Charting The Stock Market "Melt Up" & The Fed's Naïveté
Charting the stock market “melt-up” in prices, and the Fed’s naivety of the laws of physics may be of benefit to younger investors. After more than a decade of rising prices, accelerating markets seem entirely normal, detached from underlying fundamentals. As a result, new acronyms like “TINA” and “BTFD” get developed to rationalize surging prices.
However, a more extended look at price history suggests the current market environment is anything but typical. More importantly, the “moral hazard” created by the Federal Reserve’s continuous bailouts have put individual investors at significant risk.
A Long History Of Poor Outcomes
In the short term, like above, charting stock market prices may not seem extraordinarily stretched. However, this is because the chart lacks context from a historical perspective. Once we look at the market from 1900 to the present, a different picture emerges compared to its exponential long-term growth trend.
Usually, when charting long-term stock market prices, I would use a log-scale to minimize the impact of large numbers on the whole. However, in this instance, such is not appropriate as we examine the historical deviations from the underlying growth trend.
What you should take away from the chart above is apparent. Investing capital when prices are exceedingly above the underlying growth trend repeatedly had poor outcomes. Investing money at peak deviations led to very long periods of ZERO returns on capital. (Interestingly, as the Fed became active in the markets, the periods of zero returns got cut in half.)
Timing Is Everything
Investors are remiss to dismiss the importance of the long periods of zero returns.
More often than not, the consistently bullish advisory and media crowd present long-term studies to support investing in markets. Generally, these studies get presented without context to coerce you into buying their products or using their services. I recently showed an example of such a study:
While well-meaning, there are several critical points with such analysis. Let’s review the long-term chart above.
- When charting stock market prices or returns, cherry-picked start dates can provide any result you want.
- For example, 100-years ago was 1920. That was the beginning of a significant bull market cycle that lasted until 1929.
- However, back up 20-years to 1900, an investor had to wait until the 1950s to break even.
- Starting 25-years ago was 1995. While the run from 1995-2000 was solid, investors spent the next 13-years going nowhere.
Given that we don’t live forever and have a finite time frame to save for retirement, “when” you start your investing journey is critically important.
As the old saying goes, “timing is everything.”
Newton’s Law Of Gravity
Sir Issac Newton discovered the relationship between the motion of the moon and the motion of a body falling freely on Earth. His dynamical and gravitational theories established the modern quantitative science of gravitation. Moreover, Newton realized that this force could be, at long range, the same as the force with which Earth pulls objects on its surface downward.
Notably, there is a clear “gravitational pull” of prices to the exponential growth trend line. Thus, without fail, when prices have deviated well above the trend line, there was an eventual reversion below the trend.
Since the Federal Reserve became active with “monetary interventions” in 2009, the current deviation from the long-term trend is the highest in history. Of course, as one would expect, valuation excesses accompany such deviations.
In all cases, the subsequent returns to investors from such excesses in price and valuation have never been kind.
Ignoring The Laws Of Physics
Interestingly, in the July FOMC minutes, the Fed made mention of market valuations. However, while they may acknowledge that valuations have become elevated, they fail to understand the laws of physics.
As noted, extreme deviations above the long-term growth trend will eventually revert to the mean. In the 60s and 70s, it took nearly 15-years of rolling tops and bear markets to complete the reversion. It took almost 9-years to complete the reversion at the turn of the century.
The problem facing the Fed is the diminishing impact of QE on the financial markets. As noted previously, it requires ever greater levels of monetary intervention to lift asset prices. As a result, when the reversion to mean ultimately begins, the Fed may not be able to arrest the decline as quickly as they did in 2020.
There is more than adequate evidence a “bubble” exists in markets once again.
‘I have no idea whether the stock market is actually forming a bubble that’s about to break. But I do know that many bulls are fooling themselves when they think a bubble can’t happen when there is such widespread concern. In fact, one of the distinguishing characteristics of a bubble is just that.“It’s important for all of us to be aware of this bubble psychology, but especially if you’re a retiree or a near-retiree. That’s because, in that case, your investment horizon is far shorter than for those who are younger. Therefore, you are less able to recover from the deflation of a market bubble.” – Mark Hulbert
Read that statement again.
