TheChek News Flow

Head of the Financial Conduct Authority criticizes promotion of EthereumMax token

An Instagram post by Kim Kardashian asking her Instagram followers to join “the Ethereum Max Community” is bringing social media’s role in promoting cryptocurrency into the spotlight.

Charles Randell, head of the U.K.’s Financial Conduct Authority, said Ms. Kardashian’s post might “have been the financial promotion with the single biggest audience reach in history.”

But he criticized the noted ad, saying it wasn’t required to tell followers that EthereumMax was a month-old speculative digital token.

“I can’t say whether this particular token is a scam,” Mr. Randell said in a speech Monday to the Cambridge International Symposium on Economic Crime, according to a copy posted online. “But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all.”

A representative for EthereumMax said Ms. Kardashian’s “post was simply intended to raise awareness of the project and its utility.”

“Altcoins [non-Bitcoins] in general are speculative, and EthereumMax is not excluded from this macro truth,” the representative said in an emailed statement. “However, what makes EMAX different is our commitment to transparency and communication.”

The FCA currently has a limited role in registering U.K.-based crypto asset exchanges for anti-money-laundering purposes. Criticism by the FCA, through a speech, of an individual’s actions is somewhat unusual, industry observers said.

But the speech suggests that the FCA is seeking to expand its authority in regulating the growing cryptocurrency sector, and highlighting Kim Kardashian’s case supports that effort, said Jeffrey Alberts, a partner at law firm Pryor Cashman LLP in New York.

“By identifying this type of case, which politicians and voters would be aware of, that increases the chance that they would be given that authority in expanding their regulation,” Mr. Alberts said. The speech indicates that the FCA may be seeking to have authority in protecting investors from speculative tokens, Mr. Alberts added.

Ms. Kardashian, who is known as one of the stars on the reality TV series “Keeping Up With The Kardashians,” didn’t immediately respond to a request for comment on the regulator’s speech.

The speech also can be seen as a warning to British investors, as Mr. Randell said in his speech that around 2.3 million Britons currently hold this type of token, according to Ross Delston, a lawyer specializing in anti-money-laundering issues.

“He was also trying to warn U.K. citizens that investing in these tokens can be, not just speculative, but also outright frauds,” Mr. Delston said.

Asset manager presses ahead with expansion into savings market despite concerns over tech crackdown

BlackRock has raised Rmb6.7bn ($1bn) for its first mutual fund in China, as the world’s biggest asset manager presses ahead with its expansion into the country’s lucrative savings market despite concerns over the political climate.

The US company, which became the first global group to gain approval for a wholly owned Chinese mutual fund business in June, said it closed fundraising a week earlier than expected and brought in more than 110,000 investors.

BlackRock’s move is part of a wider push by international finance into China’s rapidly growing $19tn asset management market, even in the face of rising geopolitical tensions with the US.

But its latest announcement came after a dramatic recent shift in tone from Beijing, where President Xi Jinping’s administration is seeking to tighten the Chinese Communist party’s grip over industries from tech to education and has unveiled a “common prosperity” drive to redistribute wealth.

A regulatory crackdown on Didi Chuxing in July hit the ride-hailing company’s shares days after its $4.4bn initial public offering in New York, while a ban on for-profit tutoring wiped billions off the value of US-listed Chinese education groups.

News that BlackRock had completed its fundraising came one day after George Soros, the billionaire financier, wrote in The Wall Street Journal that the asset manager’s move into China was a “tragic mistake”.

Soros specifically cited the launch of its mutual fund business and warned that the “common prosperity” programme “does not augur well for foreign investors”.

“Xi regards all Chinese companies as instruments of a one-party state,” Soros wrote in a column for the Financial Times last week, warning that investors in China would face “a rude awakening”.

Rachel Lord, who was appointed BlackRock’s head of Asia Pacific this year and will oversee the firm’s expansion in China, said in a statement that the asset manager was “excited to be able to contribute our investment and risk management expertise to help make investing easier and more affordable for Chinese investors”.

The recent imposition of social and commercial restrictions in China, including on video gaming, has coincided with a long-term liberalisation of the country’s financial system, reflected in Beijing’s willingness to allow foreign companies to fully own mutual fund businesses. In the past, asset managers were forced to co-operate with a local joint venture partner.

The regulatory interventions have raised fears over listings of Chinese companies in the US, which operate through depositary receipts. Most of BlackRock’s $19bn stake in Alibaba’s American depositary receipts were converted to its Hong Kong shares in June as a result of a change to the way an MSCI index incorporated the Chinese ecommerce group.

As well as its mutual fund business, BlackRock received approval in May for a majority owned wealth management business in partnership with China Construction Bank and Temasek, Singapore’s state fund.

