FT : Terry Leahy confident of Morrisons recovery as £6bn debt refinancing looms

Terry Leahy confident of Morrisons recovery as £6bn debt refinancing looms
Recently appointed chair points to private equity owner’s record on returns through sales growth

More stores, new products, better branding and expanded ecommerce will help generate the additional profit needed to support Wm Morrison’s heavy debts following its takeover by private equity, according to Sir Terry Leahy.

The former Tesco chief executive is a longstanding adviser to Clayton, Dubilier and Rice, the US private equity group that outbid SoftBank affiliate Fortress to acquire the UK’s fourth-biggest supermarket chain last year. He now chairs the company.

“We will be very careful to ensure that the way the business is financed provides plenty of liquidity and flexibility if the environment changes,” Leahy told the Financial Times.

“People can be reassured by CD&R’s approach to business . . . it’s pretty unique in that it has operating executives like myself rather than just financiers. That brings an understanding of the businesses we operate in.”

He said that four-fifths of the firm’s returns had historically come from sales growth and operational improvements, pointing to its record at UK discounter B&M and French furniture retailer BUT. “We don’t think it will be any different with Morrisons,” he said.

In what is likely to be the UK’s largest high-yield debt issue, the company will need to refinance more than £6bn of short-term borrowing taken out to help fund the £10bn acquisition at a time when bond yields are rising.

Some in the credit markets have expressed concern that heavy debt could affect Morrisons’ ability to respond to an expected squeeze on consumers’ spending power and higher food price inflation. Industry data suggest it has lost market share in recent months.

Even if the company can secure terms similar to those offered last year to Asda, a larger rival that also has a large debt burden, Morrisons’ annual interest bill is set to rise sharply.

While Leahy declined to comment on the progress of the refinancing, he said a broad-based increase in profits would help offset higher borrowing costs. “What we have seen is the industry and Morrisons gradually recovering its profitability.”

“It’s lots of little things with retailing but in a relatively large business, those things add up,” he said, citing opportunities to open more stores “in areas where it is not currently represented”, expand online and improve efficiency and product development in its substantial food manufacturing business.

Leahy said he did not think it was necessary for the company to change its strategy in either ecommerce, where it is heavily dependent on partners such as Ocado and Amazon, or convenience. It does not operate its own local shops, but supplies McColl’s and various petrol station operators under wholesale agreements.

He added that Morrisons could expand its forecourt retail operations whether or not CD&R retained ownership of Motor Fuel Group, which it acquired in 2015. MFG operates over 900 filling stations but Leahy did not deny recent reports that the asset may soon be sold.

“As is normal, we keep a range of options [for MFG] under review but we’ve learned a lot about forecourt retailing and we feel that in any scenario that knowledge would be beneficial to our investment in Morrisons,” he said.

He declined to comment, however, on the possible sale of some of Morrisons’ assets beyond the commitments made during the bidding process. CD&R pledged last summer to keep Morrisons’ headquarters in Bradford and said it “did not intend to engage in any material store sale and leaseback transactions”.

That still leaves it with leeway to offload some stores or warehouses and production facilities in an effort to reduce borrowings, as has happened at Asda after its acquisition in 2020 by EG Group.

Even though its final offer was 61 per cent above Morrisons’ undisturbed share price and almost a quarter higher than its opening bid, Leahy said CD&R had paid “a fair price” for the company.

The pandemic had interrupted its recovery, he added, while memories of past price wars allied with concerns over the challenges of discounters and ecommerce, meant “the achievements and prospects of the business were not being fully reflected in the share price”.

“Morrisons was always the business we were interested in. We knew the management, we were very impressed with what they’ve done, and we liked the strategy with a clear focus in the market.”

He added that the competitive threat from Aldi and Lidl had abated. “We’re probably past the peak of the disruptive effect of discounters . . . supermarkets have learned how to compete with them.”

Leahy was also fulsome in his praise for David Potts, the Morrisons chief executive with whom he previously worked at Tesco, and played down the idea that Potts might leave once the acquisition had bedded down.

“Having spoken with David, he is very excited about the future with Morrisons and wants to be a part of it.”

FT : The new Premier League owner with a power struggle off the pitch

The new Premier League owner with a power struggle off the pitch
Plus, the risks in the $2bn sports NFT industry, gaming’s M&A gambit, and more.

Join leaders from Uefa, the FA, PCP Capital Partners, LaLiga and more to discuss disruption, recovery and the struggle for power in the football industry. The fourth edition of the Business of Football Summit kicks off online and in-person on March 2-3. Register today at: https://bit.ly/3nnho3p

Last year, when my colleague Christine Zhang and I began reporting on the first FT story about a little-known marketplace called NBA Top Shot, we joked it took two full-time journalists a week to wrap our heads around the idea of NFTs, or non-fungible tokens. It was hard to believe that, by now, they’d become ubiquitous within the sports industry and beyond.

In this week’s Scoreboard, we take a deep dive into the way this industry has evolved in so short a time. But something else has changed, too: two years into a pandemic, it’s abundantly clear that modern life will become more and more entrenched in the digital realm. It’s evident from Microsoft’s big bet on Activision Blizzard, from Facebook owner Meta’s push into NFTs, and Nike’s acquisition of collectible platform RKFKT. In other words, the big bet is that life will be lived even more online, not less.

First up, however, we venture to the Balkans for a different kind of takeover story. Do read on — Sara Germano, US sports business correspondent

Southampton’s new owner is fighting a political battle at home

Dragan Solak is the billionaire who likes to operate outside of the limelight. He’s spent more than two decades building a media empire but it was the acquisition of an English Premier League football club that changed everything.