Millennials are quick to dismiss the “Boomers” in the financial markets today for “not getting it.”
No, we get it. We have just been around long enough to know how these things eventually end.
When The Money Runs Out
Historically, all market crashes have been the result of things unrelated to valuation levels. Instead, issues such as liquidity, government actions, monetary policy mistakes, recessions, or inflationary spikes are the culprits that trigger the “reversion in sentiment.”
Notably, the “bubbles” and “busts” are never the same.
I previously quoted Bob Bronson on this point:
“It can be most reasonably assumed that markets are efficient enough that every bubble is significantly different than the previous one. A new bubble will always be different from the previous one(s). Such is since investors will only bid prices to extreme overvaluation levels if they are sure it is not repeating what led to the previous bubbles. Comparing the current extreme overvaluation to the dotcom is intellectually silly.I would argue that when comparisons to previous bubbles become most popular, it’s a reliable timing marker of the top in a current bubble. As an analogy, no matter how thoroughly a fatal car crash is studied, there will still be other fatal car crashes. Such is true even if we avoid all previous accident-causing mistakes.”
Comparing the current market to any previous period in the market is rather pointless. The current market is not like 1995, 1999, or 2007? Valuations, economics, drivers, etc., are all different from one cycle to the next.
Most importantly, however, the financial markets constantly adapt to the cause of the previous “fatal crash.”
Unfortunately, that adaptation won’t prevent the next one.
Yes, this time is different.
“Like all bubbles, it ends when the money runs out.” – Andy Kessler
Saks CEO Marc Metrick discusses profitable e-commerce spinoff
Eight months after Hudson’s Bay, the Canada-based owner of Saks Fifth Avenue, split off the luxury retailer’s e-commerce business into a separate entity, changes are already underway on its site.
The number of styles Saks.com sells is up 40 percent, and the number of brands available has increased by 30 percent. Saks.com is also ramping up offerings in kids clothing and home furnishings as well as activewear. Shoppers can now enjoy free deliveries and returns. And eventually, shoppers will see speedier deliveries and more upscale packaging of their items — with an eco-friendly twist.
Behind all the changes is Marc Metrick, previously president and CEO of Saks Fifth Avenue, and now CEO of the new Saks.com company called Saks. Metrick says the stand-alone company with new financing means the business can grow bigger much faster. So far, there are signs the spinoff, announced in early March, seems to be working. Saks.com now has 1 million visits a day, up from 500,000 two years ago. And the sales on a total value of merchandise basis rose 80 percent on Saks.com, while store sales increased 30 percent in the second quarter ended July 31 compared with the same period in 2019.
Venture capital firm Insight Partners plowed a $500 million investment for the new Saks.com company and values the standalone business at $2 billion. Hudson’s Bay, which also owns Saks Off Fifth and the Canadian Hudson’s Bay department store chain, went private nearly two years ago.
The changes are happening as online shopping exploded during the pandemic, even for high-priced luxury items, as shoppers avoided brick and mortar stores. Online sales rose 21.1 percent and overall luxury sales nearly doubled for the first nine months of this year, according to Mastercard SpendingPulse. In comparison, total retail sales excluding auto and gas increased 10.8 percent during that timeframe.
Meanwhile, reports are swirling that an initial public offering is in the offing for Saks e-commerce business. That’s occurring as activist investor Jana Partners is reportedly pushing for a spinoff of Macy’s e-commerce business.
AP recently interviewed Metrick at Saks’ New York headquarters about a wide range of issues from the reasons behind the split to how luxury spending is rebounding. His responses have been edited for clarity and length.
