FT : UK officials weigh national security grounds to force London IPO for Arm

UK officials weigh national security grounds to force London IPO for Arm
Plan has drawn criticism within government circles and tensions with SoftBank over lobbying effort

The UK government has debated the use of national security legislation as a means to convince SoftBank to list Arm in London, as the Japanese investor reconsiders holding an IPO for the chip designer exclusively in the US.

Two people familiar with internal government discussions said it had weighed applying the UK’s new National Security and Investment Act, but has not formally done so. Some government officials have pushed back against the idea of invoking the law, believing it would not be applicable as the proposed listing was not considered an acquisition.

Government officials said they had preferred attempts at persuasion. Lord Gerry Grimstone, Britain’s investment minister, has met with Rajeev Misra, head of SoftBank’s $100bn Vision Fund, according to people briefed on the efforts, while Prime Minister Boris Johnson sent a letter to SoftBank executives.

A person involved in the discussions said the UK government had so far used “carrots” rather than “sticks” in the talks and had offered to provide Arm subsidies on research and grants. This person added that officials have not made specific threats and that their message was more akin to “you don’t want to make an enemy out of us”.

The interventions reveal how retaining Arm’s image as a UK success story has become a hot political issue, amid criticism that British markets are no longer an attractive home for globally significant tech companies.

Before SoftBank’s purchase in 2016 for $32bn, Arm was dual listed, with its primary stock held on the London Stock Exchange and secondary stock held via American Depositary Receipts in New York.

Representatives of the Japanese investment group have held a series of talks with UK ministers and officials in recent weeks, after SoftBank’s founder Masayoshi Son announced plans to return Cambridge-based Arm to the public markets.

The intense lobbying has led SoftBank to reopen the door to a listing in London to complement a principal listing in the US, according to multiple people familiar with the situation.

A spokesperson for the culture department said Chris Philp, technology minister, had not raised national security concerns with SoftBank. Both SoftBank and the UK’s business department also denied Lord Grimstone had raised the NSIA with the Japanese company. 

But a person familiar with ongoing talks said SoftBank executives became aware of the UK government’s discussions about potentially using the NSIA in future, considering it a ploy to push Arm towards a London listing.

This aggravated some of SoftBank’s leadership, the person said, as the move made little business sense because the US market is by far the most liquid and is where most prospective investors are based.

Another person who has worked with the government on the law said while the decision to launch an IPO would not itself be enough to allow the business secretary to intervene, if a foreign company took a significant stake in Arm following the listing, that could trigger a notification to the government. At that stage, the UK could attempt to block that stake or ask for it to be unwound.

People close to discussions said the listing venue does not have to be picked for several months and no final decisions have been reached.

A dual IPO, which would raise dollars and sterling, would be a modest win for UK officials, who fear a further weakening of the British tech sector and knock-on effects for banks, analysts and advisers.

The NSIA gives the secretary of state the power to call in transactions they “reasonably suspect give rise to or may give rise to a risk to national security”, according to a business department (BEIS) document.

If deemed “necessary and proportionate”, the minister is then able to “impose certain conditions, block or unwind it completely”.

The UK government has so far “called in” 17 transactions. The first to be made public was an examination of the takeover last year of Newport Wafer Fab, in Wales, by Nexperia, a Dutch subsidiary of Chinese company Wingtech, and the second was French telecoms group Altice’s majority stake in the telecoms group BT.

Arm lies at the heart of the global tech industry. Its chip design IP is licensed to semiconductor companies and electronic manufacturers around the world and used in more than 90 per cent of smartphones.

A successful listing at a targeted valuation of at least $50bn is critical to SoftBank, whose Vision Fund last month posted a historic investment loss of Y3.5tn ($26bn) after its portfolio companies were hammered by regulatory crackdown in China and a global sell-off in technology shares.

