Ferragamo: independence makes cobbling a turnround harder
Incoming chief needs to shake awake the dormant beauty lying within the luxury goods group
A sleeping beauty was how a recent boss described Ferragamo. But perking up the Italian luxury company is no easy job, as shown by its long flagging share price and rapid turnover at the top.
On Tuesday, chief executive Micaela Le Divelec Lemmi bowed out with a better than expected set of interim results. But even with Tuesday’s near-7 per cent share price jump, the share price remains a few percentage points below its level when she was appointed in July 2018.
Beijing’s planned crackdown on wealth inequalities did not help. Last month’s announcement hit all luxury makers’ shares. Chinese consumers are expected to account for most of the sector’s growth in the next few years. Still, Ferragamo has slightly below average exposure. Its leather goods should be less vulnerable than, say, expensive watches. Those are not pitched at the swankiest end of the market
Even so, Ferragamo has some fundamental problems. Though the “shoemaker to the stars” has a famous brand, it lacks much of a buzz. Ferragamo has trailed peers that invest more in new product launches.
The company is not stretched. It has averaged free cash flow of more than €100m annually since 2016. But luxury brands need to spend. Many family-owned businesses have sold out to get the benefits of scale offered by conglomerates, such as LVMH.
The named family owns two-thirds of Ferragamo. Its reluctance to relinquish control probably explains why plans to sell a minority stake had to be abandoned earlier this year. Its recent success in recruiting a big name boss — Burberry’s Marco Gobbetti — offers another sign the family has no imminent plans to sell out. Hence, there is rightly little speculative, buyout premium in the share price. The enterprise value to forward ebitda multiple sits about a quarter below the biggest luxury groups.
Just attracting Gobbetti was a coup. He has a strong record and should recruit a talented team. Nonetheless, it has proved hard for small luxury companies to turn themselves round. Gobbetti will be Ferragamo’s fourth chief executive in little more than five years. The investment case depends on him shaking awake the dormant beauty lying within Ferragamo.
Morningstar joins race to provide direct indexing services
Acquisition of Moorgate Benchmarks follows similar deals by BlackRock, Vanguard and Morgan Stanley
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Morningstar is the latest big name to enter the field of “direct indexing”, following in the footsteps of a handful of industry giants including BlackRock, Vanguard and Morgan Stanley.
The Chicago-based group, with operations spanning credit ratings, investment research and asset management, is acquiring indexing specialist Moorgate Benchmarks, which focuses on developing the customised and personalised indices that lie at the heart of direct indexing.
The concept allows investors to create bespoke portfolios tailored to meet their personal preferences for investment factors, such as tilts to value, quality or momentum investing or their own environmental, social and governance (ESG) beliefs.
In the US, direct indexing also allows investors to minimise their tax liabilities via tax-loss harvesting — systematically selling losing stocks and replacing them with similar holdings in order to offset capital gains tax due elsewhere in their portfolio.
Currently a niche service only available to wealthy investors, Cerulli Associates forecasts that in the US alone direct indexing strategies will account for $4.7tn of assets by 2030, 8 per cent of all adviser-managed assets, up from just $300bn in 2019.
“ESG and other drivers will lead to a future of mass or even hyper customisation,” said Tobias Sproehnle, chief executive of Moorgate who will become head of Morningstar Indexes in Europe.
“Our kids will want more flexibility than we have. They will want to swipe left and right and decide exactly what is in their basket and what isn’t.”
Parametric, a division of investment group Eaton Vance and the global leader in direct indexing, was acquired by Morgan Stanley last year in a deal that kickstarted a flurry of activity.
BlackRock bought Aperio, the industry number two, in November 2020; Vanguard made its first acquisition in its 46-year history in July when it bought Just Invest, a Californian wealth management boutique with a customisable, direct indexing service; and JPMorgan Asset Management acquired OpenInvest in June, a fintech platform that facilitates the customisation of portfolios based on ESG metrics.