Through London-based investment vehicle Sport Republic, Solak bought an 80 per cent stake in Southampton, a team based in the south of England, in a bet that demand for football rights will continue to rise, as online streaming platforms compete against traditional broadcasters to screen sports around the world.

“If you look at the inflation of the prices of elite sports rights,” he told Scoreboard, “I thought if it goes crazy like this I’d rather be in the sports business than in the broadcasting business.”

The Serbian-born media tycoon says he’s been fielding calls from compilers of rich lists to ascertain his net worth ever since confirmation of the acquisition, which valued the club at around £250m including debt.

This is far from Solak’s first encounter with the Premier League, the world’s richest domestic football division. As founder of United Group, in which he retains a minority stake, he still owns the rights to screen top-flight English football matches across much of the Balkans.

Beneath the surface, the acquisition also signals Solak’s swing from buyer of media rights to the indirect recipient of TV money paid by broadcasters.

What’s gone under the radar is that United’s grip on Premier League broadcast rights ends at the end of this season, pointing to a clash between the businessman and the president of Serbia, Aleksandar Vucic, who Solak accuses of cracking down on independent media outlets.

That’s because Serbian state broadcaster Telekom Srbija last year splashed out an estimated €600m for the next six years, roughly ten times the annual price paid by United.

Solak’s theory is that TS is buying up sports screening rights in a political manoeuvre designed to lure subscribers from his independent news channels to state channels that are uncritical of the government.

TS said it did not overpay and denied it had a political motivation, adding that it “finances its deals solely from its own financial resources and capacity.”

This dispute raises uncomfortable questions for the Premier League, which was forced to part ways with former chair Gary Hoffman over its decision to approve last year’s Saudi Arabia-led takeover of Newcastle United for £305m, amid scrutiny of its dealings with state-backed entities.

A person close to the Premier League says it is not uncommon to see leaps in the value of broadcast deals.

For his part, Solak insists the Southampton takeover has nothing to do with his media interests, and pledged: “I don’t want to abuse my position now in the Premier League.”



Profits and pitfalls of the $2bn sports NFT industry

Around this time last year, the acronym “NFT” made little sense to anyone except true blockchain diehards. But it was NBA Top Shot, a then nascent venture between the National Basketball Association and Dapper Labs, a platform for crypto consumer products, that brought NFTs to the mainstream.

Today, athletes from basketball star Kevin Durant to Olympic fencer Ibtihaj Muhammad have issued digital collectibles in their likeness, and sports NFTs are expected to become a $2bn industry in 2022, doubling in size over the past year, according to Deloitte.

Such astronomic growth has attracted equal doses of enthusiasm and scepticism about NFTs from some of sport’s top athletes and dealmakers, as we explore in depth in the latest Scoreboard film.

As a fun exercise, it’s worth watching in tandem with another recent documentary about collectible craziness, HBO’s “Beanie Mania”. Anyone over the age of 25 likely remembers the precipitous rise — and calamitous fall — of the plush toys in the late 1990s, in part due to their reclusive manufacturer’s attempts to manipulate market supply.

So is NFT mania any different? And if so, how can savvy collectors and entrepreneurs avoid potential busts?

Consider that leagues jumping into the blockchain aren’t so much looking for quick revenue streams as much as they’re trying to identify the next big tech behemoth.

“This is the internet in 1996”, said Joe Ruggiero, senior vice-president of consumer products for the US National Football League. “We’re going to look back and we’re going to say, there’s some great things that have happened, and there’s some things that probably didn’t make sense. But the next Amazon, Google, whoever is probably out there right now starting to think about what this means for the next 10 years.”

There are many potential NFT pitfalls, including the possibility they could be used as money-laundering instruments. Regulators are scrambling to keep up with the explosion of the crypto products. The speculative nature of an NFT’s value — collectibles have traded for millions on secondary markets — make some digital natives, like gamers, suspicious.

But for sports fans, there are now more ways to extract “real” value from a digital asset. Facebook and Instagram are preparing ways for users to create their own NFTs or display them on their profiles. Pro athletes see NFTs as a rare way to create direct relationships with their fans, in some cases incorporating privileges like meet-and-greets with sales of fan tokens.

As for what the right price for an NFT might be, there’s no straight answer. “People have to make a decision on whether they’re buying NFTs for the true love of collecting it, if they’re buying it with the idea that they want to make money on it”, said Rich Kleiman, co-founder with Durant of Thirty-Five Ventures. “It’s what the value is to you.”

FT : US in talks with Qatar over gas supplies to Europe in event of Ukraine inva

US in talks with Qatar over gas supplies to Europe in event of Ukraine invasion
Washington discusses contingency measures with Gulf state and others in case Russian incursion were to lead to shortfalls

The US is holding talks with Qatar and other large gas exporters to plan contingency measures in case a Russian invasion of Ukraine disrupts supplies to Europe.

The talks with Qatar and EU member states, focused on securing additional seaborne liquefied natural gas cargoes, have gained urgency after high-level security negotiations between Washington and Moscow this week yielded minimal progress.

This has increased concerns that conflict could hit gas supplies at a time when Europe is facing record prices. However officials warned that there was no “magic wand” to solve the potential shortfall with the continent already in the grip of an energy crisis.

“We’re looking at what can be done in preparation for an event, especially midwinter with very low [European natural gas] supplies in storage,” a senior US administration official said.

“We discussed what can be moved around the market, what can help . . . the things we can prepare now for deployment if and when there is an escalated crisis”.

Another person briefed on the discussions with Doha said there was “potential to explore a long-term guarantee of LNG security, especially as Qatar will greatly increase its LNG production over the next few years”.

