TheChek News Flow

SpaceX won’t receive NASA funding until the GAO resolves two formal protests

NASA has suspended work on SpaceX’s new $2.9 billion lunar lander contract while a federal watchdog agency adjudicates two protests over the award, the agency said Friday.

Putting the Human Landing System (or HLS) work on hold until the GAO makes a decision on the two protests means SpaceX won’t immediately receive its first chunk of the $2.9 billion award, nor will it commence the initial talks with NASA that would normally take place at the onset of a major contract.

Elon Musk’s SpaceX was picked by NASA on April 16th to build the agency’s first human lunar lander since the Apollo program, as the agency opted to rely on just one company for a high-profile contract that many in the space industry expected to go to two companies.

As a result, two companies that were in the running for the contract, Blue Origin and Dynetics, protested NASA’s decision to the Government Accountability Office, which adjudicates bidding disputes. Blue Origin alleges the agency unfairly “moved the goalposts at the last minute” and endangered NASA’s speedy 2024 timeline by only picking SpaceX.

“Pursuant to the GAO protests, NASA instructed SpaceX that progress on the HLS contract has been suspended until GAO resolves all outstanding litigation related to this procurement,” NASA spokeswoman Monica Witt said in a statement.

Starship, SpaceX’s fully reusable rocket system under development to eventually ferry humans and cargo to the Moon and Mars, won NASA’s award mainly for its massive cargo capability and its proposed bid of $2.9 billion — far cheaper than Blue Origin’s and Dynetics’, according to a NASA source selection document.

Starship’s development to this point has been driven primarily by Musk, SpaceX’s billionaire founder and chief executive. The company has launched several Starship prototypes in short- and high-altitude test flights at its Boca Chica, Texas, launch facilities. Landing the prototypes after soaring over six miles in the air has proved to be a formidable challenge — all of SpaceX’s high-altitude prototype rockets have been destroyed in landing-phase explosions.

SpaceX’s private Starship development will likely continue. The company’s most recent test of a Starship prototype, SN15, is slated to launch within the next few days after clinching license approval from the Federal Aviation Administration this week.

NASA has said picking one company was the best decision it could make at the time with the funds made available from Congress. Last year, Congress gave the agency $850 million of the $3.3 billion it requested to procure two lunar landers.

SpaceX’s award was a key “first step” in a broader program to secure transportation to the Moon, NASA’s human spaceflight chief Kathy Lueders said at the time, promising that new contract opportunities will open up in the near future.

Shares in Holiday Inn owner InterContinental Hotels Group have gained about 59% over the past 12 months on expectations that a Covid-19 vaccine will eventually ease travel restrictions.

The United Kingdom–listed stock (ticker: IHG.UK), which has a secondary listing in the U.S. (IHG), looks like it has limited upside, with a return to travel already factored into the price. But don’t underestimate its potential gains. The recovery from the coronavirus pandemic is quickening, and the hospitality company’s new brands are poised for growth.

In an interview with Barron’s, CEO Keith Barr says that demand is at prepandemic levels in some markets, and he points to China as the playbook for the rest of the world.

“You see travel returning with an incredible surge,” he says. “Planes are full, trains are full, and meetings and events are happening.” As for the rest of the world: “Leisure demand could outstrip supply in some markets in the short-to-medium term.”

Occupancy in the company’s core North American market was 54.6% in March 2021, up from 24.5% in the height of the pandemic in April 2020, according to estimates from Sabrina Blanc, at Société Générale.

Blanc says the more resilient U.S. market has helped the Denham, England–based company. “Of the hotel stocks we cover, IHG was the only one able to generate cash during the worst of the pandemic,” Blanc wrote in an April note. “The group has benefited from its rapid response to the situation and will continue to do so.”

She estimates that the shares will increase over the next 12 months to 58.36 pounds sterling ($81.10). The stock was at a recent $72.67. Shares in the past year are trailing rivals Marriott International (MAR), which has gained 66% this year, and Hilton Hotels Worldwide (HLT), up 72%.

Andre Juillard, an analyst at Deutsche Bank, said in a note that “IHG continues to check all boxes for market outperformance in the near term.”

