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Rakuten pioneers new retail route into telecoms

The Japanese ecommerce group hopes to succeed where other groups in the sector have failed by building and running its own mobile phone network

Retailers’ long-held ambitions to break into the telecoms business finally produced a breakthrough this year when Japan’s ecommerce operator Rakuten became the first retailer to turn itself into a fully-fledged telecoms company.

Some big name retailers have already made the leap into the mobile market in an effort to tap new sources of growth with varying degrees of success.

But despite the smartphone taking over from the high street as the main shopping venue for billions of users, a process accelerated by the pandemic, retailers have largely stayed on the fringes of the telecoms sector.

Bricks and mortar chains have created basic “virtual” brands such as Superdrug Mobile, which offers discounted services to the chain’s shoppers, and uses Three, the operator, which, like it, is owned by Hong Kong tycoon Li Ka-shing.

Amazon’s Fire mobile phone, aimed at creating a stronger relationship between the US online retailing behemoth’s customers and its shopping platform, failed to spark.

“Uniting retail with telecoms has not always proved easy,” said Kester Mann, an analyst with UK research group CCS Insight. “It is an approach that needs careful brand positioning, strong marketing investment and coherent execution. Few have been able to find the right balance, so far.”

Analysts say Rakuten’s approach has the potential finally to deliver on the original dream of marrying retail with connectivity.

A virtual operator since 2014, the company became a fully fledged telecoms operator this year after building new mobile network Rakuten Mobile in its home country with partners including Nokia and Fujitsu.

With no legacy equipment, it has also forged a different path in network architecture by using smaller technology companies and interoperable components to reduce the cost and increase the flexibility of its network. That pioneering approach has seen it team up with old world telecoms companies, including Spain’s Telefónica.

For Rakuten, the push into networks is still underpinned by its retail ethos rather than a burning desire to become a company of telephone engineers.

Naho Kono, chief marketing officer, said the heart of the company’s strategy rested on its existing “points” programme, which encourages consumers to use new services such as its shopping, content and online banking products.

About 70 per cent of Rakuten customers use more than two services and the prospect of cheap mobile phone contracts in the expensive Japanese telecoms market is an important cross-selling opportunity.

Ms Kono said combining location data from the mobile network with a customer’s retail habits could prove powerful for Rakuten in increasing customer loyalty and activity.

The points-based system is not so different to the old-fashioned model of a Superdrug Mobile but Rakuten has gone further with its approach by taking on rivals SoftBank Mobile and NTT at the network level. “Rakuten Mobile is not one of the pieces. It is the centre of our ecosystem,” she said.

Ms Kono said, however, that Rakuten needed to win customers from outside its existing base to justify its vast investment in building a telecoms network. In the third quarter, Rakuten posted an operating loss of ¥28.7bn ($271m) mostly due to a ¥43.3bn investment in its mobile network during the period.

So far, 15 per cent of subscribers that have signed up to the Rakuten Mobile service are new. About 35 per cent of those new customers are now using other services from the company, such as its Ichiba ecommerce marketplace and credit cards.

Mr Mann of CCS Insight said Rakuten was using a “freemium” approach, drawing on its internet heritage of signing large numbers of users with free or very cheap prices before generating revenue from them in other ways.

However, he said the bold move that was “far from risk-free” given that the company was using unproven technologies and suppliers for its network. “Should these or other hurdles lead to a dip in service performance, Rakuten could suffer reputational damage,” he said.

Rakuten is not alone, however, in expressing confidence that the time is ripe for a stronger convergence of connectivity and customer-oriented retail.

Reliance Industries, historically a petrochemicals and oil refinery business, which is India’s biggest bricks-and-mortar retailer, has shaken up India’s telecoms market after launching 4G services that were initially free. It amassed a large customer base at the expense of established rivals such as Vodafone. It now aims to replicate the scale of the big technology platforms after selling $20bn worth of its Jio mobile business to global investors including Google and Facebook, which are looking for a footprint in the country.

