 33.3-percent stake in OCS and “isn’t willing to let another group step in and/or acquire the company,” said another source.
Vivendi is also on track to acquire a 57.35-percent stake in Lagardère, the French media, publishing and travel retail conglomerate. The French company is also a shareholder in Banijay, as well as FL Entertainment, the newly-listed banner comprising Banijay and the online gambling group Betclic.
Representatives of Canal Plus declined to comment on this report. Variety is awaiting a comment from Orange.
LVMH Highlights Recruitment Drive as Vacancies Reach Record Levels
The world's biggest luxury group is looking to fill 2,000 positions by the end of the year amid a shortage of skilled workers.
WE NEED YOU: LVMH Moët Hennessy Louis Vuitton is hiring.
While that may be a given for the world’s largest luxury group, vacancies are peaking amid a shortage of skilled workers, Chantal Gaemperle, executive vice president of human resources and synergies at LVMH, said at an event highlighting the company’s recruitment efforts during the last 12 months.
“We have to prepare for the future now, and it’s all the more crucial as it is difficult to find talent and we have very substantial needs,” she told employees gathered at LVMH headquarters on Avenue Montaigne in Paris for the screening of a short film based on the story of Lucie Faucher, an apprentice seamstress at Givenchy.
“We have a record number of vacancies this year. We have 2,000 left to fill by the end of the year and we need leather goods workers, jewelers, watchmakers and sales associates, as well as hotel and restaurant workers. And if we project ourselves a little further out to 2024, we’re talking about 30,000 positions to be filled to ensure continuity,” she added.
Underlining the importance of the issue, LVMH chairman and chief executive officer Bernard Arnault attended the screening of the documentary, titled “Métiers d’Excellence, le cercle vertueux,” or “Métiers d’Excellence, the Virtuous Circle.” The group, which owns brands including Louis Vuitton, Dior and Guerlain, plans to broadcast a trailer for the film on LinkedIn, Facebook and Twitter on Wednesday.
Alexandre Boquel, head of development for LVMH’s Métiers d’Excellence division, said the group has ramped up efforts to source new talents, including a recruitment tour in five French cities and school programs targeting 1,600 students under the age of 14. “It’s been a crazy year with a single obsession: transmitting know-how,” he said.
LVMH plans to ramp up the intake at its Institut des Métiers d’Excellence, which has trained some 1,400 people in France, Switzerland, Italy, Spain, Germany and Japan since it was founded in 2014. This fall, 450 apprentices will join the program, which is expanding for the first time to the U.S. with jeweler Tiffany & Co.
Boquel invited Faucher, who is combining her apprenticeship at Givenchy with vocational studies at the Institut Français de la Mode, on stage to detail her experience. The trainee seamstress revealed she applied for the position by sewing a jacket and embroidering her CV on the lining.
To underline the potential of a career in craftsmanship, Boquel highlighted the fact that Jacqueline Smeyers-Picot, the head of the flou division at Dior’s haute couture workshop, this year won the prestigious National Order of Merit for her services to the fashion industry.
Gapping down
In reaction to earnings/guidance:
- FOR -10%, BBWI -8.6%, BKR -4.7%, IBKR -2.2%, JBHT -2%, HOPE -1%, BIIB -1%, ASML -0.9%, ELV -0.7%
Other news:
- VBLT -77.1% (announces top-line data from OVAL Trial)
- RVMD -11.5% (prices offering of 11.5 mln shares of common stock at $20.00 per share)
- INZY -4.8% (announces preliminary data from Phase 1/2 trial of INZ-701)
- OMIC -3.4% (files for $250 mln mixed securities shelf offering)
- GOGL -3% (files mixed securities shelf offering)
- LQDA -2.4% (US patent office rules in its favor)
- QGEN -1% (surpasses 3 mln NGS patient test cases)
- AIR -1% (awarded a Captains of Industry contract with the Defense Logistics Agency)
- MRK -0.9% (reports Phase 3 KEYNOTE-412 Trial did not meet its primary endpoint)
Analyst comments:
- ATRA -4.4% (downgraded to Sell from Neutral at Citigroup)
- ANET -3.9% (downgraded to Underperform from Buy at BofA Securities)
- FFIV -2.1% (downgraded to Neutral from Buy at BofA Securities)
- CMI -1.1% (downgraded to Mkt Perform from Outperform at Bernstein)
- EXLS -1.1% (downgraded to Sell from Neutral at Citigroup)
- EQR -1% (downgraded to Underweight from Neutral at Piper Sandler)
- ALLY -0.9% (downgraded to In-line from Outperform at Evercore ISI)
Gapping up
In reaction to earnings/guidance:
- OMC +6.8%, NFLX +6.3% (also to acquire animation studio Animal Logic), FULT +4.3%, NBHC +3.4%, HIVE +2.2%, MATX +1.3%, CALM +1.1% (also to pay $0.75/sh dividend as part of variable div policy), ABT +0.6%, CMA +0.5%, NDAQ +0.5%
Other news:
- AEHR +7.3% (receives $12.8 mln in orders from its lead silicon carbide test and burn-in customer)
- BDSX +4.5% (to present data at IASLC 2022 World Conference demonstrating that the VeriStrat Test is predictive of progression free survival and overall survival in patients with low or negative PD-L1 treated with immune checkpoint inhibitors)
- BLTE +3.4% (submits IND application to FDA for LBS-008 Phase 3 clinical trial)
- ROKU +2% (in sympathy with NFLX earnings)
- LSCC +1.5% (collaborates with LG to bring edge AI technology to LG's 2022 premium laptop lineup)
- DIS +1.5% (in sympathy with NFLX earnings)
- PARA +1.4% (in sympathy with NFLX earnings)
- NVAX +1.3% (confirms that CDC Advisory Committee voted unanimously to recommend COVID-19 vaccine; President Biden issues statement on FDA and CDC authorizing Novavax's COVID-?19 vaccine for adults)
- WBD +1.2% (in sympathy with NFLX earnings; also plans to add massive collection of A24 films to HBO Max according to ScreenRant)
- CNM +1% (to acquire Inland Water Works Supply Co) .
