TheChek News Flow

Japanese tech investor rides the boom in valuations toward end of 2020

TOKYO— SoftBank Group Corp. 9984 4.45% rode red-hot stock markets to a big quarterly profit, largely on the back of investment gains at its $100 billion Vision Fund and its $10 billion successor.

The Japanese technology investor said Monday that it posted a net profit of ¥1.17 trillion, equivalent to about $11 billion, on investment gains of ¥1.77 trillion during the quarter ended Dec. 31. Nearly 80% of the investment gains were due to strong performance at Vision Funds 1 and 2.

Anticipation of strong results pushed SoftBank’s stock price up 4.4% to ¥9,485 Monday—a level last seen in February 2000, when the company’s shares peaked during the internet bubble.

The results highlight how much the boom in public markets over the last several months has benefited SoftBank, which during the past year completed its metamorphosis into an investment holding company from a telecommunications conglomerate. Climbing share prices last year helped SoftBank claw its way back into the black from a multibillion-dollar loss.

Those gains continued in the latest quarter, pushing up the market capitalizations of the Vision Fund’s listed companies—most importantly ride-hailing company Uber Technologies Inc., one of the fund’s biggest investments.

Enthusiastic public-market investors also gave SoftBank an investment bonanza when Vision Fund portfolio company DoorDash Inc. listed in December. Shares of the U.S. food-delivery company immediately soared well above their initial public offering price. By the end of the month, DoorDash had earned the fund more than $8 billion in paper gains, and its shares have continued to rise since.

SoftBank is poised to continue taking advantage of strong markets this year. Half a dozen or more of the Vision Fund’s investees—some of which already have multibillion-dollar valuations—are readying initial public offerings this year, Vision Fund Chief Executive Rajeev Misra said on a November call with boutique research firm New Street Research.

SoftBank has also rolled out or filed listing applications for at least four special-purpose acquisition companies, or SPACs, blank-check firms that go public first and then find a company to take over the listing later.

Apple’s Talks With Hyundai Break Down

The tech giant began seeking potential automotive partners late last year

In regulatory filings, Hyundai Motor Co. and Kia Corp. said they are “not in talks with Apple over developing an autonomous vehicle.” The two auto makers have fielded multiple requests from other firms to jointly develop autonomous electric vehicles, though no initial steps have been determined, according to the regulatory filings.

The companies had held talks with the Cupertino, Calif. technology giant about a deal for Hyundai subsidiary Kia to build vehicles for Apple in Georgia, The Wall Street Journal reported last week. The prospect of an auto partnership had sent the Korean companies’ stocks soaring this year, igniting investor enthusiasm after both Kia and Hyundai had suffered years of slumping car sales.

Shares sank 6% for Hyundai Motor following Monday’s regulatory-filing disclosures, while Kia plunged by more than 13%.

Apple began seeking potential automotive partners late last year as it considers whether it can begin production of a vehicle as soon as 2024. In a rare move for a potential Apple partner, Hyundai in January said it was talking to Apple about a potential cooperation around electric, driverless vehicles. No sooner than it had said so, Seoul-based Hyundai tried to backtrack on the statement.

Kia had begun reaching out to potential partners in recent weeks about making an electric car for the iPhone maker, even without a deal having been locked down, the Journal previously reported.

Apple has flirted with other automotive companies over the years, but without reaching a partnership. Word of its secret car program broke in 2015, stoking excitement for the potential of what new possibilities Apple might bring to the auto market. The interest raised fears among traditional car makers that they’d soon be surpassed—like Nokia Corp. or BlackBerry Ltd. had been after the iPhone’s debut in 2007.

Instead, Apple’s auto effort has been largely unrealized as it has struggled to decide which path it will choose. It has gone through different leadership and approaches since beginning in 2014.

Analysts highlight sensitivity of top-rated corporate debt to Treasuries market

The sensitivity of US corporate bonds to a rise in interest rates is near record levels, just as higher growth and inflation are expected to return in coming months as the nation’s coronavirus-hit economy recovers. 

Duration, which captures the expected time it will take for the price of the debt to be repaid in total cash flow, has been on an upward march for a couple of years. The rise has been driven by a rush of companies issuing longer-maturity debt at a time when borrowing costs are low.

The average duration for investment-grade corporate bonds now stands at 8.3 years, according to data from ICE Data Services, up from 7.7 years at the start of 2020 and just 6.5 years a decade ago. 

The shift heightens the risk that a rise in Treasury yields — a more pressing possibility in an economic recovery — will prompt a sell-off in corporate debt markets. 

Nonetheless, yield-starved investors continue to lap up longer-dated bonds that are most in danger if rates do start to climb. Already this month, tech group Apple has issued a $1.75bn 40-year bond, as part of a $14bn fundraising, while Alibaba has raised a $1bn 40-year bond. 