The acquisition of Moorgate Benchmarks, a 20-strong, three-year-old London and Frankfurt-based company, is also part of Morningstar’s drive to muscle in on the more plain vanilla but increasingly lucrative business of providing indices for exchange traded products and other investment funds.
Morningstar is a minnow in indexing, accounting for just 0.6 per cent of the industry’s $4.1bn of revenue last year, according to analysis by Burton-Taylor International Consulting. It is the 10th largest player in the sector, well behind the controlling oligopoly of MSCI, S&P Dow Jones Indices and FTSE Russell.
However, Morningstar has the highest five-year compound annual growth rate in the industry, of 43.5 per cent, aided by last year’s acquisition of Sustainalytics, a provider of ESG ratings and research, and its “attractive pricing models”, according to Burton-Taylor.
More than $80bn of assets are now benchmarked against its indices by asset managers such as Lyxor, JPMorgan AM and BNY Mellon.
“We see this as an opportunity to be advocates for investors. When you talk to clients there is a lot of dissatisfaction about the services they get from some providers and the price they have to pay for it,” Ron Bundy, managing director, indexes at Morningstar. The former chief executive of Russell Index Group joined Morningstar in December 2019 to lead its push into indexing.
“We want to be quite disruptive in this space. To provide extreme value so investors have more money left in their pockets.”
Financial terms of the deal were not disclosed.
Deloitte boosted by surge in M&A and corporate distress
Professional services group increases global revenues as Covid crisis fuels need for advice
Deloitte received a boost to global revenues from a series of mandates advising distressed companies during the Covid-19 pandemic.
The group increased revenue by 5.5 per cent to $50.2bn in the year to the end of May and expanded its workforce by 3.2 per cent, taking total staff numbers to more than 345,000.
The company said its financial advisory business had grown fastest because of high demand for corporate advice during the coronavirus crisis and a boom in M&A activity towards the end of 2020 and start of 2021.
Revenues at the division rose 13 per cent. Deloitte said the unit had advised on “thousands of distressed and Covid-19 related mandates” and “thousands of transactions during the merger wave of 2020”. The group’s larger consulting division lifted revenues by 5 per cent.
Professional services businesses were deluged with demand for restructuring advice during the crisis as companies sought to renegotiate debts and sell off business units. Towards the end of 2020 a surge in dealmaking also generated fees for corporate and M&A advisers including among the Big Four and large international law firms.
Financial services clients contributed almost a third of Deloitte’s total revenue, at 27 per cent, while Asia-Pacific grew faster than any other region, by 14 per cent.
Another Wirecard? EY Slammed Over Work With Swiss Conglomerate Looted By Oligarch's Family
Across Europe, the credibility and integrity of the Big Four accounting-audit powerhouses - EY, KPMG, Deloitte and PwC - is being questioned, and not just in Germany, where the collapse of Wirecard has left an indelible blemish on the reputation of its hapless auditor/accomplice (well, alleged accomplice) Ernst & Young.
Regulators, prosecutors and lawmakers are still sifting through the wreckage of Wirecard and how the payments darling, which endured years of speculation that its business might be a fraud, only to implode after its shares were added to the DAX, a gauge of German-traded blue-chip stocks. Ultimately, some 2/3rds of the firm's business turned out to be a mirage.
Ernst & Young was found to have repeatedly ignored warning signs during its decade-long auditng relationship with Wirecard, and it's pretty clear that the auditor looked the other way instead of verifying some $2 billion that was said to be held in the Philippines, but ultimately turned out to be a mirage.
On Monday, the FT - which was credited with breaking the Wirecard story and even saw one of its reporters targeted by German regulators in retaliation - published some shocking new details about another bankrupt European firm that was aided and abetted by EY: it's called ZeroMax, and it collapsed more than ten years ago. But thanks to Switzerland's opaque legal system, details of the bankruptcy proceedings are only just reaching the public - and only after a cache of documents detailing EY's failures was leaked to the FT.