FT : European debt: risk before reward

European debt: risk before reward
‘Anti-fragmentation’ is risky, expensive and worth a shot

Europe’s debt mess
Clearly, we should have written about the European debt proto-crisis last week, but we were too captivated by the Fed to catch up on the situation properly.

While we dithered, the European Central Bank seems to have scared sellers of European peripheral bonds into backing off, buying some time to come up with a structural solution to this problem:

That’s the spread between Italian and German 10-year bonds, which began widening as soon as it became clear that inflation would force the ECB to follow the Fed in raising interest rates. At the right side, you can see how the ECB’s emergency meeting last Wednesday, and the promises of action issued afterwards, reversed the widening, for now.

Recall the basic problem. Italy — which is emblematic of many peripheral eurozone countries from Spain to Greece — has even more debt than it did when it slipped into a crisis 10 years ago. The maths is really nasty now. Italy’s debt is 150 per cent of gross domestic product. Its 10-year bonds, for example, yield 3.7 per cent. Of course it will have sold debt at lower yields than that, but as old debt rolls over, the cost will rise. GDP, on the other hand, is not going to grow at anywhere near 5.5 per cent (3.7 per cent x 150 per cent). So the Italian debt burden is set to grow steadily bigger relative to GDP.

This causes problems. Higher interest rates slow growth in general. Households own quite a lot of the debt, creating negative wealth effects. Banks own a lot too, so as the bonds lose value, their balance sheets weaken and they can’t make as many loans. Then there is the possibility of portfolio contagion bringing other European asset prices down. The debt wobbles could also push the euro even lower, and therefore push the dollar even higher — which is an automatic tightener of financial conditions globally.

This is all quite bad. And then there is the very remote but not unthinkable political follow-on: life within the eurozone becomes so unpleasant for Italians that the country decides to leave the common currency.

The ECB really does not want any of this stuff to happen. Hence its commitment to some kind of bond-buying programme, or “anti-fragmentation instrument”, that would compress Italian (or other peripheral) debt spreads. The details will come next month.

The good news is that the ECB governing council seems to be on the same page, and they are getting after the problem early. As rapid and unsettling as the rise in spreads has been, their absolute level was higher as recently as 2018-19, as the bank’s bond-buying programmes tailed off. Same chart, going further back:

The bad news is that the job of depressing the spreads is made complicated by inflation. It is bonkers to buy bonds and raise rates at the same time. In monetary policy terms, the two have opposite effects. So the ECB plan will have to involve some form of “sterilisation” to keep the peripheral purchases neutral to the money supply. Presumably this will mean sales of some other flavour of euro bond, or some sort of term deposit mechanism to sop up the proceeds from the bond purchases (it may also be that anti-fragmentation means that the ECB will have to enact more rate increases than it would have otherwise).

This is all a big experiment. As Eric Lonergan of M&G summed up in Monday’s FT:

Sovereign spread targeting by a central bank has never been done before. The outline of a programme would involve creating a reference basket of “safe” European sovereign bonds from core eurozone countries such as Germany and determining an acceptable spread for each market. The ECB would then commit to enforcing a cap on these spreads . . . 

We need to be clear about the risks. In extremis, the ECB becomes the market-maker for [Italian] or other bonds. Liquidity could disappear. How will Italy issue debt in the primary market, and at what price? Can the arrangements be gamed by market participants? How will the ECB exit?

The ECB is in terra incognita, and if things go wrong, the world economy is going to receive yet another nasty growth shock.

How much money will the ECB spend buying peripheral bonds, and will it be enough? Frederik Ducrozet of Pictet has estimated that €10bn a month could be put to work initially, raised by redemptions of assets bought under the Pandemic Emergency Purchase Programme. But, he points out, twice that amount of Italian debt needs to be rolled over through the rest of this year. Pepp reinvestment “probably falls short of the support needed in case of severe fragmentation and protracted market dislocations”. The ECB may have to go further.

