TheChek News Flow

Japanese carmaker earmarks $40bn for EVs but keeps options open

Honda said it would pour $40bn into electric vehicles over the next decade, but stopped short of throwing its full weight behind battery-powered vehicles as it bet that its hybrid cars would dominate in the near future.

While the company became Japan’s first automaker to declare the phaseout from gasoline cars last April, Honda has only one EV model in the market, trailing Volkswagen and other global players.

It said on Tuesday it would rely on its hybrid models with a petrol-electric system until the infrastructure was ready to support more EVs on the roads, in a move that follows the hedging logic of other carmakers Toyota and BMW.

“We need to take into account multiple factors, such as the living environment and the penetration rate of renewable energy, rather than simply switching to electric vehicles,” said Toshihiro Mibe, Honda’s chief executive who assumed the role last April.

Mibe stressed that Honda’s hybrid technology, which combines a smaller petrol or diesel engine with a battery, would lead the company over the next decade. “We are ending conventional engines but we will still focus on hybrids, and it will be our strength in 2030 or even in 2035,” he said.

The carmaker outlined plans to make the most of its tie-ups with General Motors and Sony to break into the affordable EV market. It said it would launch 30 EV models by 2030 and produce more than 2mn a year. Honda’s shares did not react to the announcement.

Honda announced last week it would jointly develop with GM millions of affordable EVs for North America and China with production scheduled in 2027.

Battery supply is a growing issue for Honda as carmakers around the world race to secure stocks to increase production. “How they source EV batteries is much more important than how much they invest in EVs,” said Sanshiro Fukao, a senior fellow at the Itochu Research Institute.

As the company plays catch-up with global rivals, “Honda under Mibe is increasingly moving away from in-house production, and luring battery suppliers should be the largest priority for any carmaker today”, he added.

The Japanese carmaker said that in North America it would use GM’s Ultium battery and it was considering setting up a joint venture with another undisclosed player to produce batteries to use in EVs.

In China, Honda will source batteries from CATL, the world’s largest global battery group, while in Japan it will buy batteries from Envision AESC, the main battery supplier for the Renault-Nissan alliance, for compact electric vans in commercial use.

Seiji Sugiura, a senior analyst at advisory company Tokai Tokyo Research Institute, said while the announcement showed Honda’s commitment to EVs, “the stock market still has scepticism”.

Fixed fee aims to incentivise pharma groups to develop new drugs and curb overprescription

The UK is set to become the first country in the world to pay drug companies a fixed fee for supplying antibiotics in an effort to tackle the growing global crisis over resistance to the drugs.

The aim is to give companies a better incentive to develop new antibiotics, which would be held back to treat patients who really need them, while restraining overprescribing that leads microbes to develop drug resistance.

Health experts estimate that antimicrobial resistance (AMR) kills more than one million people a year worldwide, putting pressure on the medical profession to cut back use of antibiotics in all but the most serious cases.

Under the deal being struck by the NHS with Pfizer of the US and Shionogi of Japan, the drug companies will be paid a fixed fee of £10mn a year. The current reimbursement system based on sales volume often fails to provide sufficient revenue to justify research and development spending.

The contract value was set at a level that would give international companies an incentive to invest in antibiotic research and development, if other countries pay proportionate sums scaled to their gross domestic product.

Thomas Cueni, director-general of IFPMA, the international pharmaceutical manufacturers trade body, agreed: “We call on the other leading governments to put all efforts into progressing their own incentive models so that sufficient global scale is achieved that will attract the necessary investment in R&D.”

Two new antibiotics made by Pfizer and Shionogi have already passed a key value-for-money evaluation by the National Institute for Health and Care Excellence (Nice). NHS England aims to conclude innovative “subscription-style contracts” with the manufacturers this summer.

Nick Crabb, Nice programme director, said: “The ultimate goal is to ensure the NHS has access to effective new antimicrobials to call on when needed and patients aren’t left without treatment options in the face of growing antimicrobial resistance.”

Pfizer and Shionogi submitted their drugs for evaluation when the government announced a pilot scheme in 2020, in which two antibiotics would be selected for subscription contracts capped at £10mn a year for 10 years.

Several European nations and the US are considering similar schemes that separate payment from prescription volume, either through an upfront market entry payment or annual subscriptions like the NHS England model.

“This is an important step in our world-leading approach to incentivise innovation in antimicrobial drugs and the battle against drug-resistant infections,” said Blake Dark, NHS commercial medicines director.

Dame Sally Davies, UK special envoy on antimicrobial resistance and former chief medical officer for England, said: “I am delighted that Nice has demonstrated the value of innovative antibodies in a subscription-style payment model. I call on the NHS to continue this pilot over the next few years. Ideally, we need to add two innovative and needed antibiotics each year.”