“In the short term it will be dependent on the willingness of other client countries to reroute and availability of unallocated LNG” the person said. “However, Qatar did reroute its supplies in 2011 for Japan after the tsunami hit so there’s precedent, but only if there’s a crisis.”

Preliminary discussions have started between Qatar, the world’s biggest exporter of LNG, the UK and European states about long-term gas supply “solutions,” the person added.

Most of Qatar’s LNG is shipped to Asia where the Gulf state’s clients agree to fixed, long-term contracts.

US President Joe Biden is due to hold talks with Qatar’s Emir, Sheikh Tamim bin Hamad al-Thani, in Washington this month, the person briefed on the discussions said.

Tensions between the west and Russia have soared as Moscow has deployed about 100,000 troops on the Ukrainian border. The US has threatened severe sanctions against Russia if it invades, while some energy officials have accused the Kremlin of already leveraging its gas exports.

Fatih Birol, head of the International Energy Agency, said last week that Russia was throttling gas supplies to Europe at a time of “heightened geopolitical tensions”.

There are fears that conflict could lead to a further drop in gas supplies to Europe, which is facing a growing cost of living crisis as gas prices have soared.

With gas stocks at record low levels for the time of year, officials fear Europe could face industrial disruption, blackouts, or even a loss of heating supplies if Russian exports were to fall sharply.

The senior official in the Biden administration acknowledged that contracts between LNG exporters and Asian buyers could complicate efforts to divert supplies to Europe.

“There’s no magic wand,” the official said. “It’s all really hard, really complicated. Looking to do it within the constructs of how markets work, how commercial terms work, how cargoes work.”

The official added it had become clear that Russia had been squeezing gas supplies in recent months in order to gain leverage over European capitals.

“This is not a market situation we’re dealing with. These are not market forces. These are manipulated markets,” the official said.

Europe’s reliance on Russian gas has complicated efforts to present a united front against Moscow’s threats.

While most observers expect Russia to avoid completely cutting exports, there are concerns Moscow could still squeeze supplies further, or that gas export infrastructure in Ukraine could be damaged by conflict.

Energy executives have warned about the potential effect of US sanctions after Biden this week said punitive measures could include stopping Russian banks from dealing in US dollars — the main currency of the global commodities trade.

One energy industry executive said that Europe would almost certainly face extremely high prices in the event of disruption that required co-ordinated government action to source seaborne LNG cargoes.

“They will effectively have to compete for all the supply in the market, taking cargoes away from Asia, and the likely end result is the taxpayer will pay,” the energy executive said.

“It would be like procuring PPE at the start of the pandemic, with governments needing to intervene.” 

Doha has been locked in a dispute with the EU over a 2018 European Commission investigation into QatarEnergy’s long-term, fixed contracts. The probe has frustrated Doha and put a brake on Qatar investments and LNG supplies to Europe, causing the Gulf state to halt projects in France and Belgium.

However, the person briefed on the discussions said talks between Qatar and EU officials had also restarted over resolving a European Commission investigation into Qatar’s long-term contracts on the continent.

The person added that Europe needed to guarantee a long-term deal with Qatar or others to ensure stability and reduced dependence on Russia.

“People have become much more focused on gas security,” he said.

WSJ : Cruise Lines Betting on Summer Rebound Face Obstacles From Omicron

Cruise Lines Betting on Summer Rebound Face Obstacles From Omicron
Carnival and Royal Caribbean adjust to destinations’ changing health protocols as industry looks to recover from pandemic-related losses

The cruise industry’s bet on a big summer rebound is looking less certain.

Travel agents and industry executives say that while the season—which begins in April and runs to October—still looks strong, bookings have slowed since late last year. Some cruise lines have canceled or pushed back sailings as a result of the Omicron variant.

While cruise companies remain bullish about their prospects, the developments are the latest wrinkle for an industry that nearly two years after the start of the Covid-19 pandemic is working to recover from a mountain of debt and significant losses.

“Capacity is coming back strongly, mainly with repeat cruisers,” said Roger Frizzell, a spokesperson for Carnival Corp. CCL -3.89% , the world’s largest cruise operator by passenger capacity. “There is pent-up demand, and we are not discounting, except with traditional wave season promotions,” he said, referring to sales usually held between January and March. “I am not seeing a lot of refund letters in 2022, and I saw a lot in 2020,” he added.

Omicron hasn’t resulted in rapidly spreading infections among passengers, cruise lines say, adding that operating pressures have eased since early in the pandemic, when liners were stuck for days or weeks outside ports as authorities tried to accommodate scores of sick and frustrated cruisers.

Passengers must now be fully vaccinated, space has been reserved for isolation cabins, and port authorities are more responsive to requests to accommodate sick passengers or crew and allow ships to continue their journeys.

But this month Royal Caribbean Group RCL -2.57% and Norwegian Cruise Line Holdings Ltd. NCLH -4.61% , two of the industry’s largest operators, halted some cruises to popular destinations, including the Caribbean, with some cancellations stretching to April.

Industry executives said that since the beginning of the year, cruise ships have been denied entry to island destinations such as Puerto Rico, Curaçao, Bonaire and Aruba. Some liners have canceled short cruises in South Africa and South America, saying changes in health protocols in some countries make trips nearly impossible.

Cruise Lines International Association, an industry trade group, said it is in talks with Caribbean destinations on how ships can allow sick passengers to disembark without problems.

“Ships turned around at the last minute have a negative impact on passengers, and it’s difficult to deal with,” said Anne Madison, a spokesperson for the association. “We are making progress, but more needs to be done.”

The carriers have said all passengers booked on cruises that were canceled will get a full refund or a credit for future voyages.

