TheChek News Flow

SoftBank’s Son is sorry. Kind of

One big payday to start: Bankers, lawyers and other advisers are set to take home a combined £281m for their work on the London Stock Exchange Group’s $27bn takeover of financial data provider Refinitiv, in a huge payday for some of the city’s top dealmakers. More here.

Now on to the main item . . .

Adam Neumann may have failed in his attempt to “elevate the world’s consciousness”, but he has succeeded in opening Masayoshi Son’s eyes to the perils of bankrolling talented salesmen. 

At least until another revolutionary comes calling. 

The defiant founder of SoftBank has admitted that he turned a “blind eye” to problems with Neumann, the founder and former chief executive of the lossmaking property start-up WeWork. 

Son was forced to eat humble pie on Wednesday after disclosing a $4.6bn writedown on the Japanese company’s investment in WeWork. You can see the full results in this piece by the FT’s Kana Inagaki, but suffice to say, it was SoftBank’s first operating loss in 14 years.

We’ll spare you another rerun of the WeWork debacle. All we need to say here is that in January SoftBank invested in WeWork at a $47bn valuation and by October it was forced to inject billions of dollars to save it from going under, and pay Neumann $185m for the pleasure. 

Son cannot write that off as just a “bad investment decision”. 

The WeWork fallout is particularly embarrassing for Son because of his blind faith in Neumann’s abilities. Lest we forget, it took 12 minutes for the Japanese investor to hand over $4.4bn to the WeWork founder and Son encouraged the haemorrhaging of capital to fuel fast growth, which, as we know, Neumann really took to heart.

Neither is WeWork an anomaly. There are other SoftBank-backed companies that have fallen short in public markets. Uber contributed to the investment group’s third-quarter losses and that is without factoring in its recent stock rout as its lock-up period expired. Then, dog-walking start-up Wag is reportedly trying to sell itself for a price well below SoftBank’s valuation and there are some serious questions around the fast-growing Indian hotel company Oyo. 

Remember, this was supposed to be the year that Son’s bets came good. 

All of this is unfolding as Son tries to raise a second investment fund, most of which is supposed to come from existing investors. He has the tough job of convincing them that this is just a blip on his record rather than a pattern. 

Who will the second Vision Fund’s investor see? The man who invested $20m in Jack Ma and turned it into over $100bn or the man who ploughed billions into Neumann, a charismatic wannabe trillionaire who wants to live forever.

The FT’s Lex has a good take on the complexity of SoftBank’s accounts, which we explained in a big read earlier this week. If you haven’t already, check it out here. 

UK-based FP says Japanese brewer’s diversification into noncore areas ‘destroys value’

One of Kirin’s largest shareholders has launched a campaign to persuade the Japanese brewer to focus on making beer and ditch the “unrealistic hope” that it can thrive as a cumbersome conglomerate also encompassing food, biotechnology, pharmaceuticals and cosmetics. 

The effort by UK-based Independent Franchise Partners (FP), which is poised to intensify in coming weeks, marks a new front in the effort by activist and long-only investors to shift management thinking at the top of corporate Japan. 

While many investor campaigns in recent years have focused on convincing Japanese companies to part with their often substantial piles of excess cash via buybacks or raised dividends, FP is pushing for a wholesale change in Kirin’s growth strategy.

FP has a 2 per cent stake and has held Kirin shares for six years. But in common with some other investors and sellside analysts, it has been increasingly dismayed by Kirin’s conviction that it can deliver strong growth by branching out into a series of business areas that have nothing to do with beer. 

Those concerns were crystallised by Kirin’s midterm plan, announced earlier this year, to seek “businesses bridging pharma and food and beverages”. That drove FP to engage publicly with one of its investments for the first time. 

In February, Kirin spent $1.2bn to buy a 95 stake in biochemicals company Kyowa Hakko Bio, and then in September spent the same amount to acquire a 33 per cent stake in cosmetics and health supplement company Fancl.

Analysts were sceptical about Kirin’s $1.1bn investment in Fancl, with SMBC Nikko analyst Naomi Takagi saying that “given the firm’s past track record on acquisitions, it is unclear whether the deal will generate synergies”. 

In an October 7 letter to Yoshinori Isozaki, Kirin’s president, FP’s managing partner Hassan Elmasry said the decision to buy the Fancl stake despite objections from investors “indicates to us that management is determined to proceed in a direction that destroys value”. 

