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WSJ : Samsung Takes Intel’s Chip-Seller Crown, but Bigger Showdown Looms

Samsung Takes Intel’s Chip-Seller Crown, but Bigger Showdown Looms

Cash is paramount as both companies seek to fund aggressive expansions into high-tech production

Intel Corp. INTC 0.04% aspires to chip-technology supremacy within four years. But for now, it has fallen from the industry’s top spot by one key measure.

In the second quarter, Samsung Electronics Co. overtook Intel as the world’s top chip maker by revenue. Given divergent outlooks for their core businesses, the positioning is likely to stay that way in the near future, industry analysts say.

The South Korean tech company, which specializes in memory chips, racked up 22.74 trillion won, the equivalent of $19.7 billion, in semiconductor revenue during the April-June quarter. Total revenue for Intel, was $19.6 billion—or $18.5 billion after subtracting the contribution of a business unit it has agreed to sell.

Intel, based in Santa Clara, Calif., has held the No. 1 sales spot for much of the past three decades, ceding it to Samsung in 2017 and 2018 when memory-chip sales boomed.

The ranking is about more than bragging rights: Intel needs financial clout more than ever. Under new Chief Executive Pat Gelsinger, the company is embarking on an ambitious strategy to manufacture cutting-edge chips—one of the business world’s costliest endeavors.

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Intel aspires to vault into a top-end foundry business, or the contract manufacturing of the most-advanced chips. In the race to miniaturize chip circuitry to the final nanometers, Intel joins a world populated by Taiwan Semiconductor Manufacturing Co. and Samsung, both of which have allocated more than $100 billion. More sales provide more cash for capital expenditures and to give to shareholders.

Though many firms, including Nvidia Corp. and Qualcomm Inc., design superpowered chips, only TSMC and Samsung are able to manufacture them. Intel could join that list if its contract chip-making ambitions materialize.

With a global shortage of chips hobbling businesses world-wide, the U.S., Europe and other governments are offering tens of billions of dollars in incentives to spur the building of chip-making plants. But even so, such cutting-edge production requires advanced machines that can cost $150 million apiece, while a single facility can cost $20 billion.

The next frontiers of chip making are so demanding that only TSMC, Samsung and Intel have the technological capability and deep pockets to proceed, said Dale Gai, a research director at Counterpoint Research. “I don’t see anyone in the No. 4 position,” he said.

The three-company race will ultimately dictate where—and by whom—the advanced semiconductors essential for 5G cellular networks, self-driving cars and artificial intelligence are made. TSMC is currently the biggest foundry player, controlling 55% of the market, while Samsung represents 17%, according to first-quarter data from TrendForce, a market researcher.

Samsung and Intel didn’t appear to be on a major collision course until Mr. Gelsinger rejoined Intel in January. He wants the company’s future to be making advanced chips not only for itself, but for others.

Mr. Gelsinger said in July that Intel already had more than 100 potential foundry customers lined up. They include Qualcomm, one of the biggest providers of chips for cellphones and a major Samsung customer. “We fully expect that this is going to be a great business for us,” he said on a call with analysts.

Samsung said it is targeting 20% annual sales growth for its foundry business this year as demand increases, said Shawn Han, a senior vice president for the company’s foundry operations, in a Thursday earnings call. “We will maximize our capabilities to supply chips,” Mr. Han said.

It is a robust time for the chip industry, writ large. Global semiconductor revenue is expected to grow 12.5% this year to $522 billion, according to International Data Corp., a market researcher. Global shortages have handed chip makers pricing power and abundant orders.

Going forward, Samsung and Intel will look to fund their foundry aspirations by leaning on cash-cow chip businesses that have done well during the pandemic.

Samsung’s rise to No. 1 in revenue reflects the overwhelming demand for memory chips—they typically cost just a few dollars apiece, compared with hundreds of dollars and often more for the central processing units that provide most of Intel’s income.

For the full year, global memory sales are expected to rise 33%, while revenue from CPUs, which go in PCs and data servers, is expected to grow by 4%, according to market researcher Gartner Inc. While PC sales soared during the pandemic and are still rising, growth has slowed of late, according to IDC. And Intel is having to fend off rival CPU makers like Advanced Micro Devices Inc., while some big clients forgo Intel-made chips for in-house alternatives.

In March, Mr. Gelsinger unveiled his turnaround plan, along with more than $20 billion in investments in two plants in Arizona. He followed, in May, with a $3.5 billion expansion effort in New Mexico. Additional capacity growth, in the U.S. and abroad, is in the planning stages.

In an interview after Intel’s second-quarter earnings announcement, Mr. Gelsinger expressed optimism about the company’s core business, citing appetite for new computers as Microsoft Corp.’s Windows 11 operating system hits the market later this year. “We see that strength continuing in the next year and beyond,” he said.

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WSJ : Fired Executive Says Deutsche Bank’s DWS Overstated Sustainable-Investing

Fired Executive Says Deutsche Bank’s DWS Overstated Sustainable-Investing Efforts

Asset management arm painted a rosier-than-reality picture to investors on ESG, according to Desiree Fixler and documents. DWS says her office didn’t gain expected traction.

Deutsche Bank AG’s DB -3.02% asset management arm, DWS Group, DWS -0.30% tells investors that environmental, social and governance concerns are at the heart of everything it does, and that its ESG standards are above the industry average.

But behind closed doors, it has struggled to define and implement an ESG strategy, at times painting a rosier-than-reality picture to investors, according to its former sustainability chief and internal emails and presentations seen by The Wall Street Journal.

DWS’s experience underscores the difficulties and pressure money managers are facing to plant their flag in the hottest corner of the fund market, where investors are putting $3 billion a day, according to Morningstar data.

Frankfurt-based DWS said in its 2020 annual report released in March that more than half of its assets under management—€459 billion, equivalent to $540 billion—have run through a process it calls ESG integration. In such a process, companies are graded on ESG criteria, which helps inform fund managers if the investment faces any risks related to these standards.