Pfizer’s Zavicefta and Shionogi’s Fetcroja are used to treat severe infections of the abdomen, lungs and urinary tract by bacteria that are resistant to other antibiotics. Both are administered by intravenous infusion.

Nice worked with the Policy Research Unit in Economic Methods of Evaluation in Health and Care Interventions, based at York and Sheffield universities, to assess the two drugs.

The universities used a complex procedure that took account of their value in allowing other medical procedures to go ahead, reducing the spread of infection to other people and ensuring that the NHS had a range of antibiotics available to treat resistant bacteria.

Taking all these factors into account, Nice estimated that Fetcroja would be worth 16,200 quality-adjusted life years (Qalys) to NHS patients over 20 years, while it put Zavicefta’s value at 8,880 Qalys. Using Nice’s yardstick that a treatment is justified if it costs £20,000 per Qaly, both would justify a subscription of £10mn a year.

Alexander Saverys says that Euronav shareholders will receive ‘nothing’ from planned tie-up with Frontline

Alexander Saverys, an heir to one of Belgium’s oldest shipping dynasties, has hit out at Norwegian tycoon John Fredriksen’s ambition to create the world’s largest oil tanker group, vowing to build opposition to the plan.

Fredriksen last week announced a $4.2bn deal to merge his Frontline group with Belgium’s Euronav, a rival tanker group founded in 1995 by the Saverys family, who are also the company’s largest shareholder.

The deal has won the backing of the boards of Frontline and Euronav. Both suffered losses last year and say that the greater scale will give them leverage to raise prices.

However, Alexander Saverys said the deal offered “nothing” for Euronav shareholders, who will receive 1.45 Frontline shares for each Euronav share they own. The Saverys family own just over 13 per cent of the Antwerp-based group.

“What’s in it for Euronav? Nothing,” said Saverys. “We see this company [Euronav] is not heading in the right direction. We hate to see things we’ve built go in the wrong direction.”

Saverys insisted that he had “more than one string in his bow” to thwart the deal, including building opposition from fellow investors, the family increasing its own stake and laying out an alternative future for Euronav that would cut the group’s reliance on transporting oil.

“Our stake is already sizeable. It will not be impossible for them [Frontline and Euronav] to push it through but it will be difficult,” he said.

Saverys intends to propose that Euronav combine with a division of CMB, a shipping conglomerate with a fleet of almost 150 vessels that is owned by the family. CMB Tech, a division of the conglomerate, is designing vessels powered by hydrogen and ammonia, as well as building distribution infrastructure for the low carbon fuels.

Euronav said that it and Frontline have not yet finalised the level of shareholder support the transaction will require.

Hugo De Stoop, Euronav’s chief executive, said the proposals from Saverys were “incompatible” with Euronav’s business model and that demand to transport oil would remain high for decades to come.

Saverys also criticised analysts who have championed the deal in recent days because it will reduce borrowing costs for Frontline and Euronav.

“If the longevity of your company is based on a 30-basis point reduction of your debt, then where’s your future?,” he said. “I don’t believe in this pure play model . . . In this day and age if we want to decarbonise, we need to diversify.”

Epic raises $2 billion in biggest fundraising for a videogame company in two decades

“Fortnite” creator Epic Games Inc. raised $2 billion, the most for any gaming company in two decades, from investors including Sony Group Corp. SONY -5.54%

The funding means that Epic is now valued at $31.5 billion, after Sony and Kirkbi A/S, the holding company of the Kirk Kristiansen family, put in $1 billion apiece, according to a statement.

The company, which also counts Walt Disney Co. and China’s Tencent Holdings Ltd. TCEHY 0.51% among its investors, was valued at $28.7 billion as of last April. Its chief executive, Tim Sweeney, remains the company’s controlling shareholder.

The company said the funding will advance the company’s aims to build the metaverse—a term used to describe a virtual environment in which people can use digital avatars to work, play and shop—and its continued growth.

“As we reimagine the future of entertainment and play, we need partners who share our vision. We have found this in our partnership with Sony and Kirkbi,” Mr. Sweeney said.

The $2 billion investment in Epic is the largest in the gaming space dating back to 2002, according to research firm PitchBook Data Inc. The three previous largest investments were also in Epic, with a $1.78 billion investment topping the list before Monday.

The latest funding round comes days after Epic and the Lego Group, which is 75% owned by Kirkbi, said they are partnering to build a version of the metaverse that is child- and family-friendly.

Epic’s latest valuation will be closely watched by investors after a string of recent deals in the videogame space this year. In January, Microsoft Corp. agreed to buy Activision Blizzard Inc. in an all-cash deal valued at about $75 billion. Later that month, Sony’s videogame unit said it was buying videogame developer Bungie Inc. in a deal valued at $3.6 billion.