Data from the Centers for Disease Control and Prevention, which still advises the public to avoid cruises, show that between Dec. 15 and 29 there were 5,013 Covid cases among passengers and crew on ships, compared with 162 during the previous two-week period. While operators say the infections are a fraction of the number of cases reported earlier in the pandemic, industry analysts say elevated case counts could once again depress demand.

“We saw strong bookings six months ago for 2022 cruises, well over the same period in 2019 before the pandemic,” said Patrick Scholes, managing director at Atlanta-based Truist Securities, an investment and advisory firm that tracks the cruise industry. “But since Omicron in December, bookings are down by as much as 25% and if they don’t reverse fast, cruises will go on a big sale to fill up the ships.”

KHM Travel Group, a cooperative that includes around 4,000 independent travel agents, made 40% of its revenue from cruises before the pandemic and 60% from land services such as hotels and tours. Now 5% of its revenue comes from cruises, said Geoff Cox, the cooperative’s vice president of sales. Mr. Cox said repeat customers aren’t shying away from new trips and account for three-quarters of all tickets for some cruise operators.

Large companies such as Carnival, Royal Caribbean and Norwegian, unlike airlines, didn’t get federal relief through the pandemic and have stayed afloat by refinancing debt and selling some assets.

Carnival, which for years notched steady growth of earnings and bookings, lost $9.5 billion in the year ended in November and $10.2 billion in the year before that. The company, which has roughly $33 billion of debt and about $9.4 billion in liquidity, said in December that it expects to return to profitability in the second half of this year.

Carnival now operates around 50 ships from its 94-vessel fleet after selling or recycling 19 vessels since the start of the pandemic. It expects all of its ships to be operational by early summer.

Other operators haven’t fared so well. Genting Hong Kong Ltd. 678 5.06% said it expects to run out of cash around the end of the month and requested liquidation help.

Genting Hong Kong, which is majority-owned by the Malaysian billionaire Lim Kok Thay and his family and runs cruises under several brands, said some businesses would continue, but it expects many operations to cease.

Crystal Cruises, which operates in the U.S., has suspended ocean sailings through April 29 and river operations through the end of May. It said the pause will allow it to evaluate the business, examine its options and refund existing customers.

WSJ : How Bad Are Things in China’s Property Market?

How Bad Are Things in China’s Property Market?
Government curbs on borrowing in China’s property sector have triggered uncertainty for many market participants

Government curbs on borrowing in China’s property sector have helped set off a spiral of falling home sales, surging corporate bond yields and waning confidence among investors and prospective home buyers. While the past few days have brought a modest improvement in sentiment, the giant China Evergrande Group EGRNF -7.50% and several smaller peers have already fallen into default and casualties could continue to mount. Here’s where the market stands as 2022 gets under way.

Sales Have Tumbled
Contracted sales, or the value of new contracts that developers signed with home buyers, dropped sharply in the last few months of 2021, causing many property firms to miss their annual sales targets. Contracted sales for the top 100 developers fell 9% for all of last year, according to figures from China Real Estate Information Corp., reflecting declines in both prices and volumes. Official data shows new starts by developers fell more than 11% in 2021 and property investment tailed off in the later part of the year.


Dollar-Bond Defaults Have Ballooned
Chinese developers that collectively have tens of billions of dollars of international bonds outstanding have failed to repay investors as promised. Some have missed interest or principal payments, while others have cajoled bondholders to swap debt for less attractive new securities. This process, known as a distressed debt exchange, is often considered equivalent to defaulting by rating companies and investors.


The Bond Market Is Separating the Weak From the Strong
Investors have dumped bonds from financially weaker developers, like Evergrande, indicating deep skepticism that these debts will be repaid in full. The selloff has fed a vicious circle, all but closing the market for new bond sales and thus making it more likely that many struggling developers will have to default on debts that they can’t refinance.

Some stronger developers with state backing, like China Vanke Co. , have been relatively unscathed. But the volatility has spread, and big real-estate groups with comparatively high credit ratings that don’t have state backing, like Shimao Group Holdings Ltd. , and more recently Country Garden Holdings Co. , have also seen large swings in their bond prices recently.


And Property Stocks Have Crashed
The debt-market malaise is grabbing headlines in part because Chinese property makes up such a big part of the Asian junk-bond market and because investors are eager to see how foreign bondholders are treated. But the sudden downturn has also fed steep selloffs in the stocks of many Hong Kong-listed Chinese developers.

On the Bright Side, Home Price Declines Look Modest
Recent official statistics show that prices for new homes have begun to fall, in their first pullback since early 2015, although the decline moderated in December. Statistics for 70 major cities show secondhand home prices are also edging lower. Some local governments have introduced measures to prop up prices, including extending subsidies and warning developers against offering big discounts.

...And Some Lending Data Appears to Be Improving
Chinese authorities have softened some of their rhetoric on property, suggesting they are wary of overdoing their assault on what is a major driver of Chinese growth. The People’s Bank of China recently cut some key interest rates, including a five-year lending rate that is commonly used as a reference for pricing mortgages, as part of a wider shift to ease policy. The central bank has begun detailing monthly increases in mortgage lending—which totaled 401 billion yuan in November, or roughly $63 billion—apparently to reassure markets that both supply and demand for home loans remain healthy. Broader household credit data tells a similar story.

Still, the Pain Isn’t Over Yet
Developers have a mountain of offshore debt to refinance in the first few months of this year. While the heavyweight Country Garden was recently able to sell convertible bonds, selling new debt or convertible bonds won’t be an option for most companies. And regulators have also made it hard for companies to redeploy the cash that sits within individual projects, since most of that was provided by home buyers as prepayments for unfinished units. Recent reports that China could make it easier for developers to access that cash helped spur a slight recovery in stock and bond prices, but some analysts and investors are skeptical about how much difference this will make in practice.