He cited the company’s skew to midrange brands, which are recovering faster from the crisis than upscale segments.

InterContinental, which also owns Crowne Plaza, Staybridge Suites, and Regent, has a market value of £9.7 billion. It employs 12,832 workers and fetches a high multiple of 46.9 times this year’s expected earnings and trades at a discount to its peers.

The company said 2020 was the most challenging in its history, as tourism plunged. Earnings swung to a $153 million annual loss in 2020 from a $630 million profit in 2019, on revenue that more than halved to $992 million.

A faster bounceback combined with InterContinental’s asset-light model—it doesn’t own many of the hotels so isn’t exposed to associated costs—point to better-than-expected growth. “There are not many businesses that can…still generate cash even when revenue is down 62% and profits fall 75%,” Barr says.

While the company has expanded by acquisitions including Kimpton and Six Senses, it also created brands such as Even, Indigo, and China’s Hualuxe.

Some of those brands are still small but have huge growth potential, Barr says, adding that as this group expands, it will deliver “top-tier performance, strong earnings-per-share growth, and total shareholder return.”

InterContinental also is placing work pods in its hotel lobbies, as offices remain closed and people look for other locations to meet and work.

“This was a highly cash-generative model before Covid and should be even more so post-Covid, when things return to normal,” Barr says.

When Bristol Myers Squibb bought the biotech Celgene for $80 billion in late 2019, it tacked on a sweetener: If three experimental Celgene treatments received Food and Drug Administration approval on time, Bristol would pay an extra $9 a share, for a total of over $6 billion.

There was one catch: All three drugs had to be approved. If one of the approvals came a day late, the obligations issued by Bristol Myers (ticker: BMY), called contingent value rights, would pay nothing.

The three drugs were approved—but one approval came roughly a month past its deadline after pandemic-related travel restrictions delayed an inspection by the FDA. Bristol says it did all it could to win the approvals and isn’t paying.

“You have shareholders who lost $6 billion because of Covid,” says Tom Giovine, a former hedge fund manager who holds the CVR. “It’s insanity, when you think about it.”

Now, a group of CVR holders are preparing to fight. In a statement, their lead counsel, David Elsberg of the law firm Selendy & Gay, said that 469 holders, who together own a majority of the outstanding CVRs, had committed $50 million for litigation.

The original agreement had no clause to allow the investors to demand that an exception be made because of the pandemic. It did, however, require Bristol to undertake “diligent efforts” to meet the milestones.

Bristol said it wouldn’t speculate about possible litigation. The company said it believed it would have been able to meet the CVR timeline if not for the pandemic-related travel delays.

The dispute provides a lesson for investors. CVRs, glittering prizes often offered in biopharma acquisitions, rarely end in smiles and handshakes.

Biopharma deal makers use CVRs when they can’t agree on the value of an asset, so they set payments pegged to future milestones. They are a cousin to the earn-out provisions familiar from buyouts of tech start-ups.

But there is a key difference: Brian Quinn, a professor at Boston College Law School, notes that beneficiaries of earn-outs are often working for the acquirer when the milestones come up. “In most cases, it turns out that buyers just pay,” he says.

Not so in the case of CVRs.

The record of CVRs in biopharma acquisitions of billion-dollar public companies over the past decade or so is rocky, at best. Few appear to have fully paid out. Others have ended unhappily. Holders of a CVR that was created when Sanofi-Aventis, now Sanofi (SNY), bought the biotech Genzyme sued, claiming that the company had slow-walked the approval of a drug and then under-marketed it to intentionally miss milestones. Sanofi eventually settled for $315 million, though didn’t admit it did anything wrong.

Even among these CVRs, Celgene’s stands out. Few others trade on the public markets, as Celgene’s did, and few are all-or-nothing deals. Hedge funds built up substantial positions in the CVR, which generally traded at about a 70% discount to the $9 it would have paid.

All was going smoothly until mid-2020. The first of the three Celgene drugs, ozanimod, received FDA approval in March 2020. But soon Bristol began to warn in filings that the pandemic could derail the payout.