Having failed to start a telecoms fire of its own, Amazon is now squaring up to Reliance in the Indian ecommerce market and the battle could determine just how vital connectivity will be to achieving long-term ambitions in digital retail.

Business cycle and interest rates look to be lining up to lift the sector’s fortunes

Banks are regarded with a certain awe for both their role as gatekeepers of the economy and the bonuses bankers pull in at year-end. But there is an irony here: more than any other industry, banks and bankers are hostages to fortune. Their profits are bound to the business cycle and interest rates.

Both factors may be lining up to lift banks’ fortunes now, however. A week ago, news that Pfizer’s Covid-19 vaccine was effective pushed the drugmaker’s shares up 7.7 per cent — and bank shares up 13 per cent. This tells you how sensitive banks are to an economic recovery from the pandemic.

Should we put the virus behind us, banks will benefit in three ways. 

Long-term interest rates are likely to nudge upwards as business activity picks up. As the US Federal Reserve is committed to keeping short rates at zero, this would lead to higher bank profits. This is because banks fund themselves at the short end of the market and lend at longer-term interest rates. Even stabilisation at the long end, as opposed to further declines, would materially help bank profits.

Then there is the $112bn that US banks have set aside for loan losses since the pandemic began. Given that the losses have not materialised yet, much of that could flow back through bank income statements, becoming profit. 

Finally, banks’ revenues would start to rise, as demand for loans increased. For example: the stock of credit card loans at US banks has fallen by $100bn, to $755bn, since the crisis began, as consumers cautiously put away their cards. These loans, with their high interest rates, are a key profit driver for the largest banks and are all but certain to come roaring back when the country has been immunised. And commercial lending demand would bounce not long after consumers revived.

Last Monday’s rally did not price in a full recovery. Not even close. Bank indices remain more than 20 per cent lower than in February, even as the wider market is above where it was. If you think that the vaccine is going to work, investing in banks is the obvious trade, and it should have plenty of gas left in the tank.

Why, then, have bank shares mostly drooped or traded flat since last Monday? Investors are staring at interlocking medical and political uncertainty. Vaccines will take time to roll out and anyone who has followed the biotech industry knows that when a new product goes to a big population, there are often surprises. 

In the meantime, Covid-19 cases are surging to all-time highs in the US and municipalities are starting to reassert restrictions on economic activity. In response, Congress has been signalling uncertainty over stimulus spending. If this continues, the country could dip back into recession in the first quarter and banks could see loan defaults before the vaccine can ride to the rescue.

It is hard to assess how vulnerable loan books are: banks’ disclosures are complex and often idiosyncratic. 

Take Key Bank, a big regional bank based in Ohio (a good example because its disclosures are particularly thorough). In the third quarter, it said that of its $104bn in loans, less than 2 per cent were in forbearance — that is, not paying because of Covid-19 and put into suspended animation as permitted under the US bailout law, the Cares Act. That’s less than half the level of the second quarter. That sounds encouraging. 

But the bank also discloses that it has modified the terms on $5bn in loans hit by Covid, but not classified most of them as restructured or distressed (as the Cares Act also allows). That’s a significant number; the bank has only put aside about $1bn in new loss reserves since the crisis began. How many of those are at risk, under the double-dip scenario? Hard to say. 

If you think the double-dip can be avoided, though, the good news for banks should come quickly. As veteran analyst Charles Peabody of Portales Partners points out, if a stimulus does come through and a vaccine looks imminent, banks will have little choice but to start to release significant amounts of reserves, revving up profits. 

This is because a new accounting rule, known as CECL, requires banks to set reserves according to anticipated losses over the whole life of a loan, rather than over the present accounting period.

So banks must look out two or three years into the future. If the virus appears set to abate within that time period, they have no choice but to bring reserves down (just as at the start of the crisis, they had no choice but to raise them drastically). And falling reserves will send the market a very positive message. 

This is an unusually uncertain moment in America. Banks offer one way for optimists to bet that the dismal tide is about to turn.