Q. Why did Saks spin out its e-commerce?
A. Back 20 years ago or so, the first instance of e-commerce….none of us — us being the traditional department store folks — were really able to get into the space race the right way. We had lots of bricks and mortar to deal with. We had customers who like to shop one way, and we had to be consistent and it was very complicated. And then as we’re sitting through even pre-pandemic watching the channel shift, watching this digitally-native consumer come to life, we realized….we can’t miss this one, like the industry missed the first one. So we decided to really structure our business in a way where we can win with both channels the right way.
Q. What is the biggest difference?
A. Since we launched Saks.com in the late 90s, we were an “or” company. We can invest in online or in the stores. We can buy inventory for online or the stores. We could focus on marketing for online or the stores. Now we’ve become an “and” company. We can invest in our online and our stores. We can spend marketing dollars for our online and our stores. We can buy merchandise for online and our stores.
Q. How’s the luxury business faring?
A. I am very pleased with how the business held up and how the business pushed through the pandemic. There are people that really want to get dressed up again, even if they’re returning to the office or if they’re going out to dinner again and they’re going out to see friends. It’s the go out and travel businesses that are really working.
Q. How is the consumer benefiting?
A. They have more choice and selection than they’ve ever had before. There’s new categories that we weren’t really in in a meaningful way or they were there, but they weren’t really powerful. We are amplifying and really going after them.
Q. How are you improving the speed of delivery?
A. We used to focus on getting it to you when we could. Now we’re focusing on getting it to you as fast as we can. There’s probably a day or two faster delivery, and that’s not really where we want it to be yet. But that’s a work in progress right now.
Q. Why are you able to be speedier now?
A. It starts with having the inventory in our fulfillment centers. When you’re a fully-invested omnichannel retailer, which is what we were, some of your inventory is sitting in your fulfillment center and some of it is sitting in one of 40 stores. And that just takes a longer period of time when you run out in the fulfillment center and it’s got to go out to the stores to get filled. It’s going to take longer for the customer to get it. It’s less efficient for the consumer, and this helps move that process along in a big way.
Q. Are there plans for Saks.com to go public?
A. My job and my team’s job is to focus on the customer experience doing everything we’re saying we’re going to do and building this business. What happens from a capital market standpoint, who knows?
Q. What about acquiring new customers?
A. We’ve acquired about half a million new customers just in the last seven months while maintaining all the right economics, and I’m thinking about the economics much differently. So I’m thinking about not only my customer-acquisition costs being moderate to low. I’m thinking about the lifetime value of these customers, what they’re bringing to us.
Q. How are you navigating the clogs in the supply chain?
A. It wasn’t a matter of diversifying where we were going. It was a matter of making sure that we had enough so that if there was a fallout or if you got less than you were still getting it. It was getting in there early so that if it came late, it still came on time. So it was really about being strategic about the quantities that you’re placing. And we weren’t crazy.
FLYING MOTORCYCLES, BETTER E-BIKES AND MORE PERSONAL TRANSPORTATION TO COME
Advances in batteries and smart technologies are leading to safer, more planet-friendly mobility devices
A rendering of Jetpack Aviation’s flying motorcycle, which it hopes to make available starting in 2023.
ILLUSTRATION: JETPACK AVIATION
The Future of Everything covers the innovation and technology transforming the way we live, work and play, with monthly issues on education, money, cities and more. This month is Transportation, online starting Nov. 3 and in print Nov 10.
A Motorcycle That’s Above it All
The Speeder is a futuristic-looking flying motorcycle created by Ventura, Calif.-based Jetpack Aviation. Though some elements are still in development, the vertical take-off-and-landing aircraft will have jet turbine engines that provide vertical thrust. Once in the air, the engines would tilt backward and the aircraft would fly on small wings powered by net-zero-carbon fuel. Two recreational models, priced starting at $385,000 each, are available for preorder. One reaches speeds of over 150 mph, and flies for nearly an hour at more than 15,000 feet; an ultralight version that doesn’t require a pilot’s license to operate is limited to 60 mph by federal regulations and flies for 15 minutes. The company hopes to make them available in 2023. A faster, heavy-duty model intended for military and rescue missions is also in development. Within 10 years, the recreational Speeder could be automated and used for public transportation in cities, with rooftops repurposed for parking, says CEO David Mayman.