The next phase of FP’s campaign will involve making a presentation to Kirin’s senior management, directly linking the heavy sell-off in shares to the company’s strategy. The presentation will argue that Kirin is trading at nearly a 50 per cent discount to its sum-of-the-parts value and at a discount to rival breweries who have maintained a focus on beer. 

In the six months following Kirin’s announcement of its midterm plan, its shares fell 24 per cent.

The stock has increasingly traded on a conglomerate discount as the market had judged it could no longer value Kirin as an internationally competitive and acquisitive brewery, but instead as a group likely to increasingly suck management time into areas in which it has limited experience. 

Kirin's recent shift to the healthcare and pharmaceutical business follows a pattern of Japanese companies diversifying to offset a chronic decline in the domestic beer market, which peaked 25 years ago.

Having shunned overseas beer deals in the wake of a disastrous 2011 foray into Brazil with a $3.9bn acquisition of family-owned Schincariol, the company has said it wants to spend a part of ¥300bn ($2.8bn) allocated over the next three years to promote new businesses. 

From Peter D Hahn, Dean, Henry Grunfeld Professor of Banking, The London Institute of Banking & Finance, UK

Olaf Scholz offers a big step forward towards pan-European banking with his suggestions on a common depositor guarantee scheme and other liability side of the balance sheet advances related to resolution, such as a common insolvency regime for debt and equity investors (“Germany will consider EU-wide bank deposit reinsurance”, November 6). However, he misses the critical need on the asset side of the balance sheet which banks ultimately depend on for their profits.

Beyond sovereign lending, pan-European banking needs pan-European common creditor and debtor protections. These would facilitate a bank in France lending to an Italian business. A common deposit insurance would facilitate an Italian bank raising money in France, but would that really improve loan ability in Italy or simply lower the cost of funds for the bank?

A half-century ago, US states adopted their uniform commercial code (UCC), a form of common creditor protection, which greatly facilitated national banking when it was later permitted. Mr Scholz notes the US Federal Deposit Insurance Corporation as a model. I suggest his efforts won’t succeed without looking at the UCC.

Plus: French prime minister turns Hong Kong gallerist; confidence fragile ahead of New York season; children to bid at auction

Switzerland’s Kunstmuseum Bern, the unexpected beneficiary of the works of art found in the homes of Cornelius Gurlitt in 2012, has agreed the sale of a painting by Edouard Manet for $4m to the National Museum of Western Art, Tokyo (NMWA). Gurlitt was the son of a Nazi-era dealer, Hildebrand Gurlitt, and the discovery of about 1,500 works of art was revealed to the public just before Cornelius died in 2014.

The Kunstmuseum is at pains to point out that Manet’s “Marine, temps d’orage” (1873) has been given the green light by the German government’s Gurlitt Provenance Research Project, meaning that it is neither Nazi-confiscated nor was bought under duress. The work had been owned by Japanese businessman Kojiro Matsukata (1865-1950), who lived in Europe in the early 20th century and bought the painting from Paul Rosenberg in 1922.

When Matsukata returned to Japan, he left hundreds of paintings in the care of a representative in France. Sometime between 1940 and 1942, this representative sold the Manet, which went via the Belgian dealer Raphaël Gérard (also known to deal in looted works) to Hildebrand Gurlitt in 1944. Matsukata’s remaining works were returned to Japan in 1959 and became the founding collection of the Tokyo museum. Earlier this year the painting came on loan to the NMWA as part of its 60th-anniversary celebrations.

That the Swiss museum is selling at all is a delicate issue, as its executives maintain that the institution does not want to derive any financial benefit from its problematic bequest. Nina Zimmer, director of the Kunstmuseum Bern, describes the Manet sale as “an exception” and, in a statement, her museum says the painting’s $4m valuation equates to the costs to date of handling the Gurlitt works, including mounting two exhibitions.

Any “possible surplus” will support ongoing provenance research: the Bern museum has until the end of 2022 to assess what can be accepted. So far, the project has given the green light to only 28 of about 1,000 works that needed research. Zimmer says that “under 20” have been confirmed as Nazi-looted, and restituted where possible.

Loose monetary policy has not stopped the country’s industrial sector weakening

Last month, I bumped into a group of German investors on their way to Oktoberfest. In a lively discussion, one of their questions stuck with me. Will a trade truce between the US and China spark a recovery in German industry?