In May, Bristol said that the FDA had delayed its deadline to make a decision on the second drug, a cancer therapy known as liso-cel, until mid-November. That was still ahead of the CVR deadline of Dec. 31, but left little wiggle room when, in November, the FDA missed its own deadline after travel restrictions kept inspectors from visiting a Texas facility.

The inspectors eventually visited, but when Dec. 31 came, the FDA had yet to issue its approval, and on New Year’s Day, Bristol said that the CVR had “automatically terminated.”

The FDA approved liso-cel in February, and then the third Celgene drug, another cancer therapy called ide-cel, by its deadline.

It was too late for the CVR, which no longer trades on the New York Stock Exchange.

A project intended to help diversify the nation’s economy is mired in delays and dealing with an employee exodus

RIYADH—If Saudi Crown Prince Mohammed bin Salman realizes his dream, a $500 billion city-state dubbed Neom will one day rise from the desert, transforming Saudi Arabia by drawing billions of dollars in new investment as the kingdom attempts to reduce its dependence on oil before its crude reserves run dry.

So far, however, Neom has been mired in delays and hit by an exodus of employees who are straining under the weight of the prince’s ambitious vision.

Engineers have struggled with demands to blow a hole a half-mile long and 30 stories high in the side of a mountain, to house a honeycomb of hotels and residences. Another directive to construct 10 palaces, each bigger than a football field, attracted more than 50 different designs, but left staff wondering whether anyone would purchase homes that could list at up to $400 million each, according to a review of the project’s plans and interviews with those who have been involved in Neom’s development.

At one board meeting last December, Prince Mohammed brushed aside urban planners who offered other, simpler plans for a pollution-free city, telling them to think bolder.

“I want to build my pyramids,” he said, according to people familiar with his instructions.

The Saudi government declined to comment, referring questions to Neom.

A spokesperson for Neom, owned by Saudi Arabia’s sovereign-wealth fund, described the scale of the project as unprecedented, but said its ultimate direction is flexible and will be shaped “by changing priorities, opportunities and challenges.”

Prince Mohammed has sought to use big ideas to reel in investors, sometimes telling foreign officials that he will be happy if he achieves half of what he has set out to do.

Neom, a combination of the Greek word Neo and the Arabic word for “future,” is the boldest example yet of the 35-year-old prince’s plans to draw large-scale foreign investment to the kingdom.

So far, he has had limited success. Total investment inflows to Saudi Arabia were about $5.4 billion last year, up almost a billion dollars over 2019, despite the pandemic, but lower than the $16 billion a year a decade ago. The share sale of oil giant Saudi Aramco failed to attract significant numbers of international investors after he set a lofty valuation of $2 trillion and was unwilling to sufficiently pare it back to entice foreign institutions.

Other initiatives to reset the direction of the economy are also struggling. An attempt by former King Abdullah to build a financial center in Riyadh is a decade behind schedule. A city on the Red Sea that the king launched in 2005 in hopes of attracting millions of residents has a population of thousands.

The plans for Neom are far grander. The latest vision centers around a 106-mile-long carbon-neutral project called the Line, a linear city connected by a high-speed train, with no cars.

Four other developments—called Neom Bay, Aqaba Region, Neom Mountain and Neom Industrial City—are intended to surround it, and include the project to build a resort in a mountainside known as the Vault. The hope is for Neom to have 14 industrial sectors, including energy, food production and media, among others.

Some Neom employees and Saudi officials say they are skeptical the plans are feasible. The kingdom’s sovereign-wealth fund and finance ministry already have plowed more than $1 billion into initial infrastructure, master plans, consultants and employee wages—cash that some Saudi officials say they believe could have been put to better use elsewhere.

Other employees, both former and current, say they aren’t convinced that outside investors will buy into some of Neom’s proposals. They also doubt the kingdom can live up to plans for a new set of laws for the city to attract foreigners used to Western norms, such as alcohol consumption or for men and women to freely mingle.

The project has had some success attracting blue-chip firms. In partnership with U.S. chemical company Air Products & Chemicals Inc. and a Saudi firm, Neom plans to invest $5 billion to build what would be the world’s largest green hydrogen-production facility. The rationale for that project makes sense with or without a sprawling city-state around it: Neom’s location is blessed with world-class solar and wind power, making the plant attractive for Air Products to export globally.