Smarter, Safer Wheelchairs
LUCI, an accessory that mounts on power wheelchairs, uses different technologies to map the chair’s surroundings.
PHOTO: LUCI
Between 65% and 80% of wheelchair users injure themselves each year with tips or falls, according to the Consumer Product Safety Commission. LUCI, an accessory that mounts on power wheelchairs, uses stereovision, infrared, ultrasonic and radar sensors, and Intel Corp.’s RealSense cameras to map the chair’s surroundings so it can better navigate curbs, obstacles and tipping scenarios. It offers audible anti-tipping alerts, low-battery alerts, automated speed control and location monitors for users and caregivers in case of tips. Available since February for $8,445, LUCI has prevented over 10,000 accidents, says co-founder Barry Dean.
Next year, Mr. Dean and his engineer brother, Jered Dean, plan to launch additional products that automatically unload pressure to shift the user’s weight and prevent pressure sores. The team is working with the Colorado Smart Cities Alliance to map the accessibility of “forgotten spaces” like sidewalks and alleys. “This type of information not only gives wheelchair users more independence, but can be applicable to delivery bots or parents with a stroller,” Jered Dean says.
Manual wheelchairs are also getting upgrades. U.K.-based Phoenix Instinct is set to debut in 2023 a smart wheelchair that adjusts its center of gravity when the chair is on a slope and slows down. And Toyota Motor Corp. is developing a device that attaches to a chair’s leg rests and will stop or slow to avoid obstacles, reducing stress on a user’s arms.
Scoot Along in Style
A visitor tries the Segway S-Pod motorized chair at the tech trade show CES in Las Vegas in early 2020.
PHOTO: ETIENNE LAURENT/SHUTTERSTOCK
Segway’s latest crack at urban mobility is the S-Pod, an electric-powered, egg-shaped armchair on wheels. Aimed at an older demographic, the self-balancing device can travel 43 miles at speeds of up to 24 mph on a single charge. Riders navigate using a joystick. Segway first plans to roll out S-Pods at airports, shopping malls, theme parks and corporate campuses as early as next year. Autonomous versions for city use are years away.
Toyota’s C+walk, a three-wheeled standing electric scooter developed for the Summer Olympic Games in Tokyo, went on sale in October in Japan for around $3,000. The company is developing a seated version for commercial use that will have three speed settings that max out at 4 mph, spokesman Aaron Fowles says. Both models are intended for pedestrian-friendly zones.
Float on the Air
Lexus and a team of magnetic-levitation scientists developed a prototype hoverboard for an advertising campaign.
PHOTO: LEXUS
Will a hoverboard that effortlessly floats above the ground ever be reality? Lexus and a team of magnetic-levitation scientists spent 18 months developing a prototype called the Slide. The board contains blocks of a superconductive metal alloy cooled to -197 degrees Celsius (-322.6 degrees Fahrenheit) by reservoirs of liquid nitrogen inside the board. The team constructed a hoverpark with a magnetic track beneath the surface. When a superconductor is cooled and placed in a magnetic field, an interaction known as the Meissner effect repels the force of gravity and allows the board to levitate. Placed above the track, the Slide hovered about an inch off the ground. When the liquid nitrogen runs out, the superconductors warm and the hoverboard drops to the ground. Lexus developed the technology for an advertising campaign around innovation, and it was ridden by a professional skateboarder. It wasn’t intended for commercial use, says Mr. Fowles.
Better Electric Motorbikes
Swedish electric bike company CAKE’s first city bike, the Makka, reaches speeds of 28 mph with a range of up to 30 miles a charge.
PHOTO: CAKE
With lighter, longer lasting batteries, electric motorbikes are starting to get more practical and accessible, promising a widespread, emissions-free alternative for urban commuters. The Xubaka, a two-seater with vintage-cool design from France’s Sodium Cycles, weighs 132 pounds, including the battery, and can hit 50 mph. A passive regeneration system recovers up to 14% of the battery power while braking, and a rear seat can be replaced with utility-oriented accessories, making it more of a cargo scooter. It was launched in Europe in January with prices starting at $6,870.