It is remarkable that the question even needs to be asked, given the sector has historically been a pillar of economic strength in Europe. But that has changed in the past two years — it is now one of the region’s weaker spots. And judging from recent surveys of European purchasing managers, weakness in Germany is spilling over into other parts of Europe, including Sweden and Switzerland.

The short answer for my Lederhosen-clad friends: a US-China trade truce will not make much difference, either to the German or overall European outlook. It will simply not be enough given the damage already inflicted. After two years of disrupting global supply chains, nothing short of rolling back tariffs and an end to further trade skirmishes would do. Unfortunately, recent “truces” are not easing anxieties in global industry.

Problems with German and broader European industry go beyond the US-China trade war. Let us look at the source of recent European export weakness. China and US imports from the euro area are considerable — so a full trade resolution would certainly help the region’s manufacturing sector. But exports to emerging markets, unaffected by the trade war, are also sizeable and have been rising in recent years.

The UK’s contribution to the euro area’s export decline is also significant and under-appreciated. For a long time, Brexit was viewed as a political uncertainty for Europe. The UK economy weathered the initial political storm reasonably well. But after three years of uncertainty, the data now indicate it is struggling and will continue to do so.

In the European Commission’s most recent regional survey, every part of the UK economy reported greater weakness than any sector of the eurozone economy. After years of general stability, it was easy to forget that the UK is one of Europe’s biggest and most integrated economies. This economic uncertainty matters.

Another drag is the region’s auto sector, which is caught up in a mix of cyclical, structural and regulatory tailwinds. Global auto sales growth has been running below zero for more than a year, a trend normally associated with recession, not a robust global household sector. This weakness must be a worry.

Clearly the slowing in emerging-market growth has played a role, with China’s auto sales trend notably weak in the past year. But fears of a structural decline in auto demand is gaining traction — including the phasing-out of diesel and the greater use of ride-sharing. Lacklustre sales trends at this point of the cycle suggests longer-term drags are a factor.

Regulatory changes are also crimping the European auto sector. In Sweden, the new “bonus malus” rule, which rewards buyers of cars with low carbon emissions, is hurting demand for larger autos. Germany’s 2030 emission targets are weighing on its transportation sector.

For the past two years, analysts and policymakers have tried to look through the weakness in German and broader European industry. In 2018, it was blamed on a bad flu season. Then changes in auto emissions regulations. More recently, it was the water levels of the Rhine, which had fallen so much that shipping was disrupted. Yet the weakness in Germany industry persists.

Fixing the weakness in German industry requires a new approach. The European Central Bank’s monetary ammunition is nearly spent — a message made clear by recent disagreement within the ECB on its latest stimulus package. Either way, German monetary policy has been loose for many years but this did not stop the weakening in its industrial sector. Currency weakness will provide a cushion. But with the US administration focused on the currency market, it is not clear this avenue can be explored any further.

The case for a more aggressive German fiscal policy is overwhelming. But why would Germany abandon years of austerity? Because it makes economic sense: Germany is experiencing a period of acute industry stress for the first time in nearly 20 years. It makes financial sense: real yields on 10-year German government bonds are at minus 1.5 per cent. And Germany has the capacity. Under current EU rules, Germany can take two percentage points off its fiscal surplus without raising any flags.

Still, my answer to the German investors was also guardedly optimistic. The weakness in German industry may be just the catalyst Europe needs to kick-start a more aggressive fiscal stimulus programme. This has already begun: 2019 will be the first year in 10 that fiscal policy has eased, including in Germany. So far, it has been modest, but plans for next year are more ambitious. A convincing programme of fiscal stimulus may deliver what Germany really wants — higher Bund yields.

The writer is global head of desk strategy at NatWest Markets

Luxury automaker blames poor demand for entry level sports car

A steep fall in demand amid turbulence in the global sports car market and efforts to reduce stock at its dealers pushed Aston Martin to a quarterly loss.

The London-listed luxury carmaker swung to a pre-tax loss in the third quarter of £13.5m, compared with a profit of £3.1m a year earlier, on revenues that were 11 per cent down at £250m following a 16 per cent drop in car deliveries.

Over the first nine months of the year it has recorded pre-tax losses of £92.3m, compared with a profit of £23.9m in the same period a year earlier.

The results will put more pressure on Aston Martin’s shares, which have fallen from £19 at its initial public offering last year to £4.17 at Wednesday’s close.