“It’s kinda wacky,” said Jim Shepard, who runs investment-grade bond issuance at Mizuho in New York. “At a time when you would want greater insurance against a rise in interest rates, you are buying something more exposed to it.”

Two things can affect duration. First, the maturity of a bond, with longer bonds having a longer duration. Second, the coupon on a bond, with lower coupons more sensitive to a rise in interest rates eroding the value of the debt. Alibaba sold its 40-year bond with a 3.25 per cent coupon, while Apple is paying a rate of 2.8 per cent. 

“There is a lot of sensitivity to moves in the Treasury market,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital. “It’s something you need to be mindful of.”

Hedge fund Marshall Wace seeks venture capital deals

Shift shows how investors in public companies are seeking new sources of returns in private markets

Marshall Wace, one of the world’s biggest hedge fund firms, is expanding into late-stage venture capital, the latest sign that managers usually focused on trading stock markets are seeking new sources of returns in private markets.

London-based Marshall Wace, which manages about $52bn in assets, is raising as much as $400m for a fund that will invest in privately owned healthcare companies, according to people familiar with its plans. The strategy is to buy them before flotation and then hold on to them after they list.

The launch highlights how some hedge fund managers see a gap in the funding market between early-stage venture capital and flotation on stock markets, where valuations have soared in recent years as investors have piled into companies with attractive long-term growth prospects. 

Such managers believe that few investors are taking advantage of holding companies as they grow in private hands and then holding on when they are listed. Private equity funds will typically sell when a company has an initial public offering, whereas mutual funds and hedge funds tend to get involved at or after that point.

Pre-IPO companies often want big-name investors on their roster before moving to public markets, and staying invested for longer will make these funds more attractive for companies to have as investors, fund managers believe.

Daniel Loeb’s Third Point, best known for activist battles at public companies, has been raising up to $300m for a venture capital fund, the Financial Times reported at the end of last year.

Marshall Wace usually trades stocks and this is the first time it has launched a vehicle for outside investors that will buy into private companies. The firm might launch such funds in the future focusing on other fast-growing sectors, the people familiar with its plans said. It sees an opportunity in less efficient valuations in the private market.

The Marshall Wace and Third Point launches underscore how the lines between the hedge fund and private equity industries are becoming increasingly blurred, as managers trading highly priced public markets look for new sources of returns.

The new fund, which will lock up investors’ cash for a number of years, will aim to invest in companies that are between about six and 24 months away from going public, in areas such as biotechnology, medical technology and life sciences. It is likely to invest in companies in the US, Europe and Asia.

The healthcare sector has been in investors’ focus over the past year as drugs companies have raced to develop treatments and vaccines to combat the Covid-19 pandemic. Marshall Wace already holds about $10bn of investments in listed healthcare assets, including the effects of leverage.

Marshall Wace was co-founded by Sir Paul Marshall and Ian Wace in 1997 and is one of the London hedge fund industry’s dominant companies.

Its flagship Eureka fund and its Tops (Market Neutral) fund, which analyses buy and sell recommendations from about 1,000 external analysts at banks and research houses to determine its bets, both gained more than 14 per cent last year, according to investors. In January Eureka lost 1.5 per cent, and Tops (Market Neutral) gained 3.8 per cent.

Big oil’s huge losses raise prospect of mega mergers

Finances in tatters as demand crash and rise of clean energy force existential reckoning

When Exxon struck the biggest deal of a $300bn wave of oil mergers during the brutal late-1990s crude price collapse, Mobil chief executive Lou Noto gave a warning to the industry.

“We need to face some facts,” he said as he announced his company’s takeover. “The world has changed, the easy things are behind us. The easy oil, the easy cost savings, they’re done. So all of us are now looking for some way to make a jump.”

Now the finances of the supermajors those deals created are in tatters, just as the rise of clean energy and doubts about long-term oil demand force another existential reckoning — and the prospect of megamergers is on the cards again.

“We’ve had two price crashes in the last five years and we’ve seen a lot of money leaving the sector,” said Greg Aitken, head of mergers and acquisitions research at the consultancy Wood Mackenzie. “We’ve seen a lot of concerns about energy transition and ultimately demand destruction and a lot of uncertainty about how quickly that’s going to happen. So big strategic tie-ups and deals — those are entirely feasible.”

ExxonMobil, Chevron, BP and Shell recorded more than $50bn in losses between them last year, as the pandemic-driven crash in oil demand crushed crude prices and forced them to slash their spending plans

Reports last week that Exxon and Chevron discussed what would have been the biggest industrial merger in history during the depths of last year’s market bust are a measure of the panic that swept through the sector.