Goldman Sachs unveiled a joint venture the same month with Chinese lender ICBC in wealth management, a sector in which foreign participants are seen as one way of improving standards.

When it announced the mutual fund launch, which caters to onshore investors, in August, BlackRock said it would “seek long-term capital appreciation via a total returns strategy that takes a long-term investing approach, backed by in-depth research into individual stocks and stringent risk management controls”.

UK aerospace group’s shares drop as Parker Hannifin set to seal agreed £6.3bn takeover

Shares in Meggitt dropped 12 per cent on Tuesday after US aircraft parts maker TransDigm bowed out of a potential bidding war for the UK aerospace and defence group.

The decision by TransDigm not to proceed with a firm offer paves the way for US rival Parker Hannifin to seal its agreed £6.3bn takeover of the FTSE 100 group pending a vote by shareholders later this month. 

TransDigm, which had made a preliminary offer of 900p a share for Meggitt last month — 100p above the agreed offer from Parker Hannifin — said it had decided not to proceed with a formal offer based on the “quite limited” due diligence information it had access to.

Nicholas Howley, TransDigm’s chair, indicated the company had had an offer ready to go.

The company, he said, had arranged the “necessary financing” for the purchase and reached a memorandum of understanding with Meggitt’s pension plan trustees.

It had also communicated its commitments to the UK government “comparable” to those offered by its US rival. Parker Hannifin had made a number of pledges to the government to alleviate concerns over jobs and national security when it made its original offer to buy Meggitt. 

However, “consistent with our disciplined approach to capital allocation, we make acquisitions only when we see a clear path to achieving our investment return goals with a reasonable degree of certainty”, Howley said.

Meggitt, which said it continued to recommend the offer from Parker Hannifin, insisted in a statement that it had engaged on a “constructive basis” with TransDigm and its advisers. It said it had provided both companies with “equivalent access to both confirmatory due diligence information and management”.

“In addition, in response to a request from TransDigm, further due diligence information was provided to both parties after the announcement of Parker’s cash offer for Meggitt,” the company added.

Analysts had previously raised concerns about the high level of debt that TransDigm would have to take on to fund a prospective offer, estimating that the US company’s net debt could rise to close to 10 times prospective earnings if it made an offer at 900p a share for Meggitt.

The US company, which has talked unapologetically about its ambition to offer “private equity-style returns” to its investors, also faced an uphill battle convincing stakeholders in the UK that it would not break up Meggitt.

TransDigm’s business practices have been scrutinised in the US after a report in 2019 by the US Department of Defense’s inspector-general found that the company had overcharged taxpayers on a number of contracts between January 2015 and January 2017.

Kevin Stein, TransDigm’s chief executive, defended the company’s record in an interview with the Financial Times last month, insisting it was a long-term owner of aerospace assets.

The UK government is known to be looking at the current spate of takeover bids in the defence sector, including the bid for Ultra Electronics by private equity-owned Cobham.

Shares in Meggitt fell 12 per cent to 737.29p by the close of trade in London on Tuesday.

CMA plans detailed probe into Japanese group’s buyout of independent label AWAL

The UK competition watchdog has raised concerns over Sony’s recent $430m acquisition of independent record label AWAL, warning it could lead to “worse terms for artists and less innovation in the music sector”.

Sony signed a deal with Kobalt Music Group in February to buy AWAL, a label that represents artists including Jungle and Little Simz.

The Competition and Markets Authority launched a formal phase one investigation into the acquisition five months later and said on Tuesday it planned to escalate this into a more detailed probe.

The body said that AWAL could have been a valuable competitor to Sony in a highly concentrated market, resulting in potentially better deals for artists. It added it was “an important emerging player, recognised for its innovative business model” and “one of the few suppliers outside the major labels that has succeeded in gaining a meaningful foothold in the market and has grown significantly in recent years”.

Sony called the CMA decision “perplexing and based on an incorrect understanding of AWAL’s position in the UK”.

“We strongly believe this transaction is unambiguously pro-competitive and that our investment in AWAL is key to its continued growth, and future success,” the company said. “Every other regulatory body that has reviewed this transaction has agreed with our view and approved it quickly. We will continue to work closely with the CMA to resolve any questions they might have.”

AWAL is one of several new digital music companies to have emerged offering artists an alternative to traditional labels to promote and develop their work. It provides musicians with a DIY platform to upload their music as well as services such as global marketing, radio promotion and distribution, and claims to offer better creative control and share of revenue in comparison to mainstream labels. 

The CMA said competition between Sony and AWAL could have benefited artists by improving the terms of their deals and allowing them to keep a bigger share of their earnings.