According to an internal assessment of the company’s ESG capabilities a month earlier, “only a small fraction of the investment platform applies ESG integration,” adding there is no quantifiable or verifiable ESG-integration for key asset classes at DWS.

“As we are already quite late to the game, we need to set our ambition now and start the transformational process,” said Oliver Plein, head of ESG products at DWS, in a Feb. 1 email accompanying the assessment.

The same month, Desiree Fixler, DWS’s sustainability chief, made a presentation to the executive board saying the firm had no clear ambition or strategy, lacked policies on coal and other controversial topics and that ESG teams were seen as specialists rather than being an integral part of the decision-making, according to the presentation, which was reviewed by the Journal.

That contrasted with what DWS told investors in its annual report: “As a firm, we have placed ESG at the heart of everything that we do,” it said. It also said it had made meaningful progress during 2020 to meet its ambition of being a leading ESG asset manager. Among the progress, it said, was the hiring of Ms. Fixler in August for the new role.

Ms. Fixler was fired on March 11, one day before the annual report was released. Ms. Fixler said she believes DWS misrepresented its ESG capabilities. She said revisions and verbal objections she had made to the annual report before publication, including how many assets were under ESG integration, were never included. She said she was fired because she was too vocal about problems and has filed an unfair dismissal case against DWS in a labor court in Germany.

“As chief sustainability officer, as a proponent of ESG, how could I not speak up on wrongdoing,” she said in a statement sent to the Journal. “Posturing with big statements on climate action and inclusion without the goods to back it up is really quite harmful as it prevents money and action from flowing to the right place.”

DWS, which is majority owned by Deutsche Bank but maintains its own stock listing, said in a statement that it has always been transparent to investors and clients, and it stands by its annual report, which was audited by KPMG.

It said that standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition. It said the sustainability office led by Ms. Fixler didn’t gain the expected traction on creating or showing an action plan.

“We do not wish to attack Ms. Fixler in any way. We wish her the best for her future,” a spokesman said, adding that Ms. Fixler filed a complaint after she left, but that an investigation by a third-party firm found no substance to her allegations.

ESG investing is growing fast. Assets in ESG funds surpassed $2 trillion globally in the second quarter, almost tripling in three years, according to Morningstar. Investors are attracted by the idea of making money while curbing environmental damage and improving diversity and working conditions at companies.

DWS said ESG funds accounted for 40% of the company’s €21 billion in net inflows in the first half of this year.

Ms. Fixler arrived at DWS to make it a global leader in ESG asset management. She had been a managing director for impact investing at ZAIS, an alternative investment manager, and before that worked in structured credit products at Merrill Lynch and JPMorgan Chase & Co.

After she arrived at DWS the summer of 2020, she ran a diagnosis on the firm’s ESG policies. One question she had in mind was how Wirecard AG, a German payments-service provider that went bankrupt in an alleged fraud and money-laundering scandal, ended up in an actively managed ESG fund, where the G stands for governance.

Ms. Fixler saw Wirecard had a B score—the second highest—in business ethics up to June 2020, the same month it collapsed after admitting that more than $2 billion of its cash on its balance sheet actually didn’t exist.

Two months earlier, an auditor hired by Wirecard released a report saying it couldn’t verify the existence of the cash. The company commissioned the report in October 2019 after a series of Financial Times articles aired allegations of accounting fraud, falsification of documents and money laundering. Singapore authorities had also launched an investigation into the company.

Still, Wirecard’s ethics score was kept at B until it sank to F in July.

Several DWS funds invested in Wirecard, including its flagship Deutschland fund. DWS cut exposure to Wirecard following the April report, but only fully exited it days before the collapse. DWS claimed a €600 million loss in Wirecard’s bankruptcy court case.

The DWS spokesman said its investment decision was based on proper assessment and information at the time, and that none of its ESG-dedicated funds held Wirecard shares after the auditor report came out. Wirecard’s ESG score, he said, was based on industry-standard data from third parties.

Wirecard’s score was set by what the company called its smart ESG integration tool. DWS said in a public sustainability report that its groundbreaking process would take timely controversies into account.

Ms. Fixler found other problems with the smart ESG integration, including that it failed to identify companies drawing revenue from coal and fracking, according to a presentation she made to the executive board Nov. 4.

On Nov. 18, at DWS’s annual meeting, Chief Executive Asoka Wöhrmann called the process a pioneering approach that “goes far beyond previous industry standards.”

Email exchanges among other DWS executives show they agreed with Ms. Fixler on some points.

“We do risk management, and we do it badly,” Francesco Curto, global head of research, said in an email to Stefan Kreuzkamp, DWS’s chief investment officer on Jan. 20, referring to ESG integration.

In a statement, Mr. Curto said he was raising problems that are common to the entire industry, and that recognizing it is evidence of the firm’s efforts to improve.

Further problems were listed in a February internal assessment led by Mr. Plein, head of ESG products at DWS, including that ESG risk management wasn’t being widely applied.

In a statement Mr. Plein said the assessment also mentioned several positive points, including a high number of core and innovative ESG products and its pledge to decarbonize investment portfolios.

In a Feb. 16 presentation to Mr. Wöhrmann and other top executives, Ms. Fixler said DWS, not ranked in the top 10 in Europe on ESG by most industry rankings, could get into the top three in two years, but that it would require major and fast change at the company.

In the internal memo announcing Ms. Fixler’s departure, DWS said “while progress has been made, the executive board has taken the position that the firm needs to gain even more traction in this space.”

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FT : Planetary ‘vital signs’ show extent of climate stress — and some hope

Planetary ‘vital signs’ show extent of climate stress — and some hope

Up to 18 of the 31 indicators tracked by a group of scientists reach extremes, but there are positives among the data

At the Tokyo 2020 Olympics, each day records are being set by the dozen. Globally, a different set of records are making history but for the wrong reasons.