The company blamed weak demand for its entry level Vantage sports car, as well as falling sales in Britain and Europe for the quarterly results, and said it was planning to cut costs.

“Notwithstanding a growing market share, Vantage demand remains weaker than our original plans,” said chief executive Andy Palmer. “As a consequence, total wholesale volumes are down year-on-year as we balance growth, brand positioning and dealer inventories.”

He added: “We see pressure on volumes continuing into the end of the year and now expect total wholesales to be lower than previously guided, but within the range of market expectations.”

The company issued a profit warning earlier in the year, after saying it had too many cars piling up unsold at dealerships.

Sales in the latest quarter in the UK fell 22 per cent, with Europe down by 17 per cent, and Asia Pacific dropping by 34 per cent. The Americas grew 2 per cent.

The group’s hopes rest on the launch of its all-important sport utility vehicle, the DBX, which will be built in a new facility in Wales. The car will be revealed on November 20, and sales will begin in the second quarter of next year.

In September the company was forced to raise $150m in fresh debt, paying steep borrowing costs in order to secure the bond, with a rate of 12 per cent and half of the repayment in debt. Following the issue rating agency S&P downgraded the company to CCC+, one of the lowest tiers on the junk bond investment ladder.

U.S. and European stock futures were largely flat early Thursday after a mixed session in Asia. The yen edged up following reports that the signing of a partial U.S.-China trade deal may be delayed until next month.

Equities in Japan closed with marginal gains, while shares in Hong Kong slipped. China and Korea were little changed. Australian stocks climbed as earnings buoyed sentiment. The S&P 500 Index closed little changed Wednesday. The latest news suggested the signing of a preliminary trade agreement may not happen this month as the two sides wrangle over a location. Oil was around $56 a barrel in New York.

US After Hours FOSL -27%, TPIC -21%, PBYI -18%, DXCM +19%, VNDA +22% following earnings/guidance

Nikkei +0.11% HAng Seng -0.26% CSI +0.18% Shanghai +0.00% Shenzen +0.64%

Eur$ 1.1071 CNH 6.9869 CNY 69.9877 JPY 109.12 GBP 1.2846 RUB 63.6730 CHF 0.9933 TRY 5.7423 WTI$ 56.56 +0.37%

S&P +0.51% EuroStoxx +0.65% FTSE +0.52% Dax +0.71% SMI +0.38%

Macro :

- U.S. Investor Bull-Bear Spread 16.4: AAII

Keep an eye on :

- ARGX BB : Argenx Offering Prices 1.4m ADR at $121/ADR

- ASCN SW : Ascom Names Pilloud Permanent CEO, Chapero Rueda Board Chairman

- ALKB DC : ALK-Abello Raises FY Ebitda Forecast; Midpoint Meets Estimates

- AMS SM : Amadeus Third Quarter Adjusted Net Beats Highest Estimate

- AML LN : Aston Martin Sees Total Wholesales Lower Than Previous View (1)

- MT NA : ArcelorMittal Trims Steel Demand View as Europe Crisis Deepens

- BAMNB NA : BAM Nine Month Adjusted Pretax Profit EU20.5 Mln, -78% Y/y

- BFIT NA : Basic-Fit Sees Rev. Growth at Least 20% A Year in Next 3 Years

- BAVA DC : Bavarian Nordic Third Quarter Revenue Misses Lowest Estimate

- BYW6 GY : BayWa Nine Month Ebit EU77.3 Mln

- CNHI IM : CNH Industrial to Buy Back up to $700 Million Own Stock

- CBK GY : Commerzbank Cuts 2019 Net Income Guidance (1)

- COOR SS : Coor Third Quarter Adjusted Ebita SEK127 Mln

- DTE GY : Deutsche Telekom Lifts Guidance, Lowers Dividend in Mixed Report

- EUCAR FP : Europcar Buys Fox Rent A Car, Sees Deal Neutral to EPS in 2020

- FDJ FP IPO : France’s FDJ Sets IPO Price Range at EU16.50-EU19.90/Share

- FIE GY : Fielmann Nine Month Sales Rises 7.4%, Confirms FY Outlook

- G IM : Generali Nine-Month Profit Boosted by Disposals, Asset Growth

- GFT GY : GFT 9M Rev. Up 2%; Confirms FY Guidance (1)

- GN DC : GN Third Quarter Revenue 1.7% Above Estimates

- HAB GY : Hamborner REIT 9-Mo Rental Income +1.9% Y/y, Keeps Views (1)