So this could get expensive. But there is the possibility of a significant long-term upside. The original sin of the eurozone is common currency and monetary policy without a central fiscal policy, like the one enjoyed by the US. Anti-fragmentation could be a step in that direction. Here is George Saravelos of Deutsche Bank:

The [proposed anti-fragmentation] tool increases implicit fiscal pooling and establishes a de facto eurobond. A peripheral backstop can theoretically be conceived as a put option on [Italian bonds] and a call option on [German] Bunds thereby creating a more stable GDP-weighted risk-free rate. Assuming the operations are sterilised, the eurosystem will absorb peripheral risk on its balance sheet in exchange for short-dated risk-free liabilities (most likely term deposits) thereby increasing fiscal pooling. An investable [European bond] basket improves European yield. Consider that the Euro-US 10-year interest rate differential is at an eight-year high outside of Covid.

Europe has proven in the past that, under duress, it will do what it takes to hold together its fragile and faulted monetary-financial-political structure. If it does so again this time, it might also end up making some structural improvement.

Given this, it might be tempting to try the Jon Corzine memorial trade, and bet that spreads will compress before you get margin called. Not a stupid bet but, as Corzine discovered, a tricky one to time.

FT : IEA warns Europe to prepare for total shutdown of Russian gas exports

IEA warns Europe to prepare for total shutdown of Russian gas exports
Agency chief says governments should keep ageing nuclear plants open and take other contingency measures

The International Energy Agency has warned that Europe must prepare immediately for the complete severance of Russian gas exports this winter, urging governments to take measures to cut demand and keep ageing nuclear power stations open.

Fatih Birol, the head of the IEA, said Russia’s decision to reduce gas supplies to European countries in the past week may be a precursor to further cuts as Moscow looks to gain “leverage” during its war with Ukraine.

“Europe should be ready in case Russian gas is completely cut off,” Birol told the Financial Times in an interview.

“The nearer we are coming to winter, the more we understand Russia’s intentions,” he said. “I believe the cuts are geared towards avoiding Europe filling storage, and increasing Russia’s leverage in the winter months.”

The IEA, which is primarily funded by members of the OECD, was last year one of the first official bodies to accuse Russia publicly of manipulating gas supplies to Europe in the build-up to the invasion of Ukraine.

Birol said emergency measures taken by European countries this week to reduce gas demand, such as firing up old coal-fired power stations, were justified by the scale of the crisis despite concerns about rising carbon emissions.

He said the increase in coal-fired generation was “temporary” and would help preserve gas supplies for heating in winter. Any additional CO₂ emissions from burning highly polluting coal would be offset by an acceleration in Europe’s plans to cut its reliance on imported fossil fuels and to build up renewable generation capacity, he added.

But he warned that the steps taken by European governments so far probably did not go far enough if Russian exports were completely severed, and said countries should do everything possible to preserve supplies now to ensure storage could be filled ahead of the winter months.

“I believe there will be more and deeper demand measures [taken by governments in Europe] as winter approaches,” Birol said, adding that rationing of gas supplies remained a real possibility should Russia cut exports further.

Sweden and Denmark on Tuesday followed Germany, Austria and the Netherlands in announcing the first stage of emergency plans to preserve gas supplies, but none of those national plans yet include rationing.

Europe has reduced its reliance on Russian gas to about 20 per cent of total supplies since the Ukraine invasion, from around 40 per cent before, according to consultancy ICIS, but has already tapped most options to diversify supplies, such as seaborne cargoes of liquefied natural gas.

The IEA chief said countries should try to delay shutting down any nuclear power facilities earmarked for closure to help limit the amount of gas burned in electricity generation.

Germany has faced sustained criticism for its decision to continue decommissioning the last of its nuclear plants during the energy crisis.

While Birol did not single out any country he said all “should consider postponing closures [of nuclear power plants] as long as the safety conditions are there”.

Berlin has indicated it believes the technical and safety hurdles to keeping the plants open are too high.