Italian brand Piaggio this summer unveiled a lighter, cheaper version of its electric Vespa called the Piaggio One. Priced at $3,100 in Europe, the bike doesn’t require a motorcycle license to operate because it tops out at 28 mph.
Swedish electric bike company CAKE’s first city bike, the Makka, starts at $3,800. Available for preorder for early 2022 deliveries in the U.S. and Europe, it has customizable features like bicycle bags, racks and an additional passenger seat. Weighing just over 140 pounds, the moped reaches 28 mph with a range of up to 30 miles a charge. CAKE has also introduced a $4,200 version that is compatible with Polestar 2 electric cars. The bike mounts to a rear rack, plugs into the car and charges as customers drive the highway. When they arrive in the city, customers can complete the last mile on their e-bike.
Playtech in talks over potential counterbid
Approach from Hong Kong-based shareholder Gopher comes days after £2.7bn Aristocrat offer
Gambling software group Playtech is in takeover talks with its second-biggest shareholder, setting up a bidding war with Australian slot machine developer Aristocrat Leisure, which had already tabled a £2.7bn offer.
Gopher Investments, a Hong Kong-based asset manager, contacted Playtech’s board on October 21 seeking “certain due diligence information”, the UK-listed gambling company said in a statement on Monday.
The approach was made just days after Playtech announced it had agreed a £2.7bn takeover by Aristocrat, which is intended to boost the Australian acquirer’s presence in the fast-growing US betting market.
Playtech, which was founded by the Israeli billionaire Teddy Sagi in 1999 and listed in 2006, develops software for online gambling and gaming machines and has operations in three US states. It is in discussions with US partners to launch in Mississippi having last month won a licence to operate in the state.
Analysts estimate that the US betting market is likely to become the world’s largest regulated gambling market after a federal ban on betting outside of Nevada was overturned in 2018.
Shares in Playtech jumped 4 per cent to 734p a share in early morning London trading before falling back. They are still trading ahead of Aristocrat’s 680p-a-share offer, however.
Aristocrat said in a statement on Monday that its “long-term engagement with regulators across key gaming jurisdictions, together with strong financial fundamentals, deep customer relationships and established presence in global gaming markets” meant that it was ready to complete the deal in the second quarter of next year.
It added that its offer would “provide certain value to Playtech shareholders”.
Playtech has had a tumultuous relationship with Gopher, which owns 4.9 per cent of the London-based gambling company, since it bought into the business for about $100m in May.
The asset manager was outspoken in its criticism of the Playtech board during the sale of its financial trading division, Finalto, accusing it of not being transparent in the sale process. Gopher ultimately stepped in to buy the business itself in a $250m deal that is being finalised.
Aristocrat said that its acquisition of Playtech was conditional on the Finalto sale being completed.
Gopher has also voiced concern that Playtech’s long-awaited new chair Brian Mattingley was previously chair of the football betting start-up Football Index, which collapsed into administration in March.
Mattingley was made chair after years of perceived corporate governance failures at Playtech including multiple shareholder revolts over the size of pay package given to its chief executive Mor Weizer.
The company has been subject to multiple campaigns by activist investors including Jason Ader, a serial gambling-industry investor, and Odey Asset Management, the investment vehicle of hedge fund manager Crispin Odey, and has been trading at a far lower value than many of its industry peers.
Sagi floated the business in 2006 and sold his last shares in 2018.
Playtech shareholders accounting for about a fifth of the company’s public stock said that they intended to vote in favour of the Aristocrat takeover at the time the offer was announced.
Playtech said that discussions with Gopher “are at an early stage and ongoing”. Gopher declined to comment.