Karimova
ZeroMax was a conglomerate based in Zug that was controlled by Gulnara Karimova, the daughter of Uzbekistan's former President Islam Karimova. Although the firm reportedly had interests ranging from textile processing to natural gas exraction, that didnt' stop Karimova from using it like her own personal slush fund - even transferring millions to another corporate entity that was implicated in organized criminal activity.
Dozens of documents seen by the Financial Times, including police reports, corporate bank statements, internal emails and receipts, as well as claims made in ongoing litigation, raise particular questions about the work of EY’s Swiss partnership, which gave Zeromax a clean bill of financial health for 2005, 2006 and 2007.
Per the FT, EY reliably signed off on transfers and expenditures that made little sense for ZeroMax's businesses, including buying millions in jewelry for Karimova. It's little wonder the firm, after being sapped of money by Karimova, the firm filed for bankruptcy protection in 2010.
EY's work for ZeroMax has led to a lawsuit filed by a US hedge fund that's seeking $1 billion in damages. The fund is called Lion Point Capital, which acquired a tranche of outstanding Zeromax debt from the bankruptcy estate in 2019. Many other creditors, including many small businesses have yet to recover any of their money.
The American accounting giant refused to comment to the FT beyond saying that court decisions in Uzbekistan led to the "de facto expropriation" of the firm's assets. So what they're saying is that Karimova essentially stole the money and jewelry she bought from the firm, with the firm's money.
The firm said: "Court decisions in Uzbekistan in 2010 caused a de facto expropriation of Zeromax assets and its bankruptcy. This matter is subject to ongoing litigation and EY Switzerland will vigorously defend its position to vexatious claims. We cannot comment further."
EY's presence, and the fact that ZeroMax was redomiciled in Switzerland was supposed, was supposed to help western investors feel more comfortable investing in ZeroMax and lending it money. Yet, it's pretty clear from the beginning that Karimova and the rest of the firm's management largely saw it as a slush fund.
Zeromax was incorporated in Delaware in 1999 and redomiciled to Switzerland in 2005, with the stated purpose of channelling investment into a range of Uzbek industrial sectors.
Investors took succour from the company’s Swiss domicile and the fact it was audited by one of the world’s biggest accounting firms.
Yet, accounts show that in the four years before its collapse, many of the funds that passed through the company went into a sprawling network of opaque offshore entities. Many of these funnelled money to Uzbekistan, but many did not.
Some of the company's most egregious expenditures included $13MM spent on luxury jewelry in 2006 and 2007.
Some transactions seem particularly hard to explain as business expenses.
In 2006 and 2007, for example, Zeromax spent more than $13m on luxury jewellery, including $2m in the Christian Dior store in Geneva alone. The following two years, it spent a further $25m on jewellery, including $6m at British jeweller Graff Diamonds.
At least some of the jewellery acquired was used by Karimova. In 2016, Swiss Federal Police obtained a warrant to search safety deposit boxes rented by her at Lombard Odier in Geneva. Inside they found luxury jewellery — including a diamond ring from Boucheron worth $2.5m — that had been paid for by Zeromax. The owner of one Geneva jewellery shop told the police, according to police documents seen by the FT, that Karimova had personally bought the jewellery and had the money wired to the business from a bank account controlled by Zeromax.
Several offshore transfers of millions of dollars through the company should have probably also raised red flags, especially considering the recipient of several transfers was later linked to an organized crime ring.
EY also failed to raise the alarm when money had been moved to opaque, offshore companies, sometimes with business pretexts that look perfunctory, such as generic contracts for “consulting services”. Between 2004 and 2007, the company transferred at least $288m to offshore companies. In at least one instance, transfers involved sending millions that ultimately went to an entity alleged to have been involved in criminal activity. Between mid 2006 and 2007, Zeromax transferred $180m to a wholly owned subsidiary, BVI-based company Galat Enterprises.