Birol was speaking ahead of the publication of a new IEA investment report on Wednesday, which warns governments are not yet doing enough to encourage investment in renewable energy to curb fossil fuel demand. Total energy investments are expected to grow this year by 8 per cent to $2.4tn, with the growth coming from renewables and higher costs.

Last year the IEA said the world did not need to invest in new oil and gasfields if governments were to hit their net zero targets by 2050.

Birol said that without enacting policies to significantly cut fossil fuel consumption the world would continue to face dangerous swings in oil and gas prices. “Unless governments sit in the driving seat and mobilise major funds to create a clean energy transition,” he said, “we will have to deal with extreme volatility in energy.”

While there were some positive signs of growing investment in cleaner forms of energy, partly stemming from Europe’s desire to break its addiction to Russian energy, he said globally the picture was at best mixed.

In the developing world, excluding China, renewable energy investment has not grown in real terms since 2015. Birol also said developing countries reliant on fossil fuel production needed to use the windfall from higher prices to diversify their economies.

“The relative weakness of clean energy investment across much of the developing world is one of the most worrying trends,” the IEA report said.

>>> TradeGate Pre-Market Indications

DAX:
  • E.On (EOAN TH) -0.9%
  • Covestro (1COV TH) -0.9%
  • Vonovia (VNA TH) -0.9%
  • Allianz (ALV TH) -0.9%
  • Brenntag (BNR TH) -1%
    • BlackRock, Inc. Raised Brenntag Voting Rights to 5.51%
  • Infineon (IFX TH) -2.3%
  • Daimler Truck (DTG TH) -2.3%
  • Puma (PUM TH) -2.3%
  • Bayer (BAYN TH) -2.7%
  • HelloFresh (HFG TH) -3.3%
    • Watch European Tech as US Futures Signal Nasdaq Rally to Falter
MDAX:
  • Hugo Boss (BOSS TH) +1.4%
    • *FRASERS GROUP INCREASES STRATEGIC INVESTMENT IN HUGO BOSS
  • TeamViewer (TMV TH) -2%
  • Thyssenkrupp (TKA TH) -2.1%
  • Jungheinrich (JUN3 TH) -2.5%
  • Delivery Hero (DHER TH) -2.9%
    • German Holdings Round-Up: Leoni, MTU Aero, Delivery Hero
  • Varta (VAR1 TH) -4%
SDAX:
  • Schaeffler (SHA TH) -1.7%
  • Jenoptik (JEN TH) -2.2%
  • SMA Solar (S92 TH) -3%
  • flatexDEGIRO (FTK TH) -3.1%
  • Salzgitter (SZG TH) -3.3%
    • Salzgitter Cut to Underweight at JPMorgan; PT 31.60 euros

>>> Stoxx 600 Pre-Market Indications

  • Hugo Boss (BOSS TH) +1.7%
    • Frasers Group Increases Strategic Investment in Hugo Boss
  • TotalEnergies (TOTB TH) -2.6%
    • Watch Europe Energy Stocks as Oil Sinks Amid Recession Worries
  • Iberdrola (IBE1 TH) -2.6%
  • Bayer (BAYN TH) -2.7%
  • Adyen (1N8 TH) -2.9%
  • Delivery Hero (DHER TH) -3.2%
    • Watch European Tech as US Futures Signal Nasdaq Rally to Falter
  • Carrefour (CAR TH) -3.2%
    • Carrefour Cut at Bernstein on Price War, Reduced Chance of M&A
  • HelloFresh (HFG TH) -3.3%
  • Repsol (REP TH) -3.3%
    • Watch Europe Energy Stocks as Oil Sinks Amid Recession Worries
  • Santander (BSD2 TH) -3.4%
  • Mowi (PND TH) -6.1%
    • Mowi Secondary Abo Priced at NOK222 per Share, Terms Show
    • Mowi Holder GBL Offers Up to 18.1m Shares via Goldman Sachs