The Neom spokesperson said it is working on a “competitive legal framework” and is in discussions with global investors, “who are keen to…embrace the uniqueness of what we are trying to achieve.”

Current and former employees say Neom’s chief executive, Nadhmi al-Nasr, is struggling to make the prince’s ideas materialize, despite his reputation for delivering projects in a 30-year career at Aramco, the oil company. Neom has cycled through dozens of senior staff members during his tenure, many of them bristling at Mr. Nasr’s management style, these people say.

Some have walked away from contracts of up to $1 million a year. Others couldn’t return to Saudi Arabia last year as lockdowns limited travel, and at least one was subsequently fired, these people added.

Andrew Wirth, the former CEO of one of the U.S.’s biggest ski resorts, who headed the planned mountain resort at Neom, left in August after determining Mr. Nasr’s leadership style was, “consistently inclusive of disparagement and inappropriately dismissive and demeaning outbursts,” according to a resignation letter viewed by The Wall Street Journal.

Other departures include the executive leading the Neom Bay development; the project’s investment fund; its legal team; and its tourism division. Also gone: two information-technology chiefs, two heads of marketing and two directors of communications.

Mr. Nasr referred questions to Neom. The spokesperson declined to answer questions related to individual employees but said Neom has natural turnover compared with a new, similar-sized organization.

Mr. Nasr often tells new recruits that to survive at Neom they need to believe in the vision and make sacrifices. “There are days when you will feel that you have worked harder than you could have ever imagined. And yet, have accomplished nothing,” he told new hires in June 2019, according to one person’s notes from the meeting.

Former employee Aimee Bothwell, who worked in the division focused on creating a food industry, said employees were drilled to believe in Neom but few risked questioning the project’s culture or feasibility. “When I left, I felt almost as though I was emerging from some sort of cult,” she said.

Current and former employees say Prince Mohammed is deeply involved in the details. When architects pitched master plans for Neom Mountain in 2019, the prince took elements of three pitches and melded them together, including designs for the Vault and a lake on a 7,500-feet summit, according to documents viewed by the Journal and a person familiar with what happened.

The prince’s ambitions for Neom became clear with the public relations launch in January of the Line: The Neom team mulled laying powerful lights that could be seen from space. The prince hoped to receive a call from the International Space Station to congratulate him on lighting the Line, according to people aware of the plans. He later scrapped plans for the lights and scaled back the launch.

To punctuate the Line’s skyscape, the project’s developers are now examining the feasibility of a massive skyscraper. According to plans seen by the Journal, the structure could soar 1,600 feet into the air, higher than the Empire State Building, and have a width of 55 miles, four times the length of Manhattan.

Warren Buffett’s conglomerate reported first-quarter net income of $11.7 billion, compared with a loss of $49.7 billion a year ago

Warren Buffett’s Berkshire Hathaway Inc. BRK.B -0.95% swung to a quarterly profit on stock-market gains and better results from its insurance business.

Berkshire reported first-quarter net income of $11.7 billion, or $7,638 per Class A share equivalent, compared with a loss of $49.7 billion, or $30,653 per Class A share equivalent, in the year-earlier period.

Operating earnings, which exclude some investment results, rose to $7.02 billion from $5.87 billion in the year prior.

The conglomerate runs a large insurance operation as well as railroad, utilities, industrial manufacturers, retailers and even auto dealerships. It also holds large investments, especially in the stock market. An accounting rule change in recent years has meant that Berkshire’s earnings often reflect the larger performance of the stock market, while operating earnings more accurately reflect the firm’s vast business operations.

Berkshire’s insurance-underwriting business had operating earnings of $764 million in the first quarter, up from $363 million a year ago. Insurance-investment income slipped to $1.21 billion, from $1.39 billion.

The company’s railroad, utilities and energy units earned $1.95 billion, up from $1.75 billion.

