TheChek News Flow

Deal for auto-service chain would value it at around $6 billion including debt, sources say

A group of private-equity firms led by BayPine LP is nearing a deal to buy Mavis Express Tire Services Corp. in a transaction that would value the auto-service chain at around $6 billion including debt, according to people familiar with the matter.

The group, which also includes TSG Consumer Partners LP, won an auction for the asset, owned by private-equity firm Golden Gate Capital, beating out rivals KKR & Co., Carlyle Group Inc., and a pairing of Bain Capital and Berkshire Partners, some of the people said.

The deal isn’t final, and there is still a chance it could fall through, the people said.

Based in Millwood, N.Y., Mavis provides tire, oil change and mechanical services at more than 1,100 service centers across 27 states.

Golden Gate bought Express Oil Change & Tire Engineers in 2017, purchasing Mavis Discount Tire a year later. The firm combined the two businesses in 2018, with Mavis co-CEOs David and Stephen Sorbaro taking the helm of the combined company.

Their parents, Victor and Marion Sorbaro, founded Mavis Tire Supply Corp. in 1972, calling it Mavis because it was portmanteau of Marion and Victor with an ‘s’ for their last name. Express, founded in 1979 in Birmingham, Ala., became known as a one-stop shop for quick oil changes, automotive maintenance and repair and tire sales and services.

At the time of their merger, Mavis had more than 430 service centers in seven states and Express had about 400 locations in 19 states.

The company has continued to expand. In November it said it would buy Town Fair Tire Centers Inc. for an undisclosed price. Based in East Haven, Conn., Town Fair had 100 stores throughout New England at the time of the deal announcement.

Boston-based BayPine, which was launched last year by Silver Lake co-founder David Roux and former Blackstone Group Inc. executive Anjan Mukherjee, is targeting $2 billion for its maiden fund, The Wall Street Journal reported. Wan Ling Martello, one of the firm’s partners, has significant experience with automotive businesses, serving on the boards of Uber Technologies Inc. and Stellantis NV.

Beijing has grown more tolerant of defaults as it tries to erode assumptions that investors will always be made whole

A developer of industrial parks joined the ranks of Chinese companies defaulting on international borrowings, with its failure to repay a maturing bond casting doubt over the entirety of its $4.6 billion in dollar-based debt.

The debt difficulties at China Fortune Land Development Co. 600340 -0.91% follow a series of defaults by other sizable Chinese groups such as Tsinghua Unigroup Co., a player in the country’s push for self-reliance in semiconductors, and state-owned commodity trader Tewoo Group Co.

While eager to support growth and avoid market turmoil, Chinese authorities have grown more tolerant of defaults in recent years, both by private companies and state-backed ones, as they try to erode market assumptions that investors will always be made whole.

China Fortune Land didn’t repay holders of a $530 million note due Sunday, prompting Fitch Ratings to downgrade it to a “restricted default” rating Tuesday morning Hong Kong time. The company has $9.8 billion of bonds outstanding, including $4.6 billion of offshore bonds, according to a February note from credit analysts at Goldman Sachs.

Late last week, China Fortune Land said it needed time to fix a short-term cash shortage, adding that it aimed to seek a “consensual resolution” with offshore bondholders and to treat domestic and international creditors fairly and reasonably. The company said it had missed payments on the equivalent of $1.7 billion of onshore loans and offshore bonds.

China Fortune Land’s bonds have been trading at deeply distressed levels for weeks, but analysts said the default was still surprising.

“This shows that the government is dead serious about letting weaker companies default,” said Owen Gallimore, head of credit strategy at ANZ. “This is a problem for the wider market because if you exclude blue-chip state-owned enterprises and financials, it’s all about implicit support.”

Mr. Gallimore said China Fortune Land would be the biggest international defaulter on record from China.

Fitch didn’t say whether the default on maturing debt would trigger cross-default on the company’s other international bonds. It also withdrew its rating, saying China Fortune Land would no longer share the information needed for it to continue assessing the group’s creditworthiness.

The company didn’t respond to a request for comment.

Chuanyi Zhou, a credit analyst at research firm Lucror Analytics, said the company’s ties to local governments, for which it has built a series of developments, had led some market participants to consider it similar to a local-government financing vehicle, or LGFV. “It is a big deal for investors that even a company like that did not get a bailout,” she said.

Investors have focused on the risks posed by property developers, who make up a big part of the Chinese offshore bond market. Many are heavily indebted, and the sector is coming under greater regulatory pressure. Banks are told to cap property lending, and a system of “three red lines,” widely reported in local media, essentially requires the weakest players to cut debt. Some cities have also imposed restrictions to damp housing-market speculation.

China Fortune Land isn’t a typical residential developer. It was founded in 1998 with roots in Hebei, the province surrounding Beijing, with a focus on building industrial parks for local authorities. But it has since branched out into home-building, often on sites adjacent to its industrial areas—a problem given recent curbs on new home sales in Hebei and neighboring regions.

In a research report last month, Moody’s Investors Service highlighted China Fortune Land’s rapid expansion and its use of “public-private partnerships” as contributing to its high debts. The company has to wait a long time to collect cash from local governments for the parks it has built, the rating company said.

