Macro :
Keep an eye on :
- DOC AV : Do & Co Eyes Up to EU100m Convertibles to Fund Expansion
- RI FP : Pernod Ricard: Esther Berrozpe Galindo Resigns as Director
Spacs/Nikola: fresh-baked fruitcake
Main outputs at the moment are glossy PR and optimistic profit projections
Spending the year in and out of lockdown required the acceptance that gratification would often be delayed. No such patience was required from US vehicle technology companies that avoided the traditional slow trundle to the market. Instead, they merged with listed “blank-cheque” businesses, also known as special purpose acquisition companies. They hope they will be cranking out thousands of cars or components in a few years. For the moment, their main outputs are glossy PR and optimistic profit projections.
Nikola is the most notorious. After its Spac merger, the market capitalisation of the electric trucks group soared to nearly $20bn. The group even inked a partnership with General Motors, which took a 12 per cent stake. A short-seller’s report shortly afterwards challenged Nikola’s technology. It included the revelation that the truck in a video was propelled by gravity, not electricity. Flashy founder Trevor Milton stepped down from the board as controversies multiplied.
Lex is a longtime sceptic concerning plans to power heavy trucks — and some types of aircraft — with electricity. Currently, the power-to-weight ratio of batteries is too low. We have therefore selected Nikola as the fruitcake in today’s food-themed festive review.
The battered shares mean the company now has a market capitalisation of just $6bn. The company maintains it should start delivering electric trucks in a couple of years. Nikola and peers such as Fisker and Hyliion believe that if their 2024 and 2025 earnings projections are simply discounted to a present value, their valuations remain reasonable, single-digit ebitda multiples.
A Financial Times study of listings from more than 80 Spac IPOs between 2015 and 2019 shows that 60 per cent now trade below the $10 a share threshold price. Among the minority of Spacs that have appreciated substantially, the largest sub-category are speculative vehicle start-ups.
Blank-cheque mergers were historically focused on undervalued or downtrodden sectors. Growth companies in frontier specialisms ranging from cannabis to tele-health now dominate Spac deals. The trend means these transactions smack more than ever of a market overreaching itself.
Telegram, nearing 500 million users, to begin monetizing the app
Instant messaging app Telegram is “approaching” 500 million users and plans to generate revenue starting next year to keep the business afloat, its founder Pavel Durov said on Wednesday.
Durov said he has personally bankrolled the seven-year-old business so far, but as the startup scales he is looking for ways to monetize the instant messaging service. “A project of our size needs at least a few hundred million dollars per year to keep going,” he said.
The service, which topped 400 million active users in April this year, will introduce its own ad platform for public one-to-many channels — “one that is user-friendly, respects privacy and allows us to cover the costs of server and traffic,” he wrote on his Telegram channel.
“If we monetize large public one-to-many channels via the Ad Platform, the owners of these channels will receive free traffic in proportion to their size,” he wrote. Another way Telegram could monetize its service is through premium stickers with “additional expressive features,” he wrote. “The artists who make stickers of this new type will also get a part of the profit. We want millions of Telegram-based creators and small businesses to thrive, enriching the experience of all our users.”
Some analysts were hoping that Telegram would be able to monetize the platform through its blockchain token project. But after several delays and regulatory troubles, Telegram said in May that it had decided to abandon the project.
For this project, Dubai-based Telegram had raised $1.7 billion from investors in 2018. It had planned to distribute its token, called grams, after developing the blockchain software. Telegram offered to return $1.2 billion to investors earlier this year.
“Telegram has a social networking dimension. Our massive public one-to-many channels can have millions of subscribers each and are more like Twitter feeds. In many markets the owners of such channels display ads to earn money, sometimes using third-party ad platforms. The ads they post look like regular messages, and are often intrusive. We will fix this by introducing our own Ad Platform for public one-to-many channels,” Durov wrote today.
All existing features will remain free, said Durov, who is one of the biggest critics of Facebook -owned WhatsApp, adding that Telegram is committed to not introduce ads in private one-to-one chats or group chats because they are a “bad idea.”