Mexico’s once roaring auto sector falls on hard times
Engine of country’s economic growth has stalled amid the pandemic and chip shortages
Once a magnet for billions of dollars in investments and rapid job creation, Mexican monthly auto production and sales are languishing at their lowest levels in a decade as the industry is pummelled by the pandemic and semiconductor chip shortages.
The chip problems felt around the world are hitting North America particularly hard, and Mexico is experiencing an outsized impact since it relies on autos for more than 3 per cent of its gross domestic product. Data published on Monday showed that auto production in Latin America’s second-largest economy in October was at its lowest for that month since 2011.
The auto supply chain issues could hit GDP by 1 per cent this year, according to a Bank of Mexico estimate from August, and the problems will probably last well into next year. The uncertainty ahead was compounded by changing US consumer tastes, the transition to electric vehicles and the Mexican government’s energy policy, analysts said.
“We’re in a really tricky moment for the sector,” said Adrián de la Garza, chief economist for Mexico at Citi. “It’s not clear that going forward we’ll see a big rebound in foreign investment.”
That could be a drag on Mexico’s already fragile economic recovery, which contracted suddenly in the third quarter. While the sector has long benefited from North America free trade agreements, an eagerly awaited boom from factories moving from Asia to be closer to the US is yet to materialise.
This year, automakers had hoped to recover fully from Covid-19 shutdowns in 2020. But supply chain bottlenecks caused by persistent waves of the virus, raw material shortages and other factors severely restricted the supply of chips. That has led to stoppages and production cuts across many factories.
“We recovered from the plant closures but then we basically ate up all the raw materials and ran out of components,” said Guido Vildozo, senior market analyst at IHS Markit. “We are at a point where . . . if anything is derailed, then the domino effect is very severe.”
Almost 1m Mexicans work in the auto industry. Entire regions of the country depend on the factories owned by big names such as General Motors and Nissan and their suppliers. More than 80 per cent of production is for export, mostly to the US.
Many emerging markets that made autos were seeing a hit of 0.1 to 0.2 per cent of GDP from the chip problems, said analysts at Capital Economics. But in Mexico, the Czech Republic and Hungary, where the sector comprises a larger chunk of the economy, the overall impact was likely to be greater than 1 per cent of GDP, including spillover effects, they added.
Tatiana Clouthier, Mexico’s economy minister, warned the chip problems were having an impact on the wider economy, and said her team had been working within the US-Mexico High Level Economic Dialogue (HLED) to strengthen the supply chain for chip parts.
“We’re in the HLED working on this, from issues around training and reskilling of people needed for new chip models, to defining which parts each side will do,” she told the Financial Times. “Its one of our priorities.”
Another reason why Mexico has been hit hard is that it still makes many smaller cars, which have been deprioritised in terms of which chips the companies order. There is also a clear trend among consumers in the US, Mexico’s main auto market, away from smaller passenger vehicles towards light trucks. Mexico is rebalancing but cannot go as fast as the changing trends.
“You essentially have a double whammy,” said Vildozo. “You’re constrained on semiconductor availability but then the industry also looks at what generates revenue.”
Local car sales have also plummeted, with the industry having suffered its worst October for sales in a decade, reflecting a lack of inventory. “It’s a complicated moment, without a doubt,” said Jorge Vallejo, president and chief executive of Mitsubishi Motors Mexico.
The short-term chip issues are hurting now, but several longer-term trends are also converging on the horizon.
A recent proposal to nationalise future lithium production and prioritise dirtier, more expensive state energy was unlikely to help Mexico’s case in the global fight for electric vehicle investment, said analysts.
Clouthier said that her team was working with the private sector and academia on the transition to electric vehicles, particularly around battery production.
“We’re doing what we have to do to move forward in a mixed system,” she said.
The shift has the potential to reshape the geography of auto manufacturing around the world, said José Zozaya Délano, executive president of the country’s auto industry body AMIA.
“Mexico . . . has shown over the years it has the capacity and qualified people to make vehicles with advanced technology,” he said. “We’re ready, but we need to do a better job in attracting investment and giving confidence in it.”