On Tuesday, Moody’s also downgraded China Fortune Land and withdrew its rating. Moody’s cut the company by two notches to Caa3, one of its lowest grades. It said bondholders were likely to recover a low proportion of what they were owed.

“The missed payments highlight the severe challenges facing CFLD given its weak liquidity. They will likely trigger cross defaults and accelerate the repayment of CFLD’s onshore bonds and its other offshore bonds, and significantly disrupt CFLD’s operations, jeopardizing its asset values,” Moody’s said.

China Fortune Land’s fall from grace has been rapid. As recently as September, it was able to issue $330 million of bonds due in 2022, paying an 8.75% coupon. On Monday, these bonds were quoted at 38 cents on the dollar, according to FactSet.

The company’s Shanghai-listed stock has tumbled 48% in the past three months, according to FactSet. Its biggest shareholders are Chairman Wang Wenxue and Ping An Insurance Group Co., one of China’s biggest insurers.

There’s a space company capturing the imagination of investors that engineers its own rockets, has launched dozens of satellites into orbit, and has planned missions to the Moon, Mars, and even Venus.

No, it isn’t SpaceX—it’s Rocket Lab USA. But there are many similarities between the two.

Rocket, for instance, plans to sell space-based services from its own constellation of internally built satellites. SpaceX plans to offer high-speed internet access from space using its own Starlink satellites.

Rocket Lab, like SpaceX, is focused on vertical integration in the fledgling space industry. The company wants to have its own launch capabilities, operate its own satellites, and provide services to other customers. “Rocket Lab is an end-to-end space company,” CEO Peter Beck says.

Rocket Lab and SpaceX are the only private companies delivering launches today. Since its founding in 2014, Rocket Lab has completed 18 launches to space and deployed 97 satellites into orbit on behalf of more than 20 customers. It has a total of three launchpads in Virginia and New Zealand, each of which can handle 44 launches a year.

Rocket Lab’s in-use Electron rocket is for launching relatively small satellites into space. Its next planned vehicle is to be called Neutron, which will be a medium-lift rocket with an eight-ton payload capacity. That will be a direct competitor to SpaceX’s Falcon 9 rocket. Rocket Lab expects 98% of satellites to be launched by 2029 to be lifted by one of those two rockets. Both have reusable components—which reduce the cost and turnaround time of a launch—and the Neutron rocket will also be able to carry human astronauts. It’s on track to be ready for use in 2024.

Rocket Lab’s third product is a satellite already orbiting earth called, naturally, Photon. The company has plans to send it to the Moon, Mars, and Venus. That’s a “turnkey satellite solution” designed and launched by Rocket Lab to save customers time and cost, says Beck. Rocket also refers to it as “satellite-as-a-service.” Rocket Lab adds the satellite as a free stowaway to its launches for other customers.

Rocket Lab is becoming a publicly traded company by merging with Vector Acquisition (ticker: VACQ). If approved by shareholders, that deal is expected to close in the second quarter, when Vector’s ticker symbol will convert to RKLB. Meanwhile, investors interested in space can, essentially, buy Rocket Lab stock now.

Government proposals aim to help London retain its place as Europe’s pre-eminent financial center post-Brexit

The U.K. government signaled support for looser stock-listing rules to attract tech companies and SPACs, moves aimed at helping London compete with New York and retain its position as Europe’s pre-eminent financial center post-Brexit.

The proposals, expected to be formally announced Wednesday, would make it easier for company founders to list shares without giving up control and still make the stock eligible for inclusion in the London Stock Exchange’s blue-chip FTSE indexes.

Changes would also place London on more equal footing with New York to compete for the surge in special-purpose acquisition companies, or SPACs, a popular vehicle that short-circuits the traditional initial-public-offering process.

The proposals “are about closing a gap” between London and other global centers, said former U.K. politician Jonathan Hill, who spearheaded a government-ordered review of the listing rules.

London faces challenges to its status following the U.K.’s official departure from the European Union. Big chunks of London stock-trading volumes quickly moved to venues in Amsterdam and Paris when post-Brexit rules took effect Jan 1.

U.K. Treasury chief Rishi Sunak said he would move quickly on the recommendations. The U.K. government is betting on a thriving IPO market to create jobs for bankers, money managers and other professionals in support of the country’s financial-services sector.

The listing rule changes, which require approval from the U.K.’s Financial Conduct Authority, would also aim to diversify London’s recently underperforming stock market, which is tilted toward old-line companies in areas such as banking, energy and mining.

To attract more tech names to London, Mr. Hill’s report recommends dropping the maximum number of shares that companies need to sell in an IPO for a “premium listing” needed for index inclusion to 15% from 25%. Similarly, founders should be allowed to sell dual-class shares in an IPO to retain greater voting rights than public investors.

Dual-class share structures have helped Nasdaq and the New York Stock Exchange attract such hot tech IPOs as Facebook Inc., Google parent Alphabet Inc. and Snap Inc. Today Facebook and Alphabet are among the largest members of the S&P 500 benchmark and serve as magnets for new growth companies to list in the U.S.