For companies that can’t quickly find alternative sources of funding—such as by selling assets or getting new loans or equity funding from rich controlling shareholders—the next stop could be either a full default, or coercing bondholders into a debt swap.

WSJ : The Nanotechnology Revolution Is Here—We Just Haven’t Noticed Yet

The Nanotechnology Revolution Is Here—We Just Haven’t Noticed Yet
For years, engineers have made microchips ever smaller and more powerful. Now they’re applying the technology to a host of miniature marvels.

Before there was a “metaverse,” before there were crypto millionaires, before nearly every kid in America wanted to be an influencer, the most-hyped thing in tech was “nanotechnology.” “Nano-,” for those who could use a refresher, means “one billionth,” and nanotechnology generally refers to materials manipulated at an atomic or molecular scale.

For decades, computer scientists and physicists speculated that, any minute now, nanotechnology was going to completely reshape our lives, unleashing a wave of humanity-saving inventions. Things haven’t unfolded as they predicted but, quietly, the nanotech revolution is under way.

You can thank the microchip. Engineers and scientists are using the same technology perfected over decades to make microchips to create a variety of other miniature marvels, from submicroscopic machines to new kinds of lenses. These nano-scale gizmos have become so integrated into the fabric of our lives, and the devices in our pockets, that we seem to have missed the fact that they are real-life examples of the nanotechnology revolution we were promised over the past half-century.

Among the routine items that have benefited from nanotechnology: air bags, cellphones, radar, inkjet printers, home projectors, and 5G and other fast wireless technology. Just around the bend, nanotechnology could enable ultra-tiny cameras, as well as a dizzying array of other kinds of sensors, able to detect everything from air pollution and black ice to hacking attempts and skin cancer.

Some of this technology is even at the heart of the current controversy over whether or not America’s 5G networks could make flying less safe.

It’s all still a far cry from the more outlandish past predictions about nanotech’s future. We don’t have molecule-size robots that patrol our bloodstream and repair damage, or microscopic factories capable of churning out endless copies of themselves until the entire planet has been reduced to what nanotech pioneer Eric Drexler in the 1980s worried would be nothing but a “gray goo.”

In the more distant future, this technology might yet enable the vision physicist Richard Feynman laid out in his famous 1959 lecture “There’s Plenty of Room at the Bottom,” in which he hypothesized about a way to build three-dimensional structures one atom at a time. Achieving even a fraction of what he proposed would open up tantalizing possibilities, from sensors that can detect viruses in the air before we inhale them to quantum computers in our pockets.

In the present, creating real-life nanomachines means capitalizing on the hundreds of billions of dollars invested in perfecting the manufacture of microchips since their introduction, also in 1959. Chip companies’ march to make faster, more power-efficient chips has led to the development of fantastically complicated and expensive equipment. By using the same types of machines, techniques and “fabs”—as microchip factories are known—builders of nanomachines can use the steady progress of Moore’s Law to make their devices ever smaller.

ASML, one of the world’s leading manufacturers of the equipment that makes microchips, researches and builds its equipment with its primary customers in mind—the Intels, Samsungs and TSMCs of the world, says CEO Peter Wennink. But it has also always had a division that works with clients who want to make things other than conventional microchips, and designs its technology so that it can be customized to their needs, he adds.

These include microelectromechanical systems—MEMS for short—which represent a classic example of tiny machines made with chip fabrication equipment. MEMS have gotten radically smaller over the decades.

Take your smartphone. To transmit and receive the different radio frequencies required for it to talk to cell towers or connect to your Wi-Fi or wireless earbuds, it must filter out all the stray interference that, more than ever, affects those bands of spectrum.

So it uses tiny radio filters without which none of our wireless devices could function. Where microchips and radio antennae are static, entirely solid-state devices, the radio filters they depend on actually move, says George Holmes, CEO of Resonant, a company that makes the filters. They vibrate at the same frequency as the signal to be received or transmitted, or sometimes at the frequency to be filtered out, like a cluster of tiny tuning forks.

That means that when your phone is sitting on your desk, streaming music to your earbuds, there are dozens of little elements inside, most shaped like tiny combs, vibrating billions of times a second. They work precisely because they are tiny. Only something so small—existing on a scale at which the bonds between atoms are much stronger relative to an object’s size—could vibrate at these frequencies and not shake itself to bits.

Similarly, for the ground-sensing radar in planes to work properly, it has to filter out interference from, among other things, America’s rapidly proliferating 5G cellphone networks. The problem, says Mr. Holmes, is that radars in older planes were designed and built before anyone knew 5G networks would be a thing. Fixing this problem could be expensive, as it could mean replacing or updating some of those old radars. The fear of airlines and the FAA is, in essence, that for the lack of sufficient microscopic combs vibrating at a few hundreds of millions or billions of times a second in order to tune out a nearby cellphone tower, a plane could be lost.

Our phones also contain many other MEMS. The system that lets them (and smartwatches and other health trackers) know their orientation, as well as the magnitude and direction of their acceleration, is no bigger than a grain of rice today. When it was first invented and installed in the Apollo spacecraft, it was bigger than a basketball. Similar and equally tiny sensors tell air bags when to deploy. The system of rapidly-twitching, red blood cell-size mirrors that make home projectors possible are also MEMS; ditto the nozzles on inkjet printers.