>>> Europe : Brokers Upgrades & Downgrades - 22nd of June 2022

>>> Up
* Admicom Raised to Buy at Inderes; PT 63 euros
* Ceres Power Raised to Buy at Goldman; PT 700 pence
* Elkem Raised to Neutral at Citi; PT 35 kroner
* NatWest Raised to Buy at Jefferies; PT 359 pence
* Smurfit Kappa Raised to Buy at Jefferies; PT 3,700 pence

>>> Down
* ArcelorMittal Cut to Neutral at JPMorgan; PT 32.50 euros
* Carrefour Cut to Underperform at Bernstein; PT 16.50 euros
* Grifols Cut to Neutral at Alantra Equities; PT 20.39 euros
* Grifols ADRs Cut to Neutral at Alantra Equities; PT $21.44
* Kone Cut to Hold at Berenberg; PT 50 euros
* Kone Cut to Sell at Goldman; PT 44 euros
* Mips Cut to Hold at Berenberg; PT 600 kronor
* Stendorren Fastigheter Cut to Hold at Handelsbanken
* Verkkokauppa.com Cut to Hold at Nordea
* Voestalpine Cut to Underweight at JPMorgan; PT 27.50 euros

>>> Initiation
* Believe Rated New Neutral at Oddo BHF; PT 11.50 euros
* Sartorius Stedim Biotech Rated New Buy at HSBC; PT 410 euros
* Stora Enso Re-Initiated Buy at Handelsbanken
* Zordix Rated New Buy at Pareto Securities; PT 35 kronor

>>> Call
* Carrefour Cut at Bernstein on Price War, Reduced Chance of M&A
* Elkem Loses Last Sell Rating as Citi Cites Rising Silicon Prices
* Mips Cut to Hold at Berenberg on Lack of Near-Term Triggers
* NatWest Upgraded to Buy at Jefferies on More Obvious Upside
* Structural Growth Shines Among Industrials When IP Growth Erodes

>>> What to look at today - 22nd of June 2022

A stock bounce reversed in Asia on Wednesday and the dollar climbed amid ever-louder warnings about the risk of an economic downturn. An Asia-Pacific share index shed almost 1%, with Chinese technology equities among the worst performers. US and European futuresdeclined as brief optimism from a Tuesday jump in the S&P 500 and Nasdaq 100 petered out. Treasuries and the yen -- traditional havens along with the greenback -- edged up. The Federal Reserve’s aggressive monetary tightening to tame inflation, and the attendant risk of recession, continue to unsettle investors. Oil sank to roughly $105 a barrel and iron ore slid. Bitcoin fell toward $20,000, though conditions were calmer than recent cryptocurrency turmoil.  Skepticism abounds about the outlook for risk assets in a year of steep drops across markets. Prognosticators from Morgan Stanley to Goldman Sachs Group Inc. warned stocks may face more losses amid dimming economic prospects. Fed Bank of Richmond President Thomas Barkin said the central bank should raise rates as fast as it can without causing undue harm to financial markets or the economy. Chair Jerome Powell is expected to reinforce the commitment to fighting price pressures when he speaks in front of lawmakers Wednesday. A backdrop of tightening financial conditions led delegates including Tesla Inc. Chief Executive Officer Elon Musk to warn the US is heading toward a recession. President Joe Biden plans call on Congress to enact a gasoline tax holiday to cool soaring pump prices and alleviate the pressure on consumers. Officials in China intensified calls for economic support. The nation’s finance minister said more pro-growth policies are being studied, and a newspaper affiliated with the Cabinet urged banks to step up infrastructure lending.