Companies reveal $40bn of deals in one day as executives put cheap debt and cash piles to work

Positive news of a coronavirus vaccine and the conclusion of the US election have emboldened global dealmakers to revisit proposed mergers and acquisitions and strike large-ticket transactions, according to bankers and legal advisers.

Companies across the globe announced nearly $40bn worth of deals on Monday alone in a clear sign that chief executives are looking to tap cheap debt or use cash stored away during the crisis to carry out strategic M&A.

Bill Demchak, PNC’s chief executive, said “news of the vaccine, together with the certainty post-US election” set the stage for his bank, based in Pittsburgh, Pennsylvania, to buy the US operations of Spanish rival BBVA for $11.6bn, the second-largest deal in the sector since the financial crisis.

The cash purchase — which creates the fifth-biggest US bank by assets — was announced on the same day that Moderna revealed trial data that showed its coronavirus vaccine was highly effective. The news came just a week after a similarly optimistic update from Pfizer and Germany’s BioNTech.

“​Even though we've had a recent spike in [Covid-19] cases, we have in effect put a floor on the downside case,” Mr Demchak told the Financial Times​. “And of course, both the Fed and ​the​ US government responded forcibly with fiscal and monetary stimulus.” ​

Home Depot, which has been among the winners in the pandemic as people working from home have looked to fix up their surroundings, reunited with former subsidiary HD Supply in a $9.1bn cash deal. 

Canada’s Endeavour Gold agreed to a $1.86bn all-stock deal to merge with rival Teranga Gold. In Europe, Milan-listed Nexi said it was in exclusive talks to buy Danish rival Nets in a €7.2bn all-share transaction. 

Anu Aiyengar, co-head of global M&A at JPMorgan Chase told the FT’s Dealmakers Summit last week that M&A was being boosted by the victory of Joe Biden in this year’s US presidential race.

While there is little correlation between M&A and US election years, she said, “there is a significant correlation to uncertainty . . . and that dramatic reduction of uncertainty that we currently have bodes very well.”

Dealmakers have also been assured by the prospect of a divided US government — with Democrats controlling the presidency and the House of Representatives and Republicans expected to retain hold of the Senate after runoff elections in Georgia in January. Some had feared that a Democratic sweep would have translated into a crackdown on deals or higher taxes.

“An expectation that not much is going to be different in terms of either regulatory approvals or the tax regime also helps in the reduction of uncertainty and increases confidence,” said Ms Aiyengar.

The last three months of a year are historically strong for M&A activity, as US and European dealmakers return from summer holidays seeking to get deals done by year’s end. In 2020, executives have also been trying to make up for lost time after the pandemic brought dealmaking to a halt.

So far, the fourth quarter of 2020 has been the third strongest for M&A in two decades. Since the start of October, $612bn of deals have been agreed, up from $461bn during the same period in 2019 and $491bn in 2018.

Jim O’Neil, head of Europe, Middle East and Africa corporate and investment banking at Bank of America, said financing markets are helping support a range of options for companies pursuing deals. 

“Corporates have the full suite of funding tools at their disposal for M&A, whether that be cash funded from debt and equity capital markets as well as . . . share-for-share transactions,” he said.

The desire to bolster revenues is also increasing incentives to strike big deals, said Frank Aquila, a partner at Sullivan & Cromwell, a law firm.

“While the global economy will improve, revenue growth will probably be low,” he said. “Without significant growth, synergistic M&A will be essential to increasing top and bottom lines.”

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Electric-vehicle maker to join Dec. 21 after five consecutive quarters of net profit

Tesla Inc. TSLA -0.10% Chief Executive Elon Musk has taken another step to turning the Silicon Valley electric-vehicle maker into a mainstream car maker, parking the company in the S&P 500 index.

It marks a milestone for the company that over the course of its 17 years has sought to overcome cash flow problems and defy skeptics from Wall Street and Detroit.

S&P Dow Jones Indices on Monday said Tesla would join the index on Dec. 21.

The move is expected to galvanize the company’s bullish investors who have propelled its soaring share price and coincides with Wall Street expectations of Tesla’s first full-calendar year of profit in 2020. The company has posted a profit in the first three quarters of the year despite the pandemic that led local authorities in California to order the company to temporarily close its lone U.S. car plant.