The number of so-called “planetary vital signs” hitting new highs and lows, despite the restraint to human activity from the pandemic in the past year, were highlighted in a paper published earlier this week that tracked a set of various indicators related to climate change.

Glaciers have been melting at record pace; sea levels are at an all-time high, and concentrations of carbon dioxide, methane and nitrous oxide in the Earth’s atmosphere have never been so dense, the data show.

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“I’m concerned. I’m alarmed. I feel like it’s important for people to see these data together,” said William J. Ripple, a professor of ecology at Oregon State University and co-author. “My conclusion is that we are mostly doing business as usual, with the transient interruption of the Covid-19 pandemic . . . but we’re [already] getting back to setting new record highs.”

The paper’s release comes as the scale and frequency of recent weather events leads some scientists to conclude that global warming is to blame.

Among the indicators are the anomalies for land and sea surface temperatures, which reached record highs in certain areas in 2020.

At the same time as oceans warmed to peak temperatures, according to the tracking data, their acidity was at the highest level recorded in seven years. Combined, these effects are known to bleach warm-water coral reefs. And there are fears the trend in these conditions could soon reach a “tipping point” — beyond which, the destruction caused would be difficult to reverse.

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One of scientists’ key concerns, highlighted in the paper, was the lack of lasting impact the Covid-19 pandemic had accumulated on the “vital” indicators.

“Huge behavioural changes by humans in reducing energy consumption [as a result of the pandemic] had such a small effect,” Ripple explained. “We need to be thinking about big transformative change at this stage . . . yet, we are still in a fossil fuel society.”

Energy consumption from fossil fuel sources fell as the pandemic brought industry and services near to a standstill in 2020. Yet global energy use originating from coal power is expected to reach above pre-pandemic levels this year, the forecasts suggests, while energy consumption from oil and natural gas sources will rebound.

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As many as 18 of the 31 indicators being tracked by the group of scientists have reached recent extremes.

Yet not all can be viewed negatively — some provide a glimmer of hope.

Wind and solar energy use is expected to be up by a third this year, from 2019 levels, for example.

The value of global subsidies on fossil fuels dropped by more than 40 per cent in 2020, compared with the previous year.

And, divestments of fossil fuel assets by pension funds, educational institutions, governments and other organisations continued to rise — up to $14tn in 2020 from $11.5tn the previous year.

But, the authors conclude, the scale of climate action presently is not enough to reverse key trends of concern.

“We’re in a climate emergency . . . a very dangerous climate emergency,” Ripple says. “At this point it’s important that we do things that will have rapid effects.”

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FT : IPO prospectuses: the long and longer of it

IPO prospectuses: the long and longer of it

For investors, more is not necessarily better

Given the sky-high valuations achieved by market newbies, it is fitting that their prospectuses achieve equally ridiculous bulk. US-listed ride-hailing apps Didi and Uber both bombarded would-be investors with about 400 pages of information. Paytm, listing in India, this month bested the duo with a 500-page “red herring”, as preliminary prospectuses are known.

This is massive page inflation. Microsoft, going public in 1986, said all it needed to in 50 pages. A couple of decades later Google weighed in at 230.

Perhaps life was simply easier back then. Bill Gates reportedly appointed Goldman Sachs to steer Microsoft’s initial public offering on the basis that they did not spill their food and “seemed like nice guys”.

Microsoft was also profitable and cheap, more than can be said for much of the current crop of debutantes. Despite being priced higher than Gates wanted, shares were valued at 5.5 times trailing revenues. This is one-quarter the price tag secured by survey software maker Qualtrics (250-page prospectus) 35 years later.

There is little correlation between a prospectus’s girth and market capitalisation. In Europe, the document for a sub-€150m company is on average only a third shorter than those valued at €1bn-plus, says Oxera, a consultancy. Nor does it correlate with an extended spell as a private business: Microsoft spent just as long time in private hands as many of today’s debutantes.

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Regulations, including provisions under Sarbanes-Oxley, only partly explain the verbosity. Likewise complexity. Some of the fodder in today’s prospectuses is kindergarten-simple. Pictures and flow charts padded out Meituan Dianping’s 700 pages.

For investors, more is not necessarily better. Boilerplate risk statements are so broad and lengthy as to be pointless. Alibaba’s blockbuster IPO was accompanied by many warnings of the legal grey area inhabited by its variable interest entity structure — as was every subsequent Chinese offering. Yet shockwaves over such structures are once again reverberating.

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Investors bleating at Didi Chuxing’s admittedly steep regulatory roadblocks perhaps struggled to get past page 3, where the company warns: “Our business is subject to numerous legal and regulatory risks that could have an adverse impact on our business and future prospects.”

Standardisation discourages scrutiny. Companies have followed Google’s lead in displaying their civic stripes but have added new, often unhelpful, metrics. Total addressable markets is a case in point. Deliveroo claims a TAM 1,000 times the size of its actual 2020 revenues. Time to cut prospectuses — and fantasy metrics — down to size.

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Barrons : High-End Oven Maker Took a Hit in the Pandemic. The Reopening Hasn’t B

High-End Oven Maker Took a Hit in the Pandemic. The Reopening Hasn’t Been Easy, Either.

When it comes to German commercial kitchen-equipment maker Rational, analysts think the stock price is downright irrational. According to FactSet data, the average analyst price target for Landsberg, Germany–based Rational’s stock was 26% below its closing price on Wednesday, at 940.60 euros ($1,118). Of nine analysts who follow the stock, only one has a Buy rating, and six have the equivalent of a Sell.

The quality of the company’s products is hardly in dispute. Rational (ticker: RAA.Germany) is known for making an oven combining steam and convection, or dry heat—so-called combi-ovens. Rational’s customers range from the White House and Buckingham Palace to fast-food chains Kentucky Fried Chicken and Nando’s, for products costing tens of thousands of dollars each.