“We are not going to sell the company like the founders of WhatsApp. The world needs Telegram to stay independent as a place where users are respected and high-quality service is ensured,” he wrote. “Telegram will begin to generate revenue, starting next year. We will do it in accordance with our values and the pledges we have made over the last 7 years. Thanks to our current scale, we will be able to do it in a non-intrusive way. Most users will hardly notice any change.”
On Wednesday, Telegram also introduced a new group voice chats feature to the app. The new voice chats feature, which is similar to Discord’s always-on room, supports a few thousand participants.
Three Reasons 2021 Could Be (a Lot) Better Than You Think
Unusual nature of this recession suggests it could lead to more rapid recovery than others
Our Covid winter has begun on a grim note: Job growth is stalling, consumer spending is wilting, and a fast-spreading virus strain has raised the prospect of crippling new lockdowns.
Yet after this most unusual of years, there are three good reasons to think next year will be better—perhaps much better than you think. It all comes down to the unique character of both the recession and the policy response.
A question of supply, not demand
Most recessions begin when rising interest rates or stressed financial markets undercut demand for goods and services, driving up unemployment, which further crimps demand. This one began with a natural disaster, like a hurricane or earthquake, which interrupts the supply of goods and services.
When a disaster of that sort ends, a V-shaped recovery ensues. But this disaster, the most widespread and longest lasting in a century, isn’t over. There was a partial V-shaped recovery in the third quarter as lockdowns were lifted. But since the pandemic was never brought under control, restrictions and social distancing never ended and indeed have recently tightened.
Those restrictions are repressing consumer spending. IHS Markit estimates personal consumption is running 7% below its fundamental level as dictated by wages and salaries, government payments, wealth, interest rates, taxes and demographics. In the 2007-09 recession, it ran close to or above its fundamental level.
If vaccines are effective—of particular concern as a fast-spreading variant paralyzes Britain—most of the population should be vaccinated by midyear, allowing social-distancing restrictions to end. It isn’t outlandish to think consumer spending could snap back to its fundamental level by year-end (though that isn’t IHS’s forecast). That could boost growth in 2021 to 5%, the best since 1984.
A policy response like no other
This week’s $900 billion fiscal package will ultimately bring total stimulus since February to $3.5 trillion, according to the Center for a Responsible Federal Budget. That is more as a share of gross domestic product than the response to the 2007-09 recession and it is being spent in less than two years instead of five.
President Trump called the $600 per person stimulus check “ridiculously low” and some liberals feel similarly about the $300-a-week bonus unemployment benefit. In fact, together with March’s higher payouts, they represent an unprecedented funnel of federal cash that in aggregate—though not for every individual—more than replaced all the wage income lost during the pandemic.
Meanwhile, Federal Reserve Chairman Jerome Powell said last week, “the concerns that we had at the very beginning of really serious, deep shortfalls and massive budget cuts on the part of state and local governments have not yet occurred.”
To be sure, states expect 11% less revenue in the current fiscal year, which ends next June, than originally budgeted, according to a report released Wednesday by the National Association of State Budget Officers. But the hit has been less than feared, in part because the pandemic has disproportionately hurt lower-paid workers who pay less income tax and services that carry less sales tax than goods, said Kathryn Vesey White, director of budget-process studies for NASBO.
State and local governments didn’t get the general assistance they hoped for from this week’s fiscal deal, but $122 billion is earmarked for schools, higher education, vaccine distribution, transit systems, and testing and tracing.
Federal largess is all the more powerful because the Federal Reserve is amplifying it. When recovery kicks in, investors often price in higher interest rates. But the Fed short-circuited that process by promising that interest rates, which are near zero, will stay there until and unless inflation reaches 2% and unemployment drops to pre-pandemic levels. This unprecedented commitment is of limited help while a rampant pandemic is holding down activity. But once restrictions are lifted, it could turbocharge asset prices and consumer and capital spending.
No scars—yet
Recessions often do long-term damage by wiping out entire businesses along with hard-to-re-create relationships among customers, suppliers, and employees, and by keeping some people jobless so long they leave the workforce altogether.
Even after seven months of solid growth, total employment stood 9.8 million lower in November than in February, a jobs deficit larger than in February 2010, the low point of the last cycle. But 38% of that number are people who permanently lost their jobs, compared with 77% then. Goldman Sachs estimates 60% of the missing jobs are in virus-sensitive industries, most of which will return with a vaccine.