“The music industry forms an important part of the UK’s flourishing entertainment sector, and it’s essential that distributors continue to compete to find new and creative ways of working with artists,” said Colin Raftery, senior director at the CMA. “We’re concerned that this deal could reduce competition in the industry, potentially worsening the deals on the table for many music artists in the UK, and leading to less innovation across the industry.”

AWAL did not immediately respond to a request for comment. Both it and Sony now have five working days to address the CMA’s concerns. If they are not able to do so, the watchdog will begin an in-depth investigation into the merger. 

The CMA’s update comes after the UK’s Department of Digital, Culture, Media and Sport committee raised concerns over the rate of consolidation in the record label industry in a report on the economics of music streaming in July.

The committee said it had “deep concerns about the position of major music companies” and said the government should take advice from the CMA on whether “competition in the recorded music market is being distorted”.

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Germany and France step up support for investment in future technology such as hydrogen-powered aircraft

France’s finance minister had sharp words for the country’s aerospace sector last week. The industry was heading for a painful reckoning, Bruno Le Maire warned, despite having just been “rescued” from the worst of the Covid-19 downturn with one of Europe’s biggest dedicated state aid packages.

Le Maire was referring to the refusal of France’s highly fragmented aerospace supply chain to take advantage of another state-backed initiative: a €1bn public-private investment fund designed to accelerate consolidation. Building scale was crucial to “the competitiveness and solidity of the French aerospace industry”, he said. 

Launched a year ago, the Ace Aéro Partenaires fund aims to bring together small companies in key segments to create suppliers with the scale and investment capability required to win work on the next commercial aircraft programme. In the machining sector alone, France had 80 companies with combined turnover of just €1.5bn, said Marwan Lahoud, Ace Capital’s chair.

But finding entrepreneurs willing to sell has proved difficult. As of last week, only seven deals had been announced.

Le Maire’s frustration raises the question of whether France was right to take such an activist approach to supporting its aerospace industry. In fact, its generous €15bn support package — which included €7bn in loans for Air France and €1.5bn over three years to fund development of a hydrogen-powered passenger jet — may have been partly to blame. It alleviated the pressure on suppliers and fewer went bust than expected.

Now with recovery on the horizon, entrepreneurs are not keen to sell out at crisis valuations. That leaves the risk that many will be vulnerable to the cash and investment pressures of the upturn, or unable to invest in the innovation required for a next-generation jet.

Neither Germany nor the UK targeted their aerospace manufacturing sectors with Covid-19 packages on a French scale. 

Yet Germany’s support was closer in spirit to France, with a €7bn national hydrogen strategy that highlighted aircraft propulsion and hybrid electric flight as government priorities. 

The UK said it provided £8.5bn to the sector through its general loan scheme and export finance. But there was no obvious industrial plan guiding how the money was allocated. 

So what has been the impact? Initial indications suggest the UK may want to rethink its agnostic approach — especially as the industry begins the pivot towards new technologies such as sustainable aviation fuels, and electric and hydrogen-powered aviation.

Figures posted by national trade bodies show that in 2020 Germany just about pipped the UK in terms of civil and military aerospace revenues. Its sector suffered a 25 per cent revenue decline against the 27 per cent fall recorded by the UK aerospace sector. Senior executives admit that Germany has for some years been gaining on the UK and it was only a matter of time before it took more market share.

In France, the percentage decline was greater than the UK, but its total revenues are still substantially higher.

It is true that the UK is penalised by Rolls-Royce’s focus on the severely depressed large engine market.

But the UK also invests less than its French and German counterparts in the future. The UK’s pre-Covid R&D funding in 2019 amounted to 5 per cent of annual revenues, according to trade body ADS, vs 11 per cent in France and 8 per cent in Germany. 

Even worse, the British government has suspended funding for new projects at the Aerospace Technology Institute, set up in 2014 to future proof UK aerospace.

The UK has made bold claims about its ambitions to be a leader in zero-emissions aviation. But while it has committed less than £100m, according to ADS, both France and Germany have put up billions. 

Meanwhile, as France provides long-term capital to build a stronger supply chain, leading UK supply chain companies such as Meggitt, Senior and Ultra have all faced foreign bids. 

The aerospace industry may be largely indifferent to ownership if suppliers are competitive. But when the next crisis hits, these deals could have implications for where research is carried out and new technology developed.

After 18 months, the pandemic has done more than reveal the eroding market share of the UK aerospace sector. It has exposed the absence of a clear and consistent strategy to guide the nation’s aerospace ambitions in a post-coronavirus world. Without consistency, foreign buyers of British aerospace suppliers are unlikely to remain committed to the UK. And without a long-term strategy, there is a very real risk that Britain falls even further behind.