Analyst comments:
- CHKP +2.6% (upgraded to Buy from Underperform at BofA Securities)
- AXTA +1.9% (upgraded to Overweight from Sector Weight at KeyBanc Capital Markets)
- BERY +1.2% (upgraded to Outperform from Neutral at Credit Suisse)
Early premarket gappers
- Gapping up:
- AEHR +7.4%, NFLX +7.1%, OMC +6.9%, BDSX +4.5%, FULT +4.3%, HIVE +4%, NBHC +3.4%, ROKU +3.2%, XOS +2.1%, DIS +2.1%, PARA +2%, WBD +1.8%, MATX +1.8%, LSCC +1.5%, FUBO +1.5%, NVAX +1.3%, TSLA +1.3%, BA +1.2%, VALE +1.1%, QGEN +1%, CNM +1%, CALM +1%, DCP +0.9%, RIO +0.9%, HOPE +0.8%, EA +0.6%
- Gapping down:
- VBLT -79%, FOR -16.3%, RVMD -10.5%, INZY -4.8%, OMIC -3.4%, IBKR -3.1%, LQDA -2%, GOGL -1.4%, AIR -1%, BLTE -0.8%, JBHT -0.6%, ELV -0.5%
Mergers destroy value. Without reform, nothing will change
The M&A playbook of warped incentives, rent extraction and creative accounting is overdue a rewrite
It’s an often-quoted statistic that roughly 70 per cent of mergers fail. McKinsey’s 2010 report, from which that estimate is taken, echoes the consistent conclusion of four decades of academic research: most mergers fail to deliver any improvement in operating profit.
Yet despite the weight of evidence, vast and ever-increasing sums are spent on mergers and acquisitions — around $5tn globally in 2021 — and on some measures the number of deals has seen a forty-fold increase in forty years.
Should we expect merger rates to continue rising, accompanied by very high failure rates? Absent changes in the present framework, undoubtedly. The M&A market’s many talented, hard-working, highly skilled, law-abiding, income-maximising participants will continue to promote destructive mergers. It would be surprising if they did not.
There are three interwoven strands in this argument. First, contracts (explicit and implicit) often reward key players in the M&A market — executives and advisers — for deals that result in zero or negative operating gains.
Second, legal and taxation arrangements often enable acquirer executives, as well as shareholders in these cases, to extract economic rent from other stakeholders in deals that yield no operating gains.
Third, accounting rules and practice often offer rich opportunities for acquirers to mislead the market about the prospective operating gains from merger, and to flatter performance measures following merger.
Contracts and incentives
“Show me the incentive and I will show you the outcome”, said Berkshire Hathaway vice-chair Charlie Munger. Incentives for bidder CEOs were the subject of a 2007 analysis by Jarrad Harford and Kai Li, which concluded that “even in mergers where bidding shareholders are worse off, bidding CEOs are better off three-quarters of the time.” One factor in this is the strong link between CEO salary and firm size. Acquisition of another company is one of the easiest ways to grow.
For example, the $27bn purchase of Refinitiv by London Stock Exchange Group in 2021 immediately tripled the acquirer’s revenue. LSE boss David Schwimmer was “rewarded with a 25 per cent increase in base salary . . . to reflect the LSE’s increased size following the Refinitiv purchase”. Yet in the same month, LSE shares fell 25 per cent on concerns about its ability to extract synergies from the acquisition.
In an attempt to align the interests of executives with shareholders, the last three decades have of course seen increasing use of bonuses linked to measures of performance such as earnings per share. But there are particularly rich opportunities afforded by mergers to game performance-related pay, through morally hazardous borrowing and by tax avoidance and creative accounting, procedures that deliver improved pay and perks for no genuine improvement in the underlying operating performance that matters most for the wider economy.
