WSJ : SoftBank’s WeWork Bailout Draws Investor Concern

SoftBank’s WeWork Bailout Draws Investor Concern
Conglomerate plans to spend nearly $10 billion to rescue floundering office-share company

Investors and credit-rating firms are growing concerned about rising risks and weak controls at SoftBank Group Corp. 9984 -1.23% after the Japanese conglomerate’s nearly $10 billion bailout of WeWork.

SoftBank announced late Tuesday it would spend $4.5 billion in share purchases and around $5 billion on debt financing to rescue the floundering office-share firm. SoftBank and its $100 billion Vision Fund, which is backed mainly by the company and two Middle East sovereign-wealth funds, had already poured more than $9 billion into WeWork.

The burden of the WeWork rescue will fall solidly on SoftBank. The funds for the buyback will come from SoftBank’s cash on hand—the group said it had around $27 billion at the end of June—and the shares will be on SoftBank’s balance sheet rather than the Vision Fund’s.

SoftBank shares fell 6.6% to ¥4,017 ($36.97) in the past week on the Tokyo Stock Exchange, while credit-rating firms have signaled concern. The shares of SoftBank are trading where they were at the start of 2017, not long after it announced the Vision Fund.

Benjamin Segal, a portfolio manager at Neuberger Berman, said he is concerned that SoftBank’s efforts to support the Vision Fund and protect the interests of some of its big investors could come at the expense of SoftBank shareholders.

“There could be some shift in value away from SoftBank shareholders to more powerful constituencies,” said Mr. Segal, who sold his SoftBank shares in 2017. “Poor governance magnifies poor investment decisions.”

One person familiar with SoftBank’s strategy said WeWork was an unusual case that warranted the bailout.

Masayoshi Son, SoftBank’s chief executive officer, has been trying to lower the risk and improve governance at the fund and the companies it has invested in, while pushing those startups to focus on profits. At a Vision Fund meeting in September that brought together its investors and portfolio companies, Mr. Son repeatedly told attendees that the fund now views the ability to make money as important as increasing revenue or market share, according to a person who was present.

Another big SoftBank investment that struggled was Sprint, which ultimately paid off when the U.S. phone carrier agreed to merge with T-Mobile US Inc. Marcelo Claure, the SoftBank executive who has been designated as WeWork’s executive chairman, is Sprint’s former CEO.

WeWork isn’t the only company weighing on SoftBank. Investors are souring on other big, fast-growing young companies as well. “SoftBank is stuffed with all that,” said Mitsushige Akino, senior executive officer of Tokyo-based Ichiyoshi Asset Management, which sold its SoftBank shares last year when it decided that the tech boom would likely peter out soon.

Instead of creating concern among investors, the Vision Fund was supposed to bring an added layer of professionalism to the often quirky and gut-driven investment style of Mr. Son, whose biggest success was the early investment in Alibaba Group Holding Ltd. , the Chinese e-commerce company. The Vision Fund hired more than a hundred staffers to vet prospects and manage investments, and it touted a valuation process that called for a review by auditors hired by the fund’s outside investors.

S&P Global Ratings said Thursday that despite the big WeWork outlay, SoftBank still had a lot of assets including significant holdings in Alibaba and SoftBank’s Japanese mobile-phone unit, adding that the aid wouldn’t further depress SoftBank’s already junk-level BB+ credit rating. SoftBank has more than $160 billion in debt.

But if SoftBank bails out other portfolio companies or increases its support for WeWork, ratings companies might have to reconsider how they view the conglomerate, said Hiroyuki Nishikawa, an analyst at S&P. “We didn’t expect such support [for Vision Fund companies], especially not from SoftBank itself,” Mr. Nishikawa said.

SoftBank had told investors and credit-rating companies that it planned to make big investments principally from the Vision Fund, not its own balance sheet. It said that except for the capital that the group had contributed, it wouldn’t be on the hook for any losses in the fund.

The WeWork bailout throws that fundamental premise into question and makes it harder to calculate SoftBank’s liabilities and obligations, said a person who watches the credit markets closely. SoftBank and the Vision Fund are closely linked, with the fund consolidated into the group. SoftBank supplied a third of the fund’s total investments, and Mr. Son helps lead the fund. SoftBank accounted for about $6 billion of the earlier $9 billion investment in WeWork, with the fund accounting for the rest, according to the person familiar with the conglomerate’s strategy.

While Mr. Son has said that the Vision Fund would take minority stakes in companies and not seek to control them, SoftBank is expected to own up to 80% of WeWork’s shares, with Mr. Claure, the conglomerate’s chief operating officer, heading the