Last month, South Korea’s Coupang Inc. announced plans for a U.S. IPO in a deal that is expected to generate a valuation exceeding $50 billion.

Hong Kong introduced dual-class shares in 2018, sparking a series of high-profile tech listings, including China’s Alibaba Group Holding Ltd. the next year.

Clare Reilly, an executive from pension provider PensionBee Ltd., warned that the move could erode investor protections.

“One share, one vote is the foundation of strong corporate governance, and we see that as a principle that’s under threat all around the world,” she said.

Regarding SPACs, the proposed changes could let investors opt out of deals if they don’t like the acquisition the SPAC managers choose and would let them trade shares immediately after a deal’s announcement, bringing London in line with the U.S. market.

London’s tighter listing requirements have left it behind when it comes to SPACs. Some European companies, including U.K. betting data firm Genius Sports Group Ltd., and Arrival Ltd., a London-based electric-vehicle manufacturer, both announced plans in recent months to list through New York-listed SPACs.

SPACs appeal to tech startups over traditional IPOs because the process is faster and allows companies to provide revenue and profit forecasts to attract investor interest.

Accountability, sustainability and diversity are increasingly — and rightly — sought by big investors

“Wanted: new chief executive for Danone, French entreprise à mission. Pressing tasks at this purpose-driven yoghurt maker include achieving 3-5 per cent organic growth and executing predecessor’s strategic overhaul. Warning: multiple constraints. Incumbent boss remains as chairman; vice-chairpersons and newly-elevated lead independent board director are dyed-in-the-wool old school. Latitude further crimped by assets that have already been put on the block with proceeds earmarked.”

Headhunters will have a tough job filling this one. Emmanuel Faber, under pressure from activist investors to step down, is relinquishing just half his job by standing down as chief executive but keeping the chairmanship. His record and the French food group's lacklustre performance have left activist shareholders baying for blood. Faber has presided over three cuts to profit forecasts since taking the helm in 2014. 

Danone, maker of Volvic bottled water and Actimel yoghurt, underperforms peers such as Nestlé and Unilever on a range of metrics including returns and forecast growth. Its markets are looking sluggish. Consumers are turning away from environmentally harmful bottled water. Lower birth rates are denting demand for infant formula.

Like Paul Polman, former boss of Unilever, Faber has championed sustainability and broader ESG: hence last year’s reframing of the yoghurt maker as an entreprise à mission, with social as well as financial objectives. Polman’s efforts were widely lauded but sustainability targets do not always chime with financial ones. That was thrown into sharp relief by Kraft Heinz’s abortive $143bn bid for the Anglo-Dutch consumer goods maker, which pitted a cost-cutting money machine against the more socially conscious multinational.

Accountability, sustainability and diversity are increasingly — and rightly — sought by big investors such as BlackRock but company chiefs can err on targets and incentives. Danone, for example, links 10 per cent of management’s short-term incentive pay to a woolly-sounding metric: “employees sustainable engagement”. 

Still, this puts Danone in a small group of maybe 5-20 per cent of European companies linking incentive pay to ESG targets. Activist investor Cevian Capital is calling on European companies to follow suit, linking meaningful ESG targets into incentive plans. Expect more investors to be this demanding.

City-boosting proposals are not enough to offset lack of EU financial services trade deal

For some Brits, dual-class stocks represent a faux pas as apocalyptic as calling napkins “serviettes”. A government-sponsored review by Lord Jonathan Hill nevertheless suggests that some shares should carry more votes. It is just one of the ways he believes the City can attract business. Unfortunately, none would compensate for the government’s failure to strike a financial services trade deal with the EU.

Hill makes some sensible proposals. They include a push to lure special purpose acquisition companies. These boom-time shortcuts to the public market are flourishing in the US. Their dowdy UK cousins, cash shell companies, have the disadvantage that their shares are typically suspended when they acquire a larger, privately held operating business.

The Tory peer is right to see such lockups as unnecessary. Higher valuations, liquidity and retail investor interest are factors behind the US Spac boom that the UK will find harder to replicate.

Dual-class shares would be more problematic for many UK investors. They see equal treatment of shareholders according to economic exposure as an inviolable principle. But purity now comes at too high a price in flotations forgone from tech company founders.

Five-year sunset clauses would be a workable compromise. Less helpfully, Hill would restrict high-vote share ownership to directors. He does not explain what happens to the stock if directors are ousted.

There is meanwhile a sense of tidal drift in reducing the allowable free float for a listed company to 15 per cent. The in-effect threshold only surged to 25 per cent a few years ago following corporate governance abuses at oligarch-controlled businesses.

Most mooted reforms simply replicate what happens in other markets. The tech revolution has changed the terms of trade in favour of entrepreneurs and against organised capital. Brexit has done the same for continental centres and the City. EU authorities no longer have to recognise UK venues and intermediaries as equivalent to their own. Hill cites Amsterdam’s booming share trade apparently more in hope than expectation that his reforms would claw back the lost business.