Rewards to the CEO for increasing firm size are sometimes defended on the general grounds that a bigger organisation is harder to manage. But growing by the particular means of acquiring rivals can often bring the CEO a quieter life. In The Curse of Bigness, author Tim Wu describes how Facebook swallowed up Instagram and WhatsApp when their innovative products presented a challenge.
But don’t the non-executive directors constrain self-serving deals by executives? That’s not how it worked at General Electric, which in the two-decade tenure of Jack Welch was buying businesses at a rate of one a week. A recent book by Thomas Gryta and Tedd Mann gives a flavour of life in the GE boardroom:
One newcomer to the board under Welch was surprised by the CEO’s command of the board room and the sparse debate among the group. Confused by how the meeting transpired, the new director asked a more senior colleague afterward, “What is the role of a GE board member?”
“Applause,” the older director answered.
What about the investment bankers, lawyers, accountants and consultants hired by the acquirer? In practice it is not reasonable to expect professional advisers to caution against a deal they doubt will enhance operating profits, when the executives who hire them (and may hire them again) express no such doubts and are backing it to the hilt. After all, the advisers’ impressive fees are related to closing the deal, not to post-merger operating gains — fees of around $1.5bn in the case of AB InBev’s merger with SABMiller, one which was followed by unimpressive financial performance.
Rentier capitalism
In some cases, mergers that lead to operating losses can still advantage the acquirer’s shareholders. Here, it is other stakeholders who bear the cost, thanks to legal, taxation and central banking arrangements favouring shareholders and executives at the expense of many others: the taxpaying public, creditors, pensioners . . .
Debt-financed acquisitions can magnify the equity-holders’ earnings even where operating profits fall. Of course, more debt means a higher risk of failure. But due to limited liability provisions much of the downside risk associated with slender equity cushions is borne by others — moral hazard in action.
An illustration is provided by Carillion, the former UK construction company. It had been built via a string of acquisitions and relied heavily on debt finance. When it failed, it owed around £2bn to 30,000 suppliers, who would receive little from the liquidators, and some of whom were themselves bankrupted as a result. Fellow casualties included members of the Carillion’s systematically underfunded pension fund.
This incentive to make acquisitions unwarranted by operating gains is reinforced by the tax system. In most jurisdictions, corporation taxes are not levied on the portion of profits paid as interest to lenders. This privileged treatment makes it even easier to transform poor operating profits into enhanced surpluses for investors via a debt-financed merger. And the benefit can be particularly valuable in cross-border transactions.
Former tax inspector Richard Brooks writes in The Great Tax Robbery that “a cross-border takeover is to Britain’s tax lawyers and accountants what a well-fed wildebeest with a limp is to a pride of lions.” His examples include Spire Healthcare, acquirer of Bupa hospitals, “wiping out its taxable profits by paying interest offshore at 10 per cent.”
The incentives for unprofitable mergers offered by morally hazardous borrowing and tax subsidies have been yet further reinforced in recent years by the central banks’ manipulation of the debt market, forcing down interest rates. Cheap debt has been described by McKinsey partner Bryce Klempner as the “lifeblood of private equity”. And private equity has of course in recent years been a major force in the M&A market with its business model of buying firms, loading them with debt, and selling them a few years later. The model benefits then not only from imposing downside risk on other stakeholders, but also both from the generous tax treatment of debt finance, and from interest rates being held down by central banks.
To complete the package of benefits, the heads of these private equity firms have in the US and UK enjoyed privileged rates of tax on their personal profits from M&A, known as “carry”. In the words of an FT leader: “The result has been to foster a generation of buyout billionaires who have paid lower tax rates than their cleaners.”
Accounting tricks
Acquiring firms enjoy rich (but perfectly legal) opportunities to deploy creative accounting around mergers — flattering and smoothing reported and forecast profit, securing funding on unduly favourable terms, and masking subsequent declines in underlying performance.
A famous illustration is provided by GE’s spending spree — some 1700 acquisitions between 1980 and 2017 — followed by its decline and dismemberment. Critics have recounted creative accounting devices GE employed such as tweaking the expected future costs of multi-period contracts, fudging the value of inventory, writing down the ‘fair value’ of acquired assets and channel stuffing (bringing forward sales).
Reform?
Governments, regulators and non-executive directors could install a series of measures to eliminate or mitigate these problems in the M&A market. It isn’t as if all this is inevitable — there is much that could be done to make this dysfunctional market much more efficient than it currently is. But under the present framework, there is every reason to suppose the disappointing outcomes of the M&A market will continue unabated.
Once the clues are followed on incentives, rent extraction and creative accounting opportunities, frequent pursuit of unproductive merger turns out not to be mysterious. And key participants in mergers are unlikely to seek to alter the status quo themselves. On the contrary, as Neil Collins writes:
Think of the impact of a “transformational” deal, the thrill of the chase, the media spotlight, the boasting rights, and — of course — the massive pay rises. You will be number one! By the time it all ends in tears, the executives who have laid waste to the shareholders are long departed with their winnings . . .
The authors’ book, The Merger Mystery, is free to download