Toshiba considers splitting itself into three companies
Plan is one of several being discussed by under-fire Japanese conglomerate
Toshiba is considering a plan to split into three separate companies, as Japan’s most famous conglomerate seeks to rebuild its market value and address the demands of activist shareholders.
The proposal is just one of several under discussion by Toshiba, which was forced by investors this year to establish a committee to overhaul the group’s strategy after a shareholder revolt.
Under the proposal, the conglomerate would be divided into a devices company, an infrastructure group and a business focused on semiconductors and memory chips, according to two people with knowledge of the plan. The businesses, according to one version of the plan, would eventually be listed, with Toshiba’s existing investors receiving stock in each.
It remains unclear whether all Toshiba’s sprawling businesses would fit within the three new companies or whether some would be sold off to private equity groups. Another crucial element is who will have control over the businesses that include sensitive technologies that would attract scrutiny from the Japanese government.
Toshiba’s involvement in several highly sensitive areas of national security, including nuclear power and defence contracting, has added a layer of complexity to any restructuring of the group, which has been beset by crises since 2015.
“It depends on details of the plan whether it will be viable. The key question is whether the businesses can continue to grow even after they are split up,” said one government official.
Toshiba confirmed late on Monday that splitting the group into three was an option on the table after the plan was first reported by the Nikkei newspaper. However, people close to the company have cautioned that the committee may present several proposals when it announces the result of its strategic review on Friday.
Such a split would be unprecedented for a Japanese conglomerate, but would echo the step DowDuPont took following the 2017 merger of Dow Chemical and DuPont. The US chemicals group broke up into three separate companies in response to shareholder concerns about the size and lack of focus of the combined entity.
Toshiba continues to face pressure from its largest shareholders, some of whom argue that Toshiba’s best option is to invite buyout offers from private equity firms that could delist the company and address its restructuring beyond the glare of the public market.
This year, Toshiba’s former chief executive said that the company was considering a $20bn buyout proposal from the UK-based private equity firm CVC. The proposal was preliminary, but triggered a boardroom coup that ousted the chief executive and has led to a situation where some of Toshiba’s largest shareholders have said they will oppose any strategic option that does not allow for the possibility of a buyout.
Toshiba’s troubled relationship with its shareholders dates from 2017, when a financial crisis pushed the company into an emergency fundraising that brought a large number of foreign and activist funds on to the shareholder register. Though many members of that register have since changed, Toshiba’s management continues to face a level of scrutiny and pressure that is rare elsewhere in corporate Japan.
The debate over Toshiba’s future has come to a head as some funds fear Japan may be becoming more hostile towards foreign investors. Under Fumio Kishida, the new prime minister, Japan has established its first minister charged directly with overseeing economic security.
Cartier Could Be an Easy Win for Activist Third Point
A sale of its weak online fashion retailer YNAP could boost the shares of luxury jewelry owner Richemont
Diamonds and technology don’t mix. This may be the only point that an activist investor need make to the owner of French jeweler Cartier.
Shares in Geneva-based Compagnie Financière Richemont rose 4% in morning trading Monday following a weekend report in fashion journal Miss Tweed that Daniel Loeb’s Third Point hedge fund has built a stake. If confirmed, it would be the fund’s second notable European investment in as many weeks, after it recently called for a break up of Royal Dutch Shell with arguments the oil major rejected.
Luxury brands have been targeted by activists before, but usually only the names whose shares and voting rights are mostly in public hands. Jana Partners demanded a board shake-up at Tiffany & Co. in 2017. The same year, activist Groupe Bruxelles Lambert GBLB 0.39% built a stake in British trench coat maker Burberry.
Richemont, however, is controlled by its South African founder and chairman Johann Rupert, who holds half of the voting rights despite an economic interest of just 9.1% through the company’s B shares. This means that a campaign for a major overhaul probably wouldn’t get far.