True, jobs or businesses destroyed during the pandemic’s darkest days are gone forever—and there are more dark days to come. But a rapid recovery next year offers hope that many unemployed will avoid the trap of long-term joblessness and new businesses will soon rise from the ashes of the old.
Private equity dealmaking defies pandemic to hit post-crisis high
Buyout firms have been boosted by government stimulus packages and continued access to cheap debt
The value of private equity deals this year soared to its highest level since 2007, roaring back from a spring slowdown as the industry snapped up companies in record numbers even as the coronavirus pandemic triggered a global recession.
Buyout groups struck deals worth $559bn worldwide in 2020, rising almost a fifth from the previous year’s total, according to figures from Refinitiv covering January 1 to December 22. More than 8,000 deals were announced this year, the most since records began in 1980.
“Given the shock to the system we saw . . . the way M&A has snapped back more broadly, and for [private equity], has definitely exceeded our expectation,” said David Kamo, Americas head of financial sponsor M&A at Goldman Sachs. After the 2008 crisis “it took about two years to come back,” he said.
The spread of Covid-19 had threatened in the spring to bring a decade-long boom in mergers and acquisitions to a juddering halt. Private equity executives shifted their focus to shoring up hard-hit companies in their portfolios and large pre-pandemic deals, such as Carlyle’s acquisition of a stake in American Express Global Business Travel, were called off.
The industry had seemed to be facing a year of reckoning, as firms’ often highly-leveraged portfolio companies confronted the worst economic outlook since the Great Depression. But enormous government stimulus packages and sweeping central bank crisis measures meant that, in dealmaking terms, the worst global pandemic since the Spanish Flu in 1918 did not derail activity.
The Federal Reserve’s historic decisions to cut interest rates to zero and buy investment-grade bonds and exchange-traded funds that own riskier junk debt, gave companies a lifeline and ensured private equity’s continued access to cheap debt for new deals. Broader economic support measures meant firms could access bailout loans and furlough funds for portfolio companies.
“Ultimately the lifeblood of private equity is cheap debt,” said Bryce Klempner, partner at consultant McKinsey. “When you’ve got the Fed saying debt will stay cheap for years, plus historically high multiples, the numbers look buoyant — especially if you’re a seller.”
Buyout groups took advantage of reduced competition for deals and of companies’ need to raise money in the crisis by putting units up for sale.
Joe Bae, co-president and co-chief operating officer of KKR, told the Financial Times in June that the $221.8bn buyout group was “capitalising on the unprecedented level of volatility and dislocation in the markets to buy high-quality businesses”.
The turmoil unleashed by the pandemic did little to bring down deal prices. The average valuation multiple for US deals between January and September reached 13.5 times earnings, the highest since Refinitiv began recording this metric in 2004.
The tech sector accounted for 28 per cent of all private equity deals by value as groups ploughed into companies that had prospered in the pandemic. The largest tech deal was Thoma Bravo’s purchase of RealPage, which valued the US property software group at $10.2bn.
Other megadeals in 2020 included Advent International and Cinven’s €17.2bn acquisition of Thyssenkrupp’s lifts business in February, and Walmart’s £6.8bn sale of UK supermarket chain Asda to TDR Capital and the brothers behind the petrol stations group Euro Garages in October.
“What’s been impressive is how the dealmaking community has taken the pandemic in its stride,” said Sam Newhouse, a partner at law firm Latham & Watkins in London. “People basically paused, reassessed, recalibrated and carried on, arguably more efficiently — it didn’t stop them.”
The share prices of the large listed buyout groups have rebounded after tumbling in March, and Blackstone and KKR are trading at all-time highs. Low interest rates have created such demand for higher-yielding debt that private equity firms are increasingly able to load companies they own with fresh loans and use the money to pay themselves dividends.
Buyout groups are “pricing in a recovery that will be driven by the vaccine and there’s light at the end of the tunnel here,” said Goldman’s Mr Kamo. The rate of dealmaking had picked up partly because, with travel curtailed, advisers could work on more transactions, he added.
“All the factors that embolden private equity were still there: the large amounts of dry powder sitting on the sidelines, supportive financing markets, willing sellers,” said Mr Kamo. “The model doesn’t work if you don’t put the money to work.”