The investment from Sony and Kirkbi in Epic is meaningful by itself and by industry standards “because there are very few billion-size dollar deals done in [the] game industry,” said Martin Yang, executive director at investment bank Oppenheimer & Co. The average size of gaming-industry investments is typically in the tens of millions, with something in the hundreds of millions considered a rare, large-size investment, added Mr. Yang.

Josh Chapman, a managing partner at Konvoy Ventures, a venture-capital firm that invests exclusively in the videogame industry, said that the size of Sony and Kirkbi’s investment is rare but not out of the question for Epic because it has been raising capital for a long time.

“This is certainly a very sizable transaction that makes a lot of sense for Epic by bringing in Lego [intellectual property] plus all of Sony’s assets,” said Mr. Chapman.

The videogame marketplace has reached new heights after more people turned to it during the Covid-19 pandemic, prompting companies to capitalize on the recent momentum.

Sony said in late March that its videogame unit is bolstering its subscription option, which has been gaining prominence throughout the industry as a way to lock in players to specific hardware, franchises and apps. Microsoft has offered a single subscription service since 2017. The two companies consider cloud gaming, also called game streaming, to be the future of game distribution.

As Mr. Sweeney’s company has grown, he has also taken on two of the world’s biggest technology companies. Epic has been in legal disputes with Apple Inc. and Alphabet Inc.’s Google after the two companies in August 2020 pulled “Fortnite” from their app stores. The move came after Epic rolled out a new way of making in-game purchases that circumvented the cut the tech giants make from digital transactions within apps.

Apple last month argued a judge’s ruling should be overturned in its appeals fight with Epic.

“Fortnite” quickly became a global phenomenon after its debut in 2017. While it is best known for its free “Battle Royale” mode, where 100 players duke it out until only one combatant or squad remains, it is also home to concerts, movies and designated areas just for socializing. Epic said “Fortnite” had more than 350 million registered users in 2020.

Epic said in March that it was committing proceeds from “Fortnite” to humanitarian relief for people affected by the war in Ukraine. It said it raised a total of $144 million.

Epic was founded in 1991. In addition to the shooter game “Fortnite,” it makes the Unreal Engine, a suite of software tools for developing videogames and producing special effects for television shows, movies and other types of digital content. It also owns the studios behind hit games such as “Rocket League’’ and “Fall Guys: Ultimate Knockout.”

Senvest Management snaps up unloved oil and gas companies

Oil and gas stocks are on track for further strong gains, as a sector shunned by ethically-minded investors regains favour, according to the hedge fund manager who made $700mn betting on meme stock GameStop.

Richard Mashaal, co-chief investment officer at New York-based Senvest Management, whose 86 per cent gains in 2021 ranked him among the best-performing hedge funds in the world, said he now has a quarter of his portfolio in fossil fuel stocks.

The shift reflects a push across the investment industry in seeking to profit from the West’s need for secure sources of energy less susceptible to geopolitical risks.

“The result of the ESG movement is that there’s been massive multiple compression [in oil and gas stocks] and we still haven’t come back from that,” said Mashaal, adding that many oil and gas companies had felt that investment capital “wouldn’t be there for them”.

“Now there are other countervailing interests, such as the security of energy supply, that have come to the fore and which are not going to go [away] anytime soon,” he said.

Senvest hit the headlines last year when it emerged as one of the biggest winners from the spectacular surge in GameStop shares. Mashaal, whose firm manages about $3.3bn in assets, had built up a stake of more than 5 per cent in the US retailer in late 2020, before a frenzy of retail investor buying in early 2021 pushed the share price up as much as 2,400 per cent.

Now he believes a surge of funding will be needed in the traditional energy sector to correct years of under-investment.

“You’ve got a couple of years before a meaningful production response can be mounted to satisfy demand. There’s a very solid outlook [for oil and gas stocks] for another year or two,” he said.

Two of Mashaal’s biggest positions in his portfolio are in Canada-based energy firms Paramount Resources and Arc Resources, which he says trade at discounts to US peers. While both stocks are trading at roughly half their all-time highs, hit in 2014 and 2008 respectively, he says they “were earning a fraction [then] of what they’re earning now”.

International oil benchmark Brent crude and US gauge West Texas Intermediate have topped $100 this year, fuelled by the Ukraine war. Oil traders have warned prices could soar to more than $200 this year, driven by a growing international boycott of Russia.

In October the FT revealed that hedge funds had been buying up and profiting from the shares of oil and gas companies discarded by ESG-focused institutional investors.