“The situation looked so desperate last spring and it was unclear how bad it was going to get,” said Daniel Yergin, vice-chairman of IHS Markit and author of The New Map, a recent book on the oil sector.

The desperation has faded but investors say big deals would be a welcome reset for a sector that was shedding value before the crash and is now watching the investment landscape tilt towards cleaner rivals.

Darren Woods, Exxon chief executive, said last week that the company was on the hunt for deals and looking at companies that could “grow value, unique value” and complement its portfolio, in what some analysts said was a nod to Chevron.

A tie-up between the US supermajors would make “eminent sense,” according to one Houston energy banker, creating a more profitable oil portfolio to compete with low-cost Middle Eastern and Russian suppliers. Such a deal could also free up capital to spend on the low-carbon technologies investors are demanding.

But scale is a key driver — part of a “last man standing” strategy for survival even if oil demand shrinks over the coming decades. A combined Exxon and Chevron, for example, could produce close to 6m barrels a day, more than any Opec country other than Saudi Arabia.

“Scale is a real enabler of cost efficiency,” said Nick Stansbury, head of climate solutions at Legal & General Investment Management, which holds shares in many supermajors.

Big deals would also help some companies “get out of the penalty box”, he added, allowing producers to align their business to “play an active role in the transition”.

Despite last year’s mammoth losses, short-term pressures on operators have eased thanks to a rebound in oil prices, which struck a 12-month high close to $60 a barrel this week.

Some observers think the rally and a growing industry consensus that prices will keep rising have lessened the pressure for a dramatic course correction.

Exxon and Chevron have probably “moved past” the need to combine, according to Sam Margolin, managing director at Wolfe Research. “Both companies have stabilised now and have a very transparent plan out to 2025,” he said.

But others say bigger concerns still loom over the sector, compelling it to consider radical solutions.

“This isn’t just about the near term, it’s about a long-term energy transition, demand destruction, price volatility . . . and the twilight years,” said Mr Aitken, referring to the possibility of those kinds of deals. A historic oil crash had left “no sacred cows”, he added.

Analysts at Morgan Stanley last year raised the possibility of Exxon or Chevron buying a US electricity producer as a “potentially more attractive strategy” than buying more oil production.

Still, although Royal Dutch Shell and Total have said they would like to go from Big Oil to Big Energy, transformations such as oil-dominated Dong Energy’s reconstitution into clean-energy focused Orsted will be tricky to pull off.

As oil company share prices slid last year, with BP’s market capitalisation more than halving to $50bn, bankers and energy analysts speculated about the company becoming an acquisition target as well as broader consolidation in the European sector.

But hurdles would stand in the way of another wave of megamergers — not least government scrutiny of such deals. And selling oil assets to raise funds for transition projects is tricky when potential buyers are also reducing exposure to fossil fuels.

“If you have to sell assets, where do they go? It’s not as easy as it once was,” one banker said. “Antitrust solutions are not as clear.”

One area where more M&A activity is widely expected is the battered American shale patch, where more than $50bn worth of deals were struck in the second half of 2020, according to the data provider Enverus.

Behind the mergers was operators’ need to amass scale, drive down drilling expenses and eliminate some of the shale sector’s notoriously bloated general and administrative costs.

More deals are likely, especially in the prolific Permian shale fields of Texas and New Mexico, following President Joe Biden’s executive orders to clamp down on drilling on federal land, according to Lee Maginniss, a managing director at the consultancy Alvarez & Marsal.

“Companies with large inventory of non-federal drillable locations have just gotten more attractive,” said Maginniss. He expects at least another big deal or two in the Permian this year, as the big US independent producers consolidate.

Chevron has already bought Noble Energy, which had shale assets as well as an international gas business. Supermajors are still hovering over the shale patch with intent, analysts say.

Top-tier operators such as EOG Resources, Pioneer Natural Resources, Diamondback Energy and ConocoPhillips — with productive fields, relatively sturdy finances and environment, social and governance plans — are all prime targets.

“We are in an era of consolidation,” Mr Yergin said. “But in shale.”

Renesas in talks to buy Apple supplier Dialog for $6bn

Japanese supplier of automotive chips investing heavily to expand into new areas including data centres

Renesas Electronics is in talks to acquire Apple supplier Dialog for €4.9bn in the latest deal by the acquisitive Japanese group aimed at expanding its semiconductor portfolio beyond cars. 

Shares in Renesas, one of the world’s largest suppliers of automotive chips, fell as much as 6.9 per cent on Monday on concerns about its stretched balance sheet after a $10bn buying spree during the past four years.

In a statement, Renesas confirmed its interest in the Anglo-German semiconductor specialist after the Frankfurt-listed company said on Sunday that it was in advanced talks about an all-cash offer priced at €67.50 a share — a 20 per cent premium to Dialog’s closing price on Friday. 