Scottish fund manager Baillie Gifford, a growth investor, is Rational’s leading shareholder. “Thanks to its innovative products, its capital-light business model, and, above all, its mission to maximize customer benefit, Rational is in the enviable position of being the global market leader in providing modern cooking systems for professional kitchens,” wrote Moritz Sitte, co-manager of the Baillie Gifford European fund, in an email to Barron’s.

Rational and Sitte argue that there are more than four million professional kitchens using traditional appliances that could be switched to its equipment. “Most professional kitchens around the world still operate in the traditional way, which means there remains a large opportunity for Rational to penetrate the market and convert these operators into long-term customers,” Sitte wrote.

Still, Rational is coping with the Covid-19 pandemic that shut down restaurants and catering operations around the world, and a reopening that features multiple supply-chain issues.

Rational has a market cap of €10.4 billion. Analysts estimates 2021 sales at €746 million.

Like its products, Rational’s stock price isn’t cheap. The shares trade at 82 times earnings, according to FactSet. Based on enterprise value-to-earnings before interest, taxes, depreciation, and amortization, or Ebitda, Rational comes in at a 70 multiple, among the highest of European large-cap stocks. Those metrics temper analyst enthusiasm.

The company did issue a positive update on July 22 ahead of its second-quarter earnings, pointing out that revenue during the June-ended quarter was slightly above pre-crisis levels, and 81% above the year-earlier quarter. Rational said that 2021’s sales might match 2019 levels a year earlier than its previous estimate, benefiting from the return of catering in most markets, the start of tourist season, and customers making investments with government assistance. Tight supplies led to inventory-building by both dealers and customers.

The stock rallied over 5% on that day.

“We believe the Covid-19 pandemic could lead to an acceleration of Rational’s growth,” said Sitte. “Hygiene standards are increasing, which favors more automation in kitchens, while the increasing popularity of online food-delivery services also favors restaurants that can manage high throughput without sacrificing consistency, quality, and speed.”

But Rational also faces lower-priced competition, from rivals such as Florida-based Welbilt (WBT), which is being acquired by Italy’s Ali Group.

Supply shortages are also a problem, particularly in key components such as microcontrollers. Rising steel and shipping prices also pose issues, notes Deutsche Bank analyst Lars Vom-Cleff, who has a Sell rating on Rational shares.

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Barrons : A Year After Gold’s Record High, Prices Continue to Slide. What It Wil

A Year After Gold’s Record High, Prices Continue to Slide. What It Will Take for a Rally.

Nearly a year since gold marked its highest price on record, the precious metal has little to show for it.

On Aug. 6, 2020, gold futures settled at $2,069.40 an ounce, their highest finish on record. A day later, prices hit an intraday, all-time high of $2,089.20.

The record highs “were driven by the initial flight to safety, followed by the reaction to the massive monetary and fiscal policies” put into play to strengthen the economy in the wake of the pandemic, says William Cai, co-founder and managing partner at Wilshire Phoenix. Due to the pandemic, the U.S. Federal Reserve has kept its benchmark interest rate close to zero, benefiting gold.

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Prices for the metal, however, have eased back by 14% from the record and look to suffer the first yearly loss since 2018.

The pullback in gold is a “healthy consolidation,” with the market digesting the effects of those monetary policies and potential follow-on policy adjustments, Cai says. Inflation, meanwhile, looks to be the major factor that will continue to support gold prices in the medium term, he says.

The Fed has helped to ease some of the uncertainty driving demand for gold as a haven. The central bank’s loose monetary policy contributed to the creation of an “economic bubble” to offset Covid-19’s harmful economic impact, says Drew Rathgeber, senior futures broker and branch manager at AIO Capital.

On March 8, gold futures dropped to $1,678, their lowest since April 2020, amid strength in the U.S. dollar and a rise in Treasury bond yields, which can dull demand for gold.

But don’t count gold out yet, says Rathgeber. “A perfect storm is setting up for gold…to go much higher.” Inflation is “here to stay for a while,” in part due to the Fed’s loose monetary policy and its failure to highlight “cost-push inflation,” he says. A rise in the cost of production and raw materials leads to cost-push inflation, and inflation can decrease the value of the dollar over time, raising gold’s investment appeal.

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The Fed has said the sharp rise in inflation this year is “transitory,” suggesting that the central bank will not tighten monetary policy and will continue to hold off raising interest rates, which is supportive for gold. On July 28, the Fed reiterated that it believes higher inflation this year reflects transitory factors. It also said the U.S. economy has made progress toward reaching its standards for easing back on its bond-buying program, but not enough for it to start doing so yet.

The Fed is “in a bind,” says Matt Psarras, head of client relations and market research for GoldCore USA. If inflation is not transitory and instead persistent, “it will feed on itself and eventually…boil over into a ‘consumer strike’ as wage growth falls far behind the cost of living.”

As money becomes more worthless, gold prices will rise, he says. And if management of debt issues becomes “disorderly,” gold could go “parabolic” as investors clamor to buy it.

At around $1,800, Psarras says gold is “exceptionally cheap.” It can moderate investors’ emotions during a time of crisis, without fully exposing them to the market. “Gold cannot go to zero—almost everything else can,” he says.

Looking ahead, interest rates, debt, and inflation are the market indicators to watch, says Psarras. If interest rates rise, inflation stays nominal, and debt levels become more sustainable, “gold will lose favor as demand for a safe haven ebbs,” he says.

If interest rates stay low or fall further, or inflation rises and possibly switches to stagflation where growth falters, then gold will “rise with gusto.”

Either way, on a long-term basis, a modest 10% allocation in gold makes a “world of sense,” says Psarras.

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WWD : Francesco Trapani Chairs New SPAC, Launches Listing on Euronext Amsterdam

Francesco Trapani Chairs New SPAC, Launches Listing on Euronext Amsterdam

The newly formed VAM Investments SPAC B.V. is focused on consumer products and services, and is launching today. Until July 16, it will be book building for up to 225 million euros, and requesting admission to listing and trading on Euronext Amsterdam.

MILAN — There’s a new SPAC in Europe, promoted by luxury veteran Francesco Trapani.