The U.S. stock market rose during the first quarter, buoyed by progress on the rollout of the coronavirus vaccines and expectations for a powerful recovery in the nation’s economy. Investors rotated into beaten-down sectors like finance and energy and out of technology stocks. And legions of individual investors plowed into so-called meme stocks such as GameStop Corp. , spurring an unusual rally in those shares that ended abruptly in early February.

The major stock indexes closed the period near record highs. The S&P 500 climbed 5.8% in the quarter, while the Dow Jones Industrial Average rose 7.8%.

The markets were a far different place a year earlier, when fears over the virus’s spread gripped Wall Street and locked down parts of the economy. Government officials raced to intervene, steadying investors’ nerves with a series of programs that unclogged markets. By May, stocks were rallying again.

Mr. Buffett, who made some of the most-successful deals of his unparalleled career in turbulent times, largely sat out the early days of the pandemic. Berkshire’s biggest deal last year came in July, when the company agreed to buy Dominion Energy’s midstream energy business for $9.7 billion, including debt.

Berkshire was a big buyer of its own stock last year and spent some $6.6 billion on share repurchases during the first quarter.

The company sold more stocks than it bought during the first quarter, gaining $6.45 billion on sales and spending $2.57 billion on purchases, according to a securities filing.

The 90-year-old Mr. Buffett, whose shrewd investments have earned him the nickname “the Oracle of Omaha,” has continued to stockpile cash for acquisitions. Berkshire held some $145.4 billion in cash at the end of the first quarter, up from about $138.3 billion at the end of 2020.

Berkshire’s Class A shares fell $4,300 to $412,500 on Friday. They have gained 20% so far this year.

One of Wall Street’s most enduring successes, Berkshire produced annualized gains of 20% from 1965 to 2020, outperforming the S&P 500’s 10.2% gains, including dividends. In recent years, Berkshire’s performance has dipped. The company’s total returns over the past five years were 14%, compared with 18% for the S&P 500.

The slump has made Berkshire an easier target for money managers seeking governance changes at the company. While shareholder proposals urging disclosures on climate change and staff diversity are expected to fail this year, institutional investors’ calls for changes may grow louder in the years to come.

Berkshire will hold its annual meeting for shareholders later Saturday.

BaFin finds fault again with Deutsche Bank’s control mechanisms

Watchdog orders lender to take additional steps and extends special supervisor’s mandate by 36 months

Germany’s financial watchdog has ordered Deutsche Bank to fix its anti-money laundering controls in a move that shows Christian Sewing, chief executive, has still not sorted out all shortcomings three years after taking office.

BaFin on Friday evening said it had broadened and extended the mandate of KPMG, which it installed as special representative in September 2018 to monitor the lender’s progress on tightening up its internal controls.

The special representative’s appointment was an unprecedented move in 2018. People familiar with the matter told the Financial Times that KPMG had received a new 36-month mandate from BaFin.

The watchdog has called on Deutsche to put in place “further appropriate internal safeguards” and to “comply with due diligence obligations”. Without going into details, BaFin said the lender needed to tackle shortcomings “in particular with regard to regular customer reviews” but also in its “correspondent [banking] relationships and transaction monitoring”.

In a statement on Friday Deutsche said it had “significantly improved” its controls, spending €2bn on the matter over the past two years and that it now has 1,600 employees globally to fight financial crime.

“We are also aware that there is still work to be done,” the lender said, adding that it will “continue to invest heavily in 2021 and beyond, especially into the fight against financial crime”.

BaFin said its order was “intended to bring about sustainable improvements in money-laundering prevention at Deutsche Bank”, adding that the special monitor “will help us to continue closely monitoring this, both now and in the future”.

The auditor’s remit was extended by BaFin in February 2019 to investigate Deutsche’s role in the Danske Bank’s Estonia money-laundering scandal, where the German lender was a correspondent bank and processed more than €160bn of potentially suspicious cross-border payments for the unit.

In October, Frankfurt prosecutors fined Deutsche Bank €13.5m for the belated reporting of suspicious transactions it processed for Danske Bank’s Estonian branch.