Nikkei -0.14% Hang Seng -1.23% CSI -0.32% Shanghai -0.24% Shenzen -0.15%

Eur$ 1.0496 CNH 6.7226 CNY 6.7205 JPY 136.25 GBP 1.2236 CHF 0.9680 RUB 55.0341 TRY 17.3463 WTI$ 105.97 -3.25% Gold 1,826.10 -0.37% BTC 20,538 -1.45% ETH 1,101 -1.95%

S&P -1.15% Nasdaq -1.24% EuroStoxx -1.52% FTSE -0.96% Dax -1.52% SMI -0.83%

Macro :
- Ray Dalio Says Reducing Inflation Will Come at Great Cost
- Italy Readies New EU3B Aid to Curb Energy Bills: Repubblica
- Bitcoin Sinks Again as Risk-Off Mood Returns on Recession Fears

Keep an eye on :
- ABBN SW : Structural Growth Shines Among Industrials When IP Growth Erodes
- AC FP : Accor in Talks to Sell 10.8% Stake of Ennismore for EU185m
- AURA NO : Aurora Eiendom Offers Up to NOK650m Shares at NOK93/Share
- BATS LN : Watch BAT, Imperial Brands on US Plans to Cut Nicotine Levels
- BCART BB : Biocartis Expands Astra Pact to Develop Tagrisso Diagnostic Test
- BNP FP : BNP, Peers' $20 Billion Cost Hike Forgotten as Revenue Surges
- BT/ LN : UK Culture Secretary Invites Telecoms Executives for Talks: Sky
- CLN SW : Clariant to Simplify Organizational, Leadership Structure
- ACA FP : Credit Agricole Targets Profit Above $6.3 Billion in 2025
- ENI IM : ENI’s Gas Supply From Russia for June 22 Partially Confirmed
- FME GY : DaVita Drops as Potential Profit Hit From Court Ruling Debated
- GLPG NA : Galapagos Acquires CellPoint for EU125m in Cash Upfront
- HUR LN : speculation that an unidentified potential buyer is preparing a bid - Daily Mail
- INRN SW : Interroll Lowering Outlook for 1H Operating Profit
- IPO LN : UK’s IP Group Sets Up New Cleantech Venture-Capital Investor
- LISN SW : Lindt & Spruengli Total Buyback Volume Aggregated to ~CHF748M
- NOVN SW : Novartis Gets European Okay for Tabrecta Use in METex14 skipping
- OCDO LN : Ocado Loads Up on Growth Capital as Impatience Builds: ECM Watch
- SU FP : Structural Growth Shines Among Industrials When IP Growth Erodes
- SPM IM : Saipem Board Exercises Authorization to Start EU2b Capital Hike
- SRG IM : Italy to Mandate Snam to Boost Gas Purchases to Fill Storages
- G5EN SS : Swedish Gaming Firm Upended by War Opens New Hubs Across Europe
- TOIVO FH : Toivo Group Offering of 1.9m Shares Prices at EU1.95/Share
- UMI BB : Umicore Sees Potential to More Than Double Revenue by 2030
- VOW GY : VW Picks Deutsche Bank, Morgan Stanley for Porsche IPO: Sky

>>> US After Hours Summary: Quiet after hours, LZB +11.9% up nicely on earnings;

After Hours Summary: Quiet after hours, LZB +11.9% up nicely on earnings; ENTA +10.3% higher on lawsuit against PFE; ORA -4.6% falls on convertible notes offering

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: LZB +11.9%

Companies trading higher in after hours in reaction to news: PRTK +10.6% (Nuzyra receives FDA Fast Track Designation), ENTA +10.3% (ENTA files patent infringement lawsuit against PFE), BMRN +4.6% (Japan grants approval for VOXZOGO for Injection for children with Achondroplasia), AVT +4.6% (forms strategic collaboration with Amazon Web Services), SB +1.5% (authorizes new 5 mln share repurchase program), PAYA +0.3% (selected by Promise as an integrated payments partner)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: None

Companies trading lower in after hours in reaction to news: ORA -4.6% ($350 mln convertible notes offering), BBAI -1.3% (stock offering)