The Milan-based VAM Investments private equity holding, chaired by Trapani, has formed VAM Investments SPAC B.V., focused on consumer products and services. It launched Wednesday, and until July 16 is book building for up to 225 million euros and is requesting admission to listing and trading on Euronext Amsterdam.

VAM Investments will directly invest in the Special Purpose Acquisition Company, up to 10.25 million euros.

“A SPAC is a tool that is relatively recent in Europe and that will allow us to put the skills of the team, and my direct experience in luxury with Bulgari, LVMH and Tiffany, at the service of a big company that intends to access the public market,” said Trapani, who expressed his eagerness to “start working to select the best company for our SPAC.”

WWD : What M&A Deal Could Be Next in Italy’s Fashion Industry?

What M&A Deal Could Be Next in Italy’s Fashion Industry?

Following the sale of Etro and the Ermenegildo Zegna Group's plan to publicly list in New York, what other deals are brewing?

MILAN — What summer doldrums? Italy’s M&A activity is as brisk as can be.

Two days in a row, two major deals were revealed last week as Etro agreed to sell a majority stake to L Catterton and the Ermenegildo Zegna Group said it plans to go public on the New York Stock Exchange by the end of the year through a deal with Special Purpose Acquisition Corporation, or SPAC, Investindustrial Acquisition Corp. According to the most recent Milan-based consultancy Pambianco Strategie di Impresa study published in December on companies with the most potential to publicly list, Zegna ranked third after Stone Island in second position and Golden Goose in the top spot. (Stone Island was acquired by Moncler in early December 2020, while Golden Goose is now owned by Permira.)

David Pambianco, chief executive officer of Pambianco Strategie di Impresa, said being part of the list means certifying the companies’ “ability to produce value.”

According to sources, more deals are in the pipeline, and some rumors are more persistent than others. The hottest one at the moment, which has banks and advisers chomping at the bit, may easily be the possible tie-up between Giorgio Armani and the Agnelli family’s holding Exor, which owns Ferrari. Despite reiterated denials from both sides, Milan-based sources contend that the last word has not been said yet.

One luxury goods analyst, who requested anonymity, claims that Exor chairman and CEO John Elkann approached Armani “with an open mind, allowing the designer to choose timing and circumstances” of a deal. However, the source said the Italian designer, who turned 87 on July 11, feels he is “not ready yet.” That may change after the holidays, contended the source, who believes Armani has often taken important decisions during his summer holidays, sailing on the Mediterranean and spending time at his home on the island of Pantelleria.

“This is a deal waiting to happen,” said Andrea Morante, chairman of independent asset management company QuattroR, which in 2019 took a majority stake in Trussardi. He believes the Agnellis represent for Giorgio Armani “Italian capitalism in the most advanced form, and an example he has always aspired to,” and that Armani would rather not sell to anyone else.

“Sure, the denials have been issued, and rightly so, because these are delicate moments, the mechanism is very complex and it’s true, there’s no ink on the paper yet, but they are setting the bases for a sale of a minority stake at first, which is necessary as a first step,” claimed Morante, who was previously CEO of Pomellato, president of Sergio Rossi and an investment banker at Credit Suisse and Morgan Stanley, and at Gucci, where he helped restructure the luxury goods house under Investcorp, later becoming chief operating officer. “I don’t see any other obvious deal for Armani.”

There is a link between the designer and the Agnelli family, as Andrea Camerana, a counselor and former licensing director at the Armani fashion house, is the son of Armani’s sister Rosanna and Carlo Camerana, a cousin of the late Gianni and Umberto Agnelli.

Also, in March, Armani signed a multiyear sponsorship of the Scuderia Ferrari racing team to supply formal attire and travel wear to the Ferrari team’s management, drivers and technicians to be worn at official events and during transfers linked to Formula One’s Grand Prix international races.

“Today, more than ever, we need to pull together as a system to promote Italian excellence, creating a synergistic dialogue among different disciplines,” Armani said at the time. “Ferrari is a world-renowned symbol of Italy, and I am proud of this collaboration.”

In turn, Elkann, who is also chairman of Ferrari, underscored that Armani “is synonymous with Italian style and elegance: We share the same pride in representing our country around the world. From today, Scuderia Ferrari and Giorgio Armani are joining one another to be stronger together, on motor racing circuits and beyond.”

Armani in 2016 established a namesake foundation, at the time when independence was a priority for the designer. Observers believe that if the designer did eventually accept Exor’s offer, it would not be a problem to change the bylaws of the foundation. As per the latest information available, the designer, who is also chairman of his fashion group, in 2017 channeled 0.1 percent of the capital, with a nominal value of 10 million euros, or $10.5 million, into the foundation.

“The existence of a foundation does not necessarily preclude a sale of the company or of a stake in it, unless the statute of the foundation or of the company include a veto to this end,” according to Riccardo Molesti, fiscal consultant and tax adviser.

Morante said it is only natural for Armani to now open up to the idea of a partner, given the current scenario, as the Italian fashion industry faces a transition due to the generational shift at many family-owned companies in a market that is changing at a much faster pace than in the past. “These are two forces pushing in different directions, and exploding after the COVID-19 impact and the emerging gender-unification trend. This will lead to an increased number of new merger and acquisition deals,” he said.

Exor has been extremely active of late. In June it expanded its reach, investing in consumer goods by taking a stake in Ludovico Martelli SpA, a personal care products company known for its storied brands including Marvis, Sapone del Mugello, Valobra and Proraso. The holding has also invested in Hermès International’s China project Shang Xia, and has acquired a minority stake in Christian Louboutin.

The acquisitions in Italy have been evolving into nuanced partnerships and platforms meant to support a manufacturing pipeline that is increasingly relevant, yet more at risk in the wake of the COVID-19 pandemic, and signaling a teamwork approach that is steadily emerging in the Italian fashion industry. For example, CEO Gildo Zegna paired with Prada chief Patrizio Bertelli on the acquisition of cashmere firm Filati Biagioli Modesto SpA last month, and has been steadily growing the men’s wear giant’s supply chain, hinting at additional deals in the pipeline — while waving away the idea of a fashion conglomerate.