Another example of modern nanomachines manipulates light rather than electricity. A new kind of lens, known as a “metalens,” has been shown in the laboratory to be able to bend and shape light in ways that used to require a whole stack of conventional lenses, says Juejun Hu, an associate professor of materials science at MIT. The advantage of metalenses is that they are thin and nearly flat—at least to the naked eye.

Under an electron microscope, the surface of a metalens looks like a plush carpet. At this scale, the metalens is clearly covered with minuscule pillars—each one-thousandth the width of a human hair—sticking up from its surface. This texture allows a metalens to bend light in a way that’s analogous to the way that conventional lenses do. (The way these little silicon “fibers” work is novel enough that they forced physicists to rethink their understanding of how light and matter interact.)

A handful of startups are translating metalens technology to commercial applications. Among them is Metalenz, which just announced a deal with semiconductor manufacturer STMicroelectronics to make 3-D sensors for smartphones. This application of metalenses could allow a greater variety of phone manufacturers to achieve the kind of 3-D sensing that enables Apple’s Face ID technology.

Unlocking your phone with your face is just the beginning, says Metalenz CEO Robert Devlin. Metalenses also have abilities that can be difficult to reproduce with conventional lenses. For example, because they facilitate the detection of polarized light, they can “see” things conventional lenses can’t. That could include detecting levels of light pollution, allowing the cameras on automobile safety and self-driving systems to detect black ice, and giving our phone cameras the ability to detect skin cancer, says Mr. Devlin.

Shrinking nanomachines further, and getting to the theoretical limit of tininess—the point at which humans are manipulating individual atoms—will require technologies radically different than the ones we currently use to manufacture even the most advanced microchips, says Dr. Andrei Fedorov, a professor at the Georgia Institute of Technology. His team, among others, has published research in which they use electron beams to etch patterns in sheets of graphene and other two-dimensional materials—or to build up structures made of carbon atoms atop them.

Graphene and its kin are already the subject of intense research as an alternative to silicon in the microchips of the future. But Dr. Fedorov says that future could include building three-dimensional structures atop two-dimensional sheets of graphene. Being able to do so with atomic precision could allow, among other things, creating the kind of structures required for the next generation of ultrapowerful quantum computers which governments and tech companies alike are trying to build.

Most of Dr. Fedorov’s research is supported by the Semiconductor Research Corp., a nonprofit sponsored by nearly every major advanced chip manufacturing and design company on earth, set up in the early 1980s to pursue fundamental research that could someday be used in electronics manufacturing. So it’s not implausible that the semiconductor industry, in its exploration of technologies that could take us beyond the limits of today’s microchips, could someday employ techniques pioneered by his team or the many others working on similar technologies.

The end goal is the ability to use an electron beam to rapidly remove, add or modify the atoms on a surface. The result is a system that resembles 3-D printing—at the atomic scale.

When Dr. Fedorov gives talks about his research, he tells audiences about what Richard Feynman proposed in 1959. “I say, ‘This is the vision,’ and then I say, ‘Sixty years later, we realized Feynman’s vision. It’s now in our hands.’”

WSJ : Kohl’s Gets $9 Billion Bid From Starboard Value Group

Kohl’s Gets $9 Billion Bid From Starboard Value Group
The department store has been under pressure to boost its share price

A consortium backed by activist hedge fund Starboard Value LP has offered roughly $9 billion to buy department store Kohl’s Corp. KSS -2.60% , according to people familiar with the matter.

A group led by Acacia Research Corp., which Starboard controls, offered to buy the department-store chain for $64 a share in cash Friday, the people said. It told the company it has received assurances from bankers that it would be able to get financing for the bid, the people said.

There are no guarantees that the group will ultimately line up all the funding needed and make a firm offer or that Kohl’s will be receptive. Other suitors may emerge too.

Kohl’s shares closed at $46.84 Friday. The bid represents a 37% premium.

Based in Menomonee Falls, Wis., Kohl’s has been under pressure to boost its share price, which rose early last year but is little changed from roughly two decades ago. Two activist shareholders—Macellum Advisors GP LLC and Engine Capital LP—have recently called on the company to explore selling itself.

Kohl’s said earlier this week that its strategy is producing results and that its board “regularly works with specialized advisers to evaluate paths that have the potential to create long-term value.” It said it plans to unveil its strategic plans at an investor day in March.

Little-known Acacia has a market value of just $215 million, but the consortium told Kohl’s it received what is known as a “highly confident” letter from a bank asserting that it will be able to attain a debt-financing package for a portion of the bid, the people said. While such letters are no guarantee, they can be a meaningful vote of confidence.

Other details of the consortium’s proposal—and who is in the group—couldn’t be determined. Reuters reported earlier this week that Acacia was exploring a possible bid for Kohl’s.

Should it succeed, the group could aim to sell the company’s real estate to another party, which could make pulling off the transaction easier. Activists have proposed that Kohl’s explore sale-leasebacks of its real estate, which they have estimated could be worth $7 billion or more.

Macellum said in an open letter to Kohl’s shareholders Tuesday it has been pushing the company to add additional directors with retail experience or to hire bankers to explore a sale.

Before Starboard invested in the firm and joined its board in 2019, Acacia was primarily a holding company for patents. It now focuses on buying and improving companies. In October, it bought privately held Printronix Holding Corp., a manufacturer of line matrix printers, for $33 million, and it has made offers for other companies including Comtech Telecommunications Corp.

Starboard, led by Chief Executive Jeff Smith, is one of the most visible activist investors. It holds seats on the boards of companies including Papa John’s International Inc. and NortonLifeLock Inc.