Deutsche in March also announced yet another reorganisation of its control and compliance organisation, putting chief legal officer Stefan Simon in charge of its anti-financial crime unit and compliance. Those functions were given to Stuart Lewis, chief risk officer, in mid-2019 after the ousting of the heavily criticised chief compliance officer Sylvie Matherat.

Lewis, the longest-serving board member, will resign at the AGM in 2022, one year before his contract is set to expire, after holding the job for a decade.

Frank Kuhnke, chief operating officer, who was in charge of Deutsche’s know-your-client procedures, will also leave the bank in May.

Many are struggling to cope with asset prices moving in ways they would not normally expect

Hedge funds have posted their best start to a calendar year since before the financial crisis. But, behind the strong headline numbers, managers are struggling to cope with some confusing moves in markets.

Funds gained a tidy 6 per cent in the first quarter, according to data group HFR, helped by rising stock markets and a sharp rally in beaten-down so-called “value” areas of the equity and credit markets that some funds favour.

Some returns have been eye-popping. Senvest, helped by a well-timed position in GameStop, has gained 67 per cent. Crispin Odey’s Odey European fund, one of the sector’s most volatile funds, is up 56 per cent, and Lee Ainslie’s Maverick Capital, which latched on to the value rally, is up more than 40 per cent.

But, those figures aside, most investors in hedge funds have not enjoyed such strong gains, and many managers’ returns have been far more mundane. For instance, equity hedge funds gained 7.1 per cent in the first quarter, based on performance averaged by the number of funds. But that figure is skewed by strong gains from smaller funds. When performance is weighted by assets instead, then funds were up a more modest 2.8 per cent on average.

And for every chart-topping manager, there is a fund languishing deep in the red. HFR data shows the gap between the best and worst-performing funds is higher than at any point in the two years before the coronavirus crisis.

“Hedge fund performance in the first quarter has been like the [equity] market — the indices are very good, but some underlying strategies, or sectors, have underperformed,” said Cedric Vuignier, head of liquid alternative managed funds and research at Syz Capital.

A major problem for many managers is that markets are not really functioning in the way they would normally expect them to. Trillions of dollars of central bank stimulus, as well as the surge in retail investor activity during the pandemic, have broken some of the tried and trusted relationships between news and price movements that managers have based their systems on.

Take London-based Sandbar Asset Management, which has lost 3.9 per cent in its $2.4bn Global Equity Market Neutral fund this year. It highlights the relationship between share prices and changes in earnings expectations. Normally, and intuitively, an improvement in expectations about a company’s earnings should mean that its share price rises, while greater pessimism should send the shares lower.

Instead, this correlation has dropped sharply in recent months “to levels not seen in the last decade”, Sandbar said in a presentation to investors. And in sectors such as aerospace it has turned negative, meaning that improving earnings expectations have actually pushed share prices lower.

Swedish hedge fund firm IPM has been another victim of a change in market relationships. Once regarded as one of Europe’s best computer-driven macro managers trading currencies, bonds and stocks, it has fallen foul of a change in the market correlations it relies on. Its assets have slumped from $8bn to $1bn and the firm, owned by finance group Catella, is now shutting down, noting that the investing environment has been tough “for strategies focusing on economic fundamentals”.

What this all adds up to is a loss of what industry insiders call “alpha” — jargon for the industry’s “secret sauce”, or the highly prized extra value that managers supposedly add through the bets they take on stocks and other securities.

Alpha matters because it is the main justification hedge funds use for charging clients their high fees. Beating markets is hard, and therefore alpha is scarce and valuable. If a hedge fund’s returns just come from the market’s gains, rather than from a manager’s skill, then why not just buy a cheap index tracker instead?

Sandbar, which admitted its own alpha has been “poor”, cites data from Morgan Stanley showing large negative alpha among its global equity long-short hedge fund clients this year. In other words, making these highly-researched bets lost them money.

The data also shows that funds’ alpha in the first quarter was far below the average generated over the past decade, and well below difficult years for hedge funds’ bets such as 2016 and 2018.

Hedge funds performed well in 2020s market chaos and are still on average in the black this year. But some managers will nevertheless be worried. If they cannot convincingly show that their well-researched and carefully placed bets add any value, then clients will question why they need to be invested with them at all.