Bertelli and his wife Miuccia Prada have been passing on increasing responsibilities to their son Lorenzo, who has been group marketing director since 2019 and head of corporate social responsibility since 2020. Prada has been publicly listed on the Hong Kong Stock Exchange since 2011 and rumors about a possible delisting or a partnership with a major fashion group emerge from time to time, but no deal has materialized.

Patrizio Bertelli has long denied any intention to sell but, in early 2020, sources pointed to Kering and Compagnie Financière Richemont as being interested parties. Bertelli and his wife flew to Paris in December 2019 to meet with Kering chief François-Henri Pinault, according to a source familiar with the company.

As reported, sources said LVMH Moët Hennessy Louis Vuitton took a serious look at Prada in 2019, but discussions about a possible deal broke down over the summer due to price, and no deal ever took place.

Given how many Italian companies are owned by foreign investors or groups, Made in Italy supporters champion a potential launch of an Italian luxury conglomerate.

Renzo Rosso is one of the few Italian entrepreneurs who has openly spoken of building a fashion conglomerate through his OTB group. After acquiring Jil Sander from Onward Holdings Co. Ltd. in March, Rosso told WWD he is also eyeing the acquisition of specialized manufacturers, a strategy that allows a company to “become more solid and build know-how,” he explained, while protecting Italy’s unique supply chain. He is looking at different areas — handbags and footwear producers, as well as firms specialized in washes and treatments. Rosso was set on taking over the Roberto Cavalli brand, but in the summer of 2019 that company also passed into foreign hands, to Vision Investment Co. LLC, controlled by the founder and chairman of Dubai-based developer Damac Properties Group, Hussain Sajwani.

Armando Branchini, deputy chairman of Milan-based consultancy, said Rosso is succeeding in the development of a fashion pole and a step forward to this end as he “knows how to choose his managers and, in turn, how to manage them.”

Branchini, who is also strategic adviser at Parthenon EY, Fashion, Luxury and Retail Practice, cited 34 out of many Italian brands acquired by foreign groups, from Fendi to Gucci in fashion but also in lifestyle, from the Bauer and Splendido hotels to San Pellegrino and Ferretti Yachts.

He believes the acceleration in M&A activity is not only caused by the impact of the pandemic, but also by the changes in the market, which include an increase in the demand for “coolness,” which generally is concentrated in the “superbrands” in every product category. “This means that niche brands, very much present in the Italian system, are penalized,” which will “surely lead to more foreign investments in the country in the short term in a natural way.”

Branchini hopes entrepreneurs and family companies will revisit their traditional approach and innovate — and go public, rather than pass the baton. It is a must to boost management, invest in innovation, put the consumer at the center of the strategies, he continued, “because the strategic goal is to create value and coolness, personalization and speed. The world that has changed and most probably will continue to change, cannot be tackled with schemes coming from the past.”

Conversely to Rosso, Moncler chairman and CEO Remo Ruffini, denied any interest in forming a conglomerate when the company he leads took control of Stone Island brand last year.

Alessandro Maria Ferreri, CEO and owner of The Style Gate consulting firm, lamented the lack of an Italian conglomerate, with only a handful of companies remaining fully Italian, from Giorgio Armani to Dolce & Gabbana. In any case, he does not attribute this wave of consolidation to the COVID-19 pandemic, believing it was planned ahead of the health emergency, which at times pushed it back. “Many entrepreneurs are slowly realizing that to change pace, they need to take action and that it is difficult to face the current challenges by remaining independent,” said Ferreri.

“Issues such as size and the generational shift are increasingly relevant to be competitive today in the fashion industry,” concurred Giovanna Brambilla, partner at Milan-based executive search firm Value Search. “Single brands are having a harder time coping with this scenario. Partnering with an important group helps to have critical mass and a relevant presence. Also, governance is increasingly key and at times an issue for smaller-sized firms — a clear governance that can inspire the company and its top management on future evolution, on what path to take, what initiatives and strategies to pursue to be aligned with the times now that there are such radical and fast changes and to attract resources that can maximize the value of the board of directors.”

Footwear remains a hot category, as exemplified by Investindustrial’s sale of the Sergio Rossi brand to Fosun Fashion Group last month, and rumors about a possible sale of the Gianvito Rossi label as well as that of Aquazzura have been circulating among financial sources for quite some time now. Florence-based retailer LuisaViaRoma, which has a strong online business, is also said to be an interesting business for investors.

Another group being watched by analysts is Tod’s SpA. In April, LVMH increased its stake in the Italian company to 10 percent. Analysts have long speculated on a possible sale of the group, which — in addition to the Tod’s SpA brand — includes Hogan, Fay and Roger Vivier, pointing to Bernard Arnault as a possible buyer. Tod’s chairman and CEO Diego Della Valle has repeatedly denied the company is for sale and has over time bought back shares with his brother Andrea.

In May, Della Valle chimed in, saying, “this operation consolidates the friendship” between himself, his family and Arnault and his family, which has spanned over more 20 years. “We share the values of luxury, quality and products appeal. This may represent an excellent reason to consider further opportunities to be taken together in the future.” This did nothing to dispel rumors about a possible change in ownership, which one luxury goods analyst in Milan continues to champion. A potential Tod’s delisting has also been flagged by some observers.

Rumors about a possible sale of the Salvatore Ferragamo company have cooled as analysts expect the arrival of a new CEO to help turn the company around, thus pushing back a change of ownership. The Ferragamo family has repeatedly denied the intention of selling the company, which is publicly listed in Milan. The company is in the midst of a transition, as CEO Micaela le Divelec Lemmi will resign on Sept. 7, and from that date, all executive powers will be exercised by vice chairman Michele Norsa until the arrival of new CEO Marco Gobbetti from Burberry. The Florence-based company is still operating without a creative director following the exit of Paul Andrew last spring.