But a sale or spinoff of Richemont’s struggling online retailer Yoox Net-a-Porter offers a quick way to polish up the stock, which has underperformed peers in recent years. YNAP is losing money despite heavy investment. Over Richemont’s last full fiscal year, the division where the online retailer sits made an operating loss of 223 million euros, equivalent to $258 million at current exchange rates.
This is dragging down more attractive parts of the business, such as jewelry brands Cartier and Van Cleef & Arpels. Richemont’s overall operating margin was 11.2% in its most recent fiscal year, compared with 16.8% before it took full ownership of YNAP in 2018.
The company may already be exploring ways to sell the business. When Richemont took a stake in luxury e-commerce company Farfetch this time last year, the Swiss company’s shares surged on speculation that it could be an initial step to unloading YNAP through a merger. Strip out the losses and goodwill depreciation associated with the struggling e-commerce website and Richemont’s shares could be worth 26% more than they are today, according to Bernstein calculations.
There are other things about Richemont that might irk an activist, such as its inefficient hoarding of cash—3.6 billion euros sat on its balance sheet at the end of June—and the dual-class share structure that cements Mr. Rupert’s control. But the billionaire’s thinking on these points seems unlikely to shift, and the only power that outside shareholders can wield is soft.
Cartier faces stiffer competition since LVMH bought Tiffany & Co. last year, which is another reason for Richemont to get rid of a distraction like YNAP. If Third Point focuses on this point, it might be pushing on a more open door than it found at Shell.
Viasat lands Britain’s Inmarsat in $7.3bn deal
More merger activity expected as satellite sector consolidation hots up
The California-based satellite company Viasat is taking over Britain’s Inmarsat to create one of the world’s biggest space-based broadband providers, in a cash and share deal that values the business at $7.3bn including debt.
The deal, which will result in Inmarsat’s private equity owners holding 37.5 per cent of the combined group, is expected to trigger more merger activity in the highly fragmented satellite industry.
The agreed bid follows a failed approach for rival Eutelsat by French cable entrepreneur Patrick Drahi last month.
It also comes as investors push up valuations for space-based companies, attracted by falling launch costs and the potential to deliver a range of mobility and data services from cheaper satellites, many at lower earth orbits.
Operators of satellites at higher geostationary orbits, however, have suffered from the decline of the legacy broadcast business and are facing a huge capacity glut. A geostationary satellite is about the size of a London bus and sits about 20,000 miles above the earth.
There are about 55 satellite companies making it a hugely competitive market in which Elon Musk’s Starlink and Amazon’s Project Kuiper, and other new players have added further capacity.
Viasat has about a 13 per cent share of satellite industry revenue compared with Inmarsat’s 7 per cent, according to one internal industry document seen by the Financial Times.
Inmarsat has long been seen as a key chip in the consolidation of the sector with rivals EchoStar and Eutelsat having looked at a deal in the past. However, Inmarsat was sold to a consortium led by Apax and Warburg Pincus for $6bn in 2020.
Many in the industry have long argued for consolidation as a means to help cut the substantial capital costs required to build and launch satellite constellations. But deals have been hindered by political concerns and business rivalry.
With the most obvious target now out of the game, other players such as Eutelsat and SES, the Luxembourg satellite company, Canada’s Telesat and Charlie Ergen’s EchoStar could be forced to come together to compete.
“It’s clear that satellite industry consolidation is now under way,” said Armand Musey, founder of satellite and telecoms consultancy Summit Ridge.
The appointment of Rajeev Suri, the former Nokia boss who consolidated the telecoms equipment market, as chief executive of Inmarsat earlier this year was seen as a move by the company’s owners to either sell the group or move on a rival.
Suri told the Financial Times: “It became clear this was a fragmented market and there was an opportunity to create a winning player with complementary assets, complementary regions. Viasat will get true global reach. We bring powerful additions like a global reach.”
Mark Dankberg, executive chair of Viasat, said “We think it enhances Viasat’s financial strength. This will be a lot more diverse company and will have a more diverse revenue base.” He said consolidation and moves such as Drahi’s bid for Eutelsat “highlighted the value in satellites”.