Inclusion in the benchmark that gauges the U.S. stock market requires an accumulation of four consecutive quarters of net profit. Tesla has strung together five for the first time in its history.

Warren Buffett’s firm makes bets on Merck, Bristol Myers Squibb, AbbVie and Pfizer

Warren Buffett’s Berkshire Hathaway Inc. is betting on some of the largest firms chasing a Covid-19 vaccine.

The Omaha, Neb., conglomerate recently made new investments in large pharmaceutical companies Merck & Co., Bristol Myers Squibb Co. and AbbVie Inc., ABBV -0.69% investing between $1.8 billion and $1.9 billion in each, according to public filings. Berkshire also made a new, smaller investment in Pfizer Inc. PFE -3.34% of $136 million.

Berkshire made these investments sometime in the quarter ended Sept. 30, well before Pfizer, BioNTech SE and Moderna Inc. MRNA 9.58% reported positive results from late-stage trials of potential vaccines.

“Historically, Buffett has stated that, if he were to invest in the pharmaceutical industry, it would likely be that he takes a basket approach and buys a handful of companies instead of a very large stake in just one,” Berkshire investor and Cheviot Value Management LLC portfolio manager Darren Pollock wrote in a note.

Mr. Buffett generally invests in stable industries he expects to grow over time, suggesting he expects the broader pharmaceutical world to profit from eventual Covid-19 vaccines and therapeutics. Berkshire’s recent investments give insight into how he believes the coronavirus pandemic will shape American businesses for the long term.

Overall, Berkshire’s largest stock investments remain Apple Inc., Bank of America Corp. BAC 2.15% and Coca-Cola Co. KO 0.75%

The 90-year-old Mr. Buffett might or might not have made these investments himself. Berkshire employs two portfolio managers, Todd Combs and Ted Weschler, who make many of Berkshire’s equities investment decisions. When Mr. Buffett eventually steps down from running Berkshire, Messrs. Combs and Weschler are on the shortlist of potential successors, along with two vice chairmen: Greg Abel and Ajit Jain.

The purchases come after Berkshire Hathaway trimmed its airline holdings earlier this year as the pandemic struck. In May, Mr. Buffett disclosed Berkshire had sold its stakes in United Airlines Holdings Inc., UAL 5.16% American Airlines Group Inc., AAL 4.49% Delta Air Lines Inc. and Southwest Airlines Co. LUV 3.87%

“The airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear,” he said during Berkshire’s virtual annual meeting. “The world changed for airlines.”

Berkshire unloaded more bank stocks in the third quarter.

The conglomerate roughly halved its remaining stake in Wells Fargo & Co., further whittling down its holdings in a bank it has owned for more than three decades. Berkshire also sold nearly all of its remaining stake in JPMorgan Chase JPM 2.82% & Co. The moves continue the billions of dollars worth of sales of both firms in the second quarter.

Meanwhile, Bank of America appears to be emerging as Mr. Buffett’s favorite bank. His firm increased its share holdings by about 9% last quarter. Berkshire now owns nearly 12% of the company, according to FactSet, above the 10% threshold Mr. Buffett has said he typically tops out at.

Berkshire has also invested heavily in its own stocks in the first three quarters of the year, making $15.7 billion in stock buybacks. These buybacks rank among the largest investments Berkshire has ever made.

Investors and analysts continue to wait for Mr. Buffett to spend a larger chunk of Berkshire’s $150 billion cash pile on an acquisition or a significant stake in a company. In recent months Berkshire purchased Dominion Energy Inc.’s D 1.34% midstream energy business and invested $6 billion in five Japanese companies.

“The portfolio has really taken on a new economy look,” said James Shanahan, senior equity research analyst at Edward Jones.

Last quarter, Berkshire invested almost $276 million in T-Mobile US Inc.

Mr. Shanahan said the portfolio has become more balanced with more technology and telecommunications positions in recent years and reduced exposure to financial services.