Morante said the Ferragamo family now “has to fully trust the outside management, seen as crucial at this moment, and managers coming from Kering or LVMH, as is Gobbetti, are considered among the best. The family is now ready to do all it takes — and pay whatever it takes — to bring in new talent.”

Morante also believes a fashion conglomerate is hard to come by in Italy because Italians are not really team players — except when soccer is involved, he quipped. “Entrepreneurs love their brands so much, maybe too much. Arnault and [Kering chief François-Henri] Pinault do not have the same background and have succeeded.”

One Milan-based source also contended Mayhoola may be eyeing another fashion acquisition to build its stable, which includes Valentino and Balmain, and this despite the impact the pandemic is having on men’s wear brand Pal Zileri, which is controlled by the Qatar-based fund.

Luxury veteran Francesco Trapani has been spearheading as chairman the new luxury production pole Gruppo Florence, established by VAM Investments, Fondo Italiano d’Investimento and Italmobiliare, whose goal is to develop a platform to supply high-quality Made in Italy products to major luxury fashion brands, while safeguarding the technical and cultural know-how of small and medium-sized family-owned Italian companies. Since its launch last October, Gruppo Florence has acquired five storied Italian manufacturers, the latest last week being Emmegi, a Lombardy-based firm founded in 1880 that produces men’s and women’s informal outerwear.

Gruppo Florence is eyeing the acquisition of another six to eight more firms at the moment, and is not looking to buy companies that are financially troubled. On the contrary, these are all solid and technically advanced firms, which “are starting to understand it’s good to be part of a bigger group” but whose size can represent a risk for big brands that need to feel safe, Trapani explained..

According to the Global Fashion and Luxury Private Equity and Investors Survey 2021 conducted by Deloitte, the appetite for luxury companies in the personal goods, and experiential luxury sectors — the latter including luxury cars, hospitality and furniture, among others — showed no signs of abating in 2020.

The report surveyed 277 deals last year, up 6 percent compared to 2019, particularly in the personal luxury goods arena and Elio Milantoni, partner at Deloitte, noted that the size of the deals has significantly increased, with 68 percent of the 277 deals based on company valuations at an earnings before interest, taxes, depreciation and amortization multiple of 11-times and more.

“Despite the crisis and the difficulty in picking the right deals, the M&A activity is healthy and the deals are big, sometimes with the valuations at an EBITDA multiple of 18- to 20-times,” believes Massimiliano Caraffa, managing director, sector head consumer and retail Europe at private equity fund The Carlyle Group, with “a lot of investors chasing few assets. The fashion and luxury sector is an interesting one but it’s not always easy to decipher and invest in it.”

Investors are attracted by companies with solid online operations, an exposure to the Chinese and U.S. markets and innovative distribution models. But since there are not that many fitting with this description deal prices skyrocketed, he said, noting that value proposition remains key for desirability.

In the 2020 to 2025 period, Deloitte expects sales of personal luxury goods will post a compound annual growth rate of between 5 and 6 percent. This would translate in revenues of between 265 billion euros and 295 billion euros in 2022, in line with the latest Bain & Co. Luxury Study 2021 Spring Update released in collaboration with Fondazione Altagamma, as reported.

Download What_M_A_Deal_Could_Be_Next_in_Italian_Fashion_Industry____WWD.pdf

Barrons : Buy Glaxo Stock Because Its Turnaround Could Be Accelerated

Buy Glaxo Stock Because Its Turnaround Could Be Accelerated

Markets rise and markets fall, but the price of a share of the British drugmaker GlaxoSmithKline doesn’t change much at all.

On the last day of June 2011, you could buy Glaxo’s American depositary receipts (ticker: GSK) for $42.90. Ten years later, they cost $39.82. The S&P 500 index is up 225% over the same period. A share of Eli Lilly (LLY) bought for $37.53 in 2011 could have been sold this June for $229.52.

Glaxo’s ADRs, meanwhile, have closed at $32 to $56 on every trading day for the past decade. Their hefty dividend means that investors have made out better than the 7.2% decrease in share price suggests, though their 58% return still leaves them far behind their peers.

Now, there is an opportunity for Glaxo to break out of its slump. In the middle of next year, Glaxo is spinning off the consumer-healthcare joint venture it created with Pfizer (PFE) in 2019, which sells Advil, ChapStick, and other drugstore staples.

Glaxo has signaled those plans for years. What’s new is the involvement of activist hedge fund Elliott Management. Investors are intrigued, and the stock is up about 10% since Elliott’s involvement emerged in April.

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If investors have perked up their ears, however, Glaxo management is rapt. Glaxo has laid out aggressive goals for the biopharma firm that will remain after the split, saying that it will grow sales more than 5% each year over the next five years, increase operating profit by more than 10% over the same period, cut its dividend, and focus its research-and-development efforts on its vaccines and specialty medicines, which treat rare and complex diseases.

That might remind investors of the commitments made by Pfizer before it pulled a similar maneuver in November 2020, spinning off its peripheral business in pursuit of a new identity as a pure-play biopharma.

Today, investors remain unconvinced by Pfizer’s transition, and the stock is underperforming the market since its last big spinoff, even though its growth is on target and the company has, in the meantime, commercialized one of the best Covid-19 vaccines in the world.

Elliott’s involvement in Glaxo, however, makes the situation different, and should give investors confidence to place a bet on the biopharma firm’s long-term turnaround.

“We know that this company has not delivered as we would all like it to be doing, in terms of shareholder returns,” acknowledges the company’s CEO, Emma Walmsley, in an interview with Barron’s.

She says her retooled version of Glaxo will deliver on its pipeline and on its financial goals. “We’re looking forward to being held accountable for that,” Walmsley says.

Glaxo’s story up to now has been one of an effective vaccine business saddled with an uninspiring pharmaceutical business.