>>> US Close Dow -1.30% S&P -1.89% Nasdaq -2.72% Russell -1.78% VIX 28.85 +12.7%

Closing Stock Market Summary

The S&P 500 fell 1.9% on Friday, as de-risking efforts persisted amid an inclination to sell into strength, disappointing Q1 guidance from Netflix (NFLX 397.50, -110.75, -21.8%), deteriorating technical factors, and a flight to safety in Treasuries. 

The Nasdaq Composite declined 2.7%, the Dow Jones Industrial Average declined 1.3%, and the Russell 2000 declined 1.8%.

Eight of the 11 S&P 500 sectors fell at least 1.0%, including the communication services sector with a 3.9% decline. The consumer staples sector (+0.02%) closed fractionally higher. 

The session began with Netflix weighing on sentiment after the company guided for slower subscriber growth and below-consensus revenue for Q1, as well as a smaller operating margin versus Q1 of last year amid higher programming costs.

The operating margin guidance, coupled with a Q1 EPS warning from PPG Industries (PPG 154.74, -4.96, -3.1%), fed into concerns about higher costs eating into profits. In addition, the visceral reaction mirrored the plunge in Peloton (PTON 27.06, +2.84, +11.7%) yesterday, stirring a fear of being invested in high-multiple growth stocks that disappoint. 

In Peloton's defense, the company provided reassuring Q2 guidance, and its CEO said prior reporting of its plans to pause production was inaccurate. PTON shares bounced roughly 12% today after falling 24% yesterday. 

Back to the broader market, buyers swooped in to defend a violation of the S&P 500's 200-day moving average (4429) early in the session. The benchmark index briefly returned into positive territory, until investors reprised efforts to sell into strength. The benchmark index closed below the key technical level. 

This negative price action left buyers mistrustful of the market, imprinting a belief that the dip will keep on dipping until proven otherwise. The CBOE Volatility Index increased 12.7% to 28.85 amid increased hedging interest. 

Other worries in the market included what the Fed will say in next week's policy meeting and the Russia-Ukraine conflict that the U.S. is trying to defuse.

The Treasury market was less of a concern, but only because it was acting as a safe-haven trade from equities. The 2-yr yield fell six basis points to 0.99%, and the 10-yr yield fell nine basis points to 1.75%. The U.S. Dollar Index decreased 0.1% to 95.63. WTI crude futures fell 1.3%, or $1.13, to $85.16/bbl.

Friday's economic data was limited to the Conference Board's Leading Economic Index for December, which increased 0.8%, as expected, following a revised 0.7% increase (from +1.1%) in November. On Monday, investors will receive the preliminary IHS Markit Manufacturing and Services PMIs for January. 

  • Dow Jones Industrial Average -5.7% YTD
  • S&P 500 -7.7% YTD
  • Russell 2000 -11.5% YTD
  • Nasdaq Composite -12.0% YTD

FT : Why gaming is the new Big Tech battleground

Why gaming is the new Big Tech battleground
Microsoft’s $75bn purchase of Activision could trigger an overhaul of the industry

Microsoft’s audacious $75bn move on games publisher Activision Blizzard has detonated a bomb under the games industry. Along with the proposed deal’s sheer size, the prospect of a tech giant worth more than $2tn making a grab for games industry leadership has prompted breathless speculation about whether it will precipitate a wider industry realignment.

According to some, the deal, announced on Tuesday, will greatly add to forces that have already been reshaping the sector in recent years including the streaming of games, leading to the creation of ever-larger gaming empires.

The huge size of today’s gaming audience, which already dwarfs other forms of mass-market entertainment, is playing to the strengths of companies that can build and manage giant online businesses to spread their costs, according to Bing Gordon, a longtime video game executive and venture capitalist.

“The new critical mass is bigger than ever,” he says. Comparing pressures building up in the games industry to the streaming video wars that are reshaping the TV and movie business, he adds: “Someone’s going to create a games service with hundreds of millions of subscribers.”

Satya Nadella, the Microsoft chief executive, meanwhile billed the planned acquisition as a step towards the metaverse — the name given to the virtual worlds that some of the biggest tech companies believe will represent the next big iteration of the internet. Video games have come to be seen as one path towards these more immersive online worlds.


The biggest tech companies have powerful incentives to take the next step and develop full gaming operations, says Michael Wolf, a media consultant. “Every one of these [tech] companies knows gaming is going to be a growth area, and it ties into their metaverse ambitions more broadly.”

With the virtual worlds of games expanding to become venues where players can do things like make purchases or watch movies, “everything you do in the real world you will be able to do inside games,” Wolf adds.

If Wolf is right, then gaming is set to become a key battleground for tech companies that want to maintain their central role in the digital lives of billions of users.

Industry scepticism
The spasm that passed through the stock market after the deal was announced suggested many investors agreed that something significant was afoot. The share prices of other big games publishers jumped on speculation that they would seek deals to get bigger, or that they would align themselves more closely with powerful games distributors in the same way Activision is doing with Microsoft. Sony tumbled 13 per cent on worries that it might have just been outflanked.

But the market shock soon faded. Sony’s shares recovered some of their lost ground within 24 hours, and the bounce in other video game stocks was modest when set against the price declines most have experienced as the pandemic has waned.

The market’s immediate assumption that the deal would trigger a wave of consolidation is a simplistic response, says an executive at one of the largest video game publishers. “You know what makes life interesting?” this person adds. “It doesn’t ever usually work out that way.”

Other industry watchers suggest the deal only represents an intensification of the competitive battle already being waged between Microsoft’s Xbox and Sony’s PlayStation, rather than a harbinger of a bigger upheaval ahead. Its main impact might well be “a rebooting of the console wars, rather than a switch away from console wars to a more general war on multiple platforms,” says Pelham Smithers, a longtime games industry analyst.