Galat, in turn, transferred at least $5m to the Gibraltar-based company Takilant, controlled by Karimova. Takilant was found in judgments in US and Swedish criminal cases to have been the central corporate conduit in a massive bribery scheme through which telecoms companies paid Karimova in exchange for lucrative Uzbek government contracts. Zeromax also transferred at least $2m to offshore companies Merkony and Belphil Capital, which between them sent $33m to Takilant, according to Swedish court files.
With this in mind, it's clear EY was essentially helping ZeroMax's management to misled investors, helping to lull their doubts and concerns, allowing ZeroMax to separate them from their capital, and funnel it to a corrupt oligarch. Although the FT's story on ZeroMax didn't mention Wirecard, the fraud at that company started a few years after most of the events described in the paper's report on ZeroMax.
As EU regulators continue to ponder what to do, we're starting to wonder if maybe the dissolution of Arthur Andersen in the wake of the Enron scandal didn't send a strong enough message to the complacent accounting and audit giants.
Gapping down
In reaction to earnings/guidance:
- PATH -8.3%, SMAR -3.8%, SHW -2%, REVG -1.8%, GENI -1.1%, PHM -0.6%
Other news:
- MGNX -9.7% (presents data for SOPHIA study of MARGENZA, did not demonstrate statistically significant advantage over trastuzumab)
- COTY -9.5% (prices secondary offering of 50,000,088 shares of common stock at $8.53 per share)
- IMPL -5.5% (stock offering)
- MRVI -5.5% (stock offering)
- INMB -4.7% (stock offering)
- .RADI -4.7% (convertible notes offering)
- OPCH -4.2% (prices secondary offering of 9.2 mln shares of common stock at $26.90 per share)
- OCDX -4.1% (stock offering)
- AGL -3.6% (stock offering)
- BMBL -3.5% (stock offering)
- VRT -3.3% (to acquire E&I Engineering Ireland Limited and its affiliate Powerbar Gulf (E&I) for ~$1.8 bln upfront plus potential for up to $200 mln in cash; lowers guidance)
- NIO -3.1% (announces at-the-market offering of up to US$2.0 bln of its ADSs)
- COIN -3.1% (subsidiary received "Wells Notice")
- NGMS -3% (stock offering)
- MCFE -2.9% (stock offering)
- ALEC -2.7% (COO and CMO are stepping down)
- HLNE -2.3% (stock offering)
- OSMT -2.3% (entered into $75 mln Controlled Equity OfferingSM)
- ID -2% (OE parts unit continue to be a high-growth area for PARTS iD, with the Company reporting 350% OE business growth in H1 2021 compared to H1 2020)
- APO -1.4% (clients to acquire up to a 50% equity stake in MaxCap Group)
- BLUE -1.2% (names new CFO)
- GENI -1.1% (expands partnership with WynnBET)
- KXIN -1% (announces "promising" sales forecasts for the POCCO brand electric vehicles manufactured by Henan Yujie Times Automobile) .