“Successive development and commercial disappointments have led to people more or less dismissing pretty much everything they have going on, and as a result, the stock doesn’t go anywhere,” says Dr. Geoffrey Porges, an analyst at SVB Leerink.

The vaccine side of the business, on the other hand, is a world beater. Glaxo’s vaccines are high quality, with all but its flu jabs boasting efficacy of at least 90%. Its top-selling vaccine, the shingles prophylactic Shingrix, is a legitimate blockbuster, expected to bring in $3.5 billion in sales in 2022.

Elliott says that investors have missed Glaxo’s strength in vaccines and in areas like HIV, and sees a 45% upside in the company’s share price even before the spinoff next year.

It’s not clear what Elliott’s managers think will spark that rally, and the eye-popping number may be more a statement of purpose for the activist fund than a prediction. Elliott’s public recommendations for Glaxo are mostly rather modest, and include giving more autonomy to the vaccines unit, a bigger investment in research and development, and for the company to look to sell, rather than spin off, the consumer health joint venture.

Glaxo has taken some of the recommendations and brushed off others. The company insists on integrating its vaccines unit with the rest of the business, and while it has said it is open to selling the consumer-health group rather than spinning it off, it thinks it’s unlikely that a buyer will emerge.

The biggest disagreement between Elliott and Glaxo is over Walmsley herself, and whether she should lead the biopharma business after the spinoff.

Most biopharma CEOs have more pharmaceutical experience than Walmsley, who was an executive at the consumer-goods giant L’Oréal (OR.France) before she came to Glaxo. In a public letter, Elliott called for a “robust process” to pick a CEO for New Glaxo.

Glaxo says it is sticking with Walmsley.

“It’s not like my profile has ever been secret,” the CEO says. “My own view is that while we can talk about all the things I’m not, what I am is a change leader, a business leader, a team creator.”

Investors need not pick a side in that spat. What’s important for investors is that the hedge fund has shown it has patience and a track record of winning value for biopharma investors.

“Elliott’s horizon here is not months; it’s years,” Porges says. “It frequently takes two to three years before their influence really starts to change what’s happening inside the company....Almost universally, they do drive or contribute to that value creation.”

Download Buy_Glaxo_Stock_Because_Its_Turnaround_Could_Be_Accelerated___Barron_s.pdf

(GS) Here Are GS Top Market Observations

Here Are GS Top Market Observations

By Louis Miller, flow sales and trading strategist at Goldman Sales.

8 Quick Equity Macro Observations:

1. Commodities (BCOM) vs Commodity Related Equities showing a negative divergence (Chart 1). Equities are more wary of reflation than commodities at this time whereas the exact opposite was the case in early to mid-2020. BCOM and this basket are not apples to apples, but it shows a non-confirmation at recent highs. This is also a reflection of positioning and fwd outlooks vs spot. We also see similar divergences in oily levered equities vs long-term crude and our global copper basket and copper.

2. Cyclicals/Defensives have not traded well post ISM manufacturing peak (chart 2). Much of the price action in the past month is consistent with mid-cycle slowdown phase of ISM cycle, which have been well document elsewhere. Since Mid-June, Mega Cap Tech has outperformed Non Profitable Tech by 13% (Chart 4), Large Caps has outperformed Small by 7%, Strong Balance Sheet has outperformed Weak Balance Sheet by 13%, High Stable Margin has outperformed Low Variable Margin by 8.7%.

The rate of change of inflation expectations remains key in driving reflationary rotations (rather than the level), Chart 3 displays the Sharpe Ratio of a Cyclical vs Defensive market neutral portfolio relative to the rate of change in breakeven. The gradual repricing of the Sharpe Ratio lower means that the outperformance of cyclicals is likely to keep on becoming less clear and choppier unless inflation data significantly surprise to the upside.

3. Equity implied inflation expectation remains elevated despite recent repricing lower of growth and falling inflation breakeven (Chart 4). Input cost issues remain a concern this earnings seasons with a number of misses so far (KMB, CAG, KO, Unilever, SAM)

4. Credit levered equities are no longer outperforming with HY Spreads near lowest level in decade (Chart 5). HY Spreads are really tight with potential tightening rhetoric ahead and the rate of change of US growth slowing.

Shorting equities with high probability of default vs those low probability of default is consistent with an up in quality, more discerning equity market, and doing so in equities is lower carry (50-60bps)

5. There are nascent concerns about execution of back-to-school and return to office with delta variant dynamics being discussed (chart 7,8,9). Mall levered retail (GSCNSMAL Index) where we have active views and handful of other companies (PLAY, PLCE, CRI, AEO, ANF, BFAM, DKS, FIVE, UA etc) as well as our office reits basket (GSFINOFC Index) are worth monitoring. More simply, one can leverage the GS Outside Basket {GSXUPAND Index} bullish or bearish depending on view (it has traded ~20% total (in different directions) in past 5 trading sessions), which would be the most liquid implementation. Since memorial day, Stay at Home has outperformed Go Outside by 21%.

6. Seasonality is not favorable Scott Rubner noted this week that August seasonals are not market friendly and trend lower all of August, for the 4th worst two-week seasonal period of the year. Jackson hole is the low point of Chart 10. Since 1950, there have been 19 times in 72 years that the S&P is up at least >10% through the first half of the year. The median return for August specifically, following a strong 1H is typically down -51bps, before rallying higher. Equity inflows are not common in August. Over the last 30 years, August typically see the largest outflows of the year. -15bps of AUM typically leaves stock market funds in August, on ~22 Trillion, we model -$33B worth of equities for sale.

7. Infrastructure Stocks have outperformed other non-industrials/materials (GSPUINFS Index) driven by stronger earnings revisions (chart 10). The market appears to be pricing the view that Democrats (or the bipartisan group) succeeds in increasing infrastructure spending without much change on the tax front.

8. Equity market is more vigilant about a potential U-turn in rates with long duration equities stopped outperforming. A lot of the high multiple tech outperformance was unwind early spring underperformance, and these equities dont fully reflect the move lower in rates here.