Dialog, whose clients also include Samsung, Xiaomi and Panasonic, added “there can be no certainty that any firm offer will be made for the company”. The talks were first reported by Bloomberg.

In recent years Renesas, which generates about half its revenue from automotive semiconductors, has been investing aggressively to broaden its footprint beyond cars to areas such as data centres and consumer devices. 

In 2019 it bought US rival Integrated Device Technology for $7.2bn, on the heels of the $3.2bn purchase of US chipmaker Intersil in 2017.

After those two deals, the company’s interest-bearing debt stood at ¥717.1bn ($6.8bn) as of the end of September. 

“The deal may fit with the company’s broader strategic direction to expand its product portfolio, but for now the financing concerns are weighing heavily,” said Naoki Fujiwara, a fund manager at Tokyo-based Shinkin Asset Management.

Dialog, whose global headquarters are in Reading but whose research locations are dotted across Europe and the US, has also been attempting to diversify its portfolio. In particular it is seeking to become less reliant on Apple, which accounted for two-thirds of its $1.4bn in total sales in 2019.

Last year it acquired Industrial Internet-of-Things specialist Adesto for $500m as part of efforts to branch out into automotive components and battery management systems. 

The Renesas-Dialog talks come at a time of heated deal activity in the global semiconductor industry, after Nvidia agreed last year to buy UK chip designer Arm from SoftBank for a price tag of as much as $40bn. 

However, the Arm deal is facing intense regulatory scrutiny, with the EU and the UK set to open in-depth competition investigations.

Renesas was formed in 2010 by a Japanese government-orchestrated merger of the chip units of Hitachi, Mitsubishi Electric and NEC.

Following the 2011 Fukushima earthquake and tsunami, Renesas was bailed out by the state-backed Innovation Network Corporation of Japan and customer companies including Toyota, Nissan and Panasonic as it also sought to fend off a takeover from KKR, the US private equity firm. INCJ remains its biggest shareholder.

Group becomes first German luxury carmaker to provide precise target for turning point

Mercedes-Benz will earn as much from electric cars as its luxury combustion engine models by the end of this decade, its chief executive said, becoming the first premium German automaker to provide a precise target for the turning point in profits.

Ola Källenius, boss of Mercedes owner Daimler, revealed the timetable after the company announced it would divorce its car arm from its trucks unit in an attempt to ape the soaring market valuation of electric auto pioneer Tesla.

“Our task is to take the healthy business model of today and to prove to ourselves and to the financial markets that we can have healthy returns when we become a dominant electric company,” Källenius told the Financial Times.

Markus Duesmann, head of rival luxury carmaker Audi, told the FT in January the brand’s electric cars would match combustion engine profits within a “very few years”. Porsche and BMW, rival premium German carmakers have yet to provide precise dates.

The cost of electric components, such as batteries, were declining rapidly, Källenius said, meaning the Stuttgart-based company would “eventually have the same contribution margins on electric vehicles as we have on the combustion vehicles”.

Källenius, who took the helm of Daimler in 2019, announced on Wednesday the company would spin off its truckmaking division and float it on the Frankfurt stock exchange, creating the world’s largest standalone commercial vehicle manufacturer. Analysts estimate it could be valued at about €35bn.

The remaining passenger car business, which will be renamed Mercedes-Benz, will maintain a minority stake in the truck spin-off that is likely to be no smaller than a blocking minority of 25 per cent, according to a person close to the company.

Mercedes’ renewed focus on luxury electric vehicles would allow the slimmed-down company to “unlock the potential” of its stock, the Swedish boss said.

The move, which is the largest reorganisation of Daimler since its demerger from Chrysler more than a decade ago, “crystallises value that is hidden in the conglomerate”, he added.

Daimler’s share price has risen about 10 per cent since the announcement, but its market valuation of €72bn, remains less than a 10th of the size of Tesla’s, even though the German company sold more than four times as many cars as its American rival last year.

However Daimler, which has electrified its Smart brand, sold fewer than 50,000 purely electric cars and vans in 2020, while Tesla sold almost 500,000.

Källenius said that Mercedes, which would unveil four new battery-powered models this year, including an emissions-free version of its S-class saloon, was due a re-rating by investors because of its strong brand and technical expertise.

In a thinly veiled reference to newer competitors, Källenius said that with a Mercedes, “even if you don't know technology, subliminally you understand you’re sitting in something that is superior”.

“Why shouldn’t we be able to tap into that fantasy in the capital markets?” he added.

The former Formula 1 executive said the planned spin-off, which is due to be completed by the end of the year, would allow Daimler Trucks to gain the “full attention” of investors, because the division would no longer be relegated to the “last 45 minutes of a five-hour long Daimler capital market presentation”.