“There’s a lot of room for multiple expansion [in these stocks],” said Mashaal, adding that a high oil price had not been fully factored into these firms’ share prices.

“People realise this is not going away in the short or medium term. It’s not like ESG goes away, but we [now] need to balance it with energy security and where you want to buy your oil from,” he said.

If oil is not produced in Canada or the US “then it’s produced somewhere else, where the ESG regulations are less stringent or even non-existent”.

Moscow says it will sue if western powers force non-payment but legal experts dismiss the effectiveness of such a move

Russia has vowed to sue if sanctions force it to default on its bonds but academics and lawyers have dismissed the threat as “payment theatre” designed to project the state’s financial strength.

Over the weekend, finance minister Anton Siluanov said western sanctions were an attempt to “artificially create a man-made default” — Moscow’s first since 1998. Siluanov, who has already sought to flip some dollar repayments in to roubles, did not say who the government might sue or in which country.

But bondholders and rating agencies assume a default process is under way, and academics argue the country’s efforts to be seen as willing to make payments are political rather than practical.

“Paying contrary to expectations is a bullish political move that’s rather cheap,” said Anna Gelpern, a professor of law at Georgetown university and a senior fellow at the Peterson Institute for International Economics. “If the whole point of [the invasion of Ukraine] is partly about projecting that ‘we are a global power, respect us’ then this kind of payment theatre is quite important for [President Vladimir] Putin.”

Moscow has already missed payments on two of its dollar bonds, after US authorities blocked American banks from processing cash as part of measures to punish the country over its invasion of Ukraine. It is unclear what bearing any Russian legal action might have on the process of a default.

“If we don’t get our dollars after 30 days it’s a default,” said one Europe-based investor who holds Russian dollar bonds, referring to the grace period after last week’s scheduled coupon and principal payments.

Already, S&P Global has downgraded Russia’s credit rating to “selective default”, saying it does not expect investors to receive payment in dollars within the 30-day window. Meanwhile a panel that determines payouts on derivatives contracts on Monday ruled that state-owned Russian Railways had defaulted on its debt after an interest payment failed to reach investors within a 10-day grace period, despite the company’s attempts to pay the cash last month.

Russia’s foreign-currency bonds — like those of many sovereign borrowers — are governed by English law. Unusually, however, in the terms under which the bonds were issued, Russia said it would not submit to the jurisdiction of a foreign court.

The legal ambiguity surrounding the bonds means the Kremlin could potentially launch legal proceedings at home, according to Mitu Gulati, a law professor at the University of Virginia, who described Russia’s argument that it has been thwarted from making payments by US authorities as “not crazy”.

“To the extent they litigate they will say ‘look, we want to pay, we just can’t, somebody is stopping us’,” Gulati said. “But here’s the rub: usually it’s supposed to be some kind of exogenous event to both parties [that is preventing payment] whereas investors would argue that’s not true. You have caused this, they could say. If you don’t invade countries then you don’t get this situation. Get out of Ukraine and you can pay.”

In any event, a court in the UK would be highly unlikely to defer to a Russian court’s judgment on whether the bonds were in default, Gulati added.

Both Gulati and Gelpern likened Russia’s situation to Argentina in 2014, when a New York judge prevented Buenos Aires from making payments to holders of new debt until it had paid off older creditors, effectively forcing the country into default.

Countries typically strive to avoid default to make it easier to eventually sell new debt once the stress on government finances has eased, perhaps through a restructuring agreement with creditors. However, the severe sanctions against Russia leave little prospect of any negotiation with bondholders, or of Moscow regaining access to bond markets in the foreseeable future.

“This isn’t like a normal default,” said one investor. “As far as I’m aware no one is talking about forming bondholder groups and talking to the Russians. I don’t even think that would be legal.”

Siluanov also said Russia had no plans to borrow in 2022. “We are not planning to enter the domestic market or foreign markets this year. This makes no sense, because the cost of such borrowing would be cosmic.”

Russian bond prices have collapsed since the invasion of Ukraine, with bonds currently trading at around 22 cents on the dollar, a level that implies a default is priced in.

After the 30-day grace period has expired, bondholders are able to “accelerate” repayment, demanding they get their money back immediately if 25 per cent of the holders of a specific bond vote to do so. Such a decision is likely to depend on whether investors think they can seize any of Russia’s overseas assets in order to enforce their claims — an exercise complicated by the fact that Russian assets are largely frozen by sanctions — said Gelpern.

“The current environment is so incredibly muddled that bondholders may not want to play their one big card with no clear game plan,” Gelpern said.

“But then it’s a little bit optimistic to expect a civil negotiation [between bondholders and Moscow] to ensue any time soon,” she added, “so some may want to accelerate if they think they can reach some assets.”

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