Analyst comments:
- UHS -2.5% (downgraded to Sell from Neutral at Goldman)
- RF -1% (downgraded to Equal-Weight from Overweight at Stephens)
Gapping up
In reaction to earnings/guidance:
- KFY +6.7%, COUP +5.2%, AGX +3.9%, PTVE +3.8%, VAPO +1.6%, JCI +1.1%
Other news:
- KDMN +73.6% (to be acquired by Sanofi (SNY) for $9.50 per share)
- IFRX +22.7% (plans to proceed with a pivotal development program for vilobelimab in Hidradenitis Suppurativa after a successful Type A meeting with the FDA)
- ADMA +11.4% (receives FDA approval for VanRx aseptic fill-finish machine and related operations)
- PTVE +3.8% (to acquire Fabri-Kal)
- NNDM +3% (announces collaboration with Fraunhofer Institute to develop 3D printing systems)
- ASPS +2.9% (considering potential sale of its origination business, according to Bloomberg)
- TBPH +2.4% (Point72 Asset Mgmt discloses 7.0% stake)
- GRTX +2.4% (reports final results from pancreatic cancer trial)
- FUN +2.2% (reports continuation of strong attendance and guest spending trends through Labor Day weekend)
- JMP +1.8% (Citizens Financial Group (CFG) to acquire JMP Group LLC for $7.50/share)
- PRGO +1.7% (to acquire Héra SAS)
- LYB +1.7% (weighing strategic options for refining business)
- LHCG +1.3% (to purchase Brookdale Health Care Services agencies from the recently formed home health, hospice and outpatient therapy venture between HCA Healthcare and Brookdale Senior Living (BKD))
- IGT +1.3% (established a dedicated Digital & Betting business segment)
- WMB +1% (authorized a share repurchase program for the repurchase of up to $1.5 bln of the company's outstanding common stock)
Analyst comments:
- SBOW +5.6% (upgraded to Buy from Hold at Truist)
- OLLI +3.7% (upgraded to Buy from Hold at Berenberg)
- NGD +2.4% (upgraded to Sector Perform from Underperform at RBC Capital Mkts)
- ALB +1.8% (upgraded to Buy from Sell at Berenberg)
Early premarket gappers
- Gapping up:
- KDMN +77.5%, COUP +6%, NNDM +3.6%, CASH +3.5%, AGX +3.3%, ASPS +2.9%, RPM +2.7%, CCO +2%, MLNK +1.4%, BLUE +0.6%, LNG +0.5%, ASND +0.5%, ADI +0.5%
- Gapping down:
- IMPL -7.6%, COTY -7.3%, PATH -7.1%, MRVI -5.5%, BMBL -5.3%, RADI -4.5%, SMAR -4.5%, OCDX -4.1%, MGNX -3.9%, INMB -3.7%, AGL -3.6%, OPCH -3.4%, NIO -3%, NGMS -3%, ALEC -2.7%, MCFE -2.4%, HLNE -2.3%, VRT -1.9%, EDIT -1.8%, GLBE -1.2%, TBPH -0.9%, CODI -0.6%, WKEY -0.6%
Morrisons takeover battle to go to auction next month
UK supermarket group being pursued by two rival consortiums
Wm Morrison has said that a takeover battle between rival groups will go to a panel-arranged auction next month since neither has declared their offers for the UK supermarket chain final.
It is the second time the UK’s takeover regulator has stepped in to order an auction in recent months. The contest between private equity group Carlyle and cigarette maker Philip Morris International over inhaler manufacturer Vectura was settled the same way.
Private equity firm Clayton, Dubilier and Rice has made a £10.2bn offer for Morrisons but is facing a rival consortium led by Fortress Investment Group.
“The board of Morrisons has engaged with the panel executive together with Market Bidco and Fortress Bidco in order to begin discussions around an orderly framework for the resolution of this competitive situation,” Morrisons said on Wednesday.
Morrisons’ stock is at 291p, above the 285p per share that private equity group CD&R offered last month. The bid, a substantial increase from its initial 230p approach, has secured a recommendation from the grocer’s directors.
Fortress Investment Group, which is owned by Japan’s SoftBank, bid 270p and said last month it was “considering its options” following the CD&R proposal.
A document containing further details of the Clayton, Dubilier and Rice offer will be posted to Morrisons’ shareholders “on or around September 25”, the supermarket said, adding that this will provide “sufficient time” to resolve the situation.
Morrisons added that it “continues to place very significant emphasis on the wider responsibilities of ownership of Morrisons” including the interests of suppliers, customers and staff.
As the bidding war heated up, analysts have expressed doubts that either suitor could make a return on the company without selling off assets — possibly including some of its freehold stores, food manufacturing sites or warehouses.
The trustees of the group’s pension funds have also warned that the high levels of indebtedness inherent to both bids would weaken the covenant of the schemes. Talks are under way with both about how to mitigate this.