Yet, even if the analysts’ scepticism proves correct and it does not turn out to be the starting gun for a broader reshaping of the industry, Microsoft’s move has still highlighted the rising stakes in a business whose $180bn of annual revenue in 2021 is already double that of the movie industry.

Games like Activision’s Call of Duty, World of Warcraft and Candy Crush now attract hundreds of millions of players between them. The most popular games are now being distributed through many different platforms, making them available on consoles, PCs or smartphones. And their makers have found new ways to wring money from their expanding audiences, including through advertising, in-game purchases and subscriptions.

“Fifteen years ago, you had about 200m gamers in the world and today you’ve got about 2.7bn,” says Neil Campling, tech analyst at Mirabaud Securities. “It’s become the biggest form of media.”

Call of Duty, Activision’s blockbuster franchise, has made the leap from games consoles and PCs to the mobile market, which has boomed to become as big in revenue terms as the console and PC businesses combined. Purchases made by players inside the games already account for a major part of Sony’s in-game transaction revenues, according to Damian Thong, senior analyst at Macquarie in Tokyo.

Bobby Kotick, Activision’s CEO, said when explaining the Microsoft deal, that this proliferation of platforms and new forms of distribution had made it difficult even for companies as big as his to keep pace with the technology requirements of today’s gaming market.

Some of the biggest tech companies already have significant stakes in the gaming world, even if they haven’t pushed far into trying to produce games themselves. These include the Apple and Google mobile app stores, which act as the main shop front for the single largest segment of the gaming market. Amazon’s Twitch and Google’s YouTube attract mass audiences for viewing video games. And through its Oculus headsets, Facebook holds the lion’s share of the nascent virtual reality market.

Meta Platforms — the name adopted by Facebook to reflect its new focus on the metaverse — was one of the companies approached by the Activision camp to see if it wanted to explore a purchase, according to one person familiar with the discussion.

Kathryn Rudie Harrigan, a Columbia University professor, describes Microsoft’s move on Activision as a pre-emptive strike to wrest the lead away from Meta in building the first iterations of the metaverse. “Facebook has stolen their thunder” with its move into virtual reality, she says, so buying Activision would give Microsoft a chance to at least “get its nose in the tent” ahead of Facebook.

Regulators and rivals
The biggest tech companies also have the deepest pockets to make the big bets now being placed in the gaming industry. Even for a company as large as Sony, buying Activision would have been a stretch, accounting for more than half of its $145bn stock market value.

By contrast, the purchase price represented only 3 per cent of Microsoft’s value, and less than its latest annual operating cash flow. That made the huge deal little more than a “tuck-in” acquisition — albeit a sizeable one — to bolster a business that most Microsoft investors hadn’t even viewed as core to the company’s future.

The deal is expected to be subjected to intense scrutiny by regulators that could take 18 months — and with both Google and Facebook on the receiving end of antitrust complaints from the US government, other acquisitions by Big Tech might now be politically impossible. Also, early attempts by Google and Amazon to create games studios of their own have failed to make a dent, putting them far behind Microsoft, which had already built a sizeable games studio business in the two decades since it launched its Xbox console.

Microsoft faces powerful opposition from bigger rivals in the gaming industry. Tencent, the Chinese company that leads the industry with gaming revenue in 2020 of $30.6bn, is widely seen as a model for the future of gaming in other parts of the world, combining mobile games and messaging to reach a massive audience inside China. And Sony, though briefly put in the shade by news of the Activision deal, has also ploughed into mobile gaming and is working on a subscription service as it looks to extend its reach into new markets.

As today’s leading gaming companies jostle for position, the most immediate impact from the Microsoft deal will be felt in the console market. After losing out in terms of sales and users to Sony’s PlayStation in the past two generations of games consoles, buying Activision could boost its access to the exclusive games that help to drive higher console sales.

Recent production problems that have weighed on the PlayStation may have given Microsoft extra incentive to make a grab for Activision as it tries to overtake its longtime rival, according to Smithers.

If so, then it would add to the opportunistic nature of the acquisition. Activision’s struggles to overcome pervasive workplace sexual harassment claims damaged its stock price and led to calls for a change in leadership last year, opening the way for Microsoft’s offer.

Although the console rivalry provides a strong incentive for the acquisition, it is in newer, growth markets that the deal’s impact could eventually be felt most keenly. Adding more exclusive content could boost Microsoft’s budding subscription service, Game Pass, which already has 25m customers. And, according to Nadella, the deal would put Microsoft in a stronger position to deliver games to mobile users in emerging countries, opening up big new markets.

For now, at least, Microsoft has tried to stamp out speculation that the pursuit of new services and audiences will lead it to keep more Activision games as exclusives — in the process, withholding them from rival platforms. Phil Spencer, head of its games business, tweeted this week that he had personally assured Sony executives of Microsoft’s “desire to keep Call of Duty on PlayStation”.

Given the scrutiny of the regulators, such assurances make sense. “Activision and Microsoft do not want to create the idea in regulators’ minds that they are going to [form] a closed shop,” says one large, long-term Sony shareholder.

With the subscription business still only representing a small part of the games industry’s revenues, turning Call of Duty into an exclusive to feed Microsoft’s Game Pass service would not make economic sense, say financial analysts. Microsoft would have to add 5m subscribers to make up for sales it would lose if it took Call of Duty away from the PlayStation, estimates David Gibson, senior analyst at MST Financial.

Considerations like these make it likely that Microsoft won’t do too much to rock the boat in the near term. But as it reaches for a big new global audience, the gaming industry’s long-term structure looks to be very much in play.