- HEI GY : HeidelbergCement 3Q Profit Rises to EU1.18b, Beating Estimates

- JUN3 GY : Jungheinrich Third Quarter Ebit Beats Highest Estimate (1)

- KOA NA : Kongsberg Automotive Third Quarter Adjusted Ebit EU13.9 Mln

- SKB GY : Koenig & Bauer Profit Tumbles, Targets Much More Challenging

- LR FP : Legrand 9-Month Adj. Profit Up 10% to EU999M, Confirms FY Goals

- LHA GY : Lufthansa Profit Declines as Waning Fares Eclipse Cost Cuts

- MB IM : UniCredit Sells Entire Stake in Mediobanca for EU785 million

- MB IM : Del Vecchio Said to Boost Mediobanca Stake to Almost 10%

- MUV2 GY : Munich Re Confirms Raised FY Profit Target of More Than EU2.5b

- SREN SW : Munich Re on Track to Beat Profit Goal Despite Costly Storms

- NEX FP : Nexans 3Q Sales EU1.17B, Confirms FY EBITDA Target EU360M-EU390M

- NWO GY : New Work SE 9M Ebitda EU63.9m, Up 20% y/y

- NOKIA FH : Dish Picks Nokia, Sprint Veterans for Wireless Venture, DJ Says

- OMASP FH : Oma Savings Bank Sees ‘19 Pretax Up Significantly on Prior Year

- ORSTED DC : Orsted’s Recent Warning a Buying Opportunity; RBC Upgrades Stock

- OSR GY : AMS’s Offer for Osram Open for Acceptance From Nov. 7 to Dec. 5

- PSM GY : ProSieben 3Q Adj. Ebitda Falls 25%, Confirms 2019 Outlook

- RECIB SS : Recipharm Third Quarter Net Sales Beat Highest Estimate

- RHM GY : Rheinmetall Cuts FY Forecast on Weaker Automotive Business (1)

- ROVI SM : Rovi Sees Mid-Single-Digit Growth Rate for 2020 Op. Revenue

- SFQ GY : SAF Holland Third Quarter Adjusted Ebit Beats Highest Estimate

- RR/ LN : Rolls-Royce Now Sees FY Op. Profit, FCF at Lower End of Ranges

- G24 GY : Scout24 Sees FY Op. Ebitda Margin at Least Low End of Range (1)

- GSF NO : Grieg Seafood Third Quarter Ebit Misses Estimates

- SPM IM : Equatorial Guinea Approves Alen Unit Contract Granted to Saipem

- SKAB SS : Skanska 3Q Revenue, Operating Profit Beat Highest Estimate

- S92 GY : SMA Confirms Sales, Earnings Guidance for FY 2019

- SIE GY : Siemens Expects 2020 Decline in Some Businesses Amid Car Slump

- SW FP : Sodexo FY Underlying Operating Profit Rises 6.4% to EU1.2 Bln

- SOLB BB : Solvay Cuts FY Organic Adj. Ebitda View to Minus 2%-Minus 3% (1)

- SSE LN : SSE’s Easing Risks Now in Price, Berenberg Downgrades to Hold

- UCG IM : UniCredit 3Q Net Beats Estimates, 2019 Outlook Confirmed

- UHR SW : Watch Swatch After U.S. Peer Fossil Cuts Gross Margin Forecast --> FOSL -27% in After Hours

- SWEDA SS : Swedbank Slumps in Reputation Ranking of Swedish Banks, DI Says

- TRN IM : Terna CEO Sees New Investments to Safeguard Network: Messaggero

- VATN SW : Valiant 9M Profit CHF86.5m; Sees FY Profit Above Prior Year

- VIE FP : Veolia CEO Says Heading for Upper End of FY Earnings Guidance

- VIE FP : Veolia Waste Business Now Less Correlated to Industrial Output

- MF FP : Wendel Nine Month Organic Revenue +0.9%

- WDP BB : WDP Offering Prices 1.25m Shares at EU160/Share

- WIE AV : Wienerberger 3Q Profit Gains; Company Confident on Forecast

- WG/ LN : Wood Keeps Expectations Unchanged

- ZURN SW : Zurich Insurance 9M P&C Gross Written Premiums $26.4b (1)

* AB Foods Raised to Buy at Goldman; PT 2,750 pence

* Befesa Raised to Buy at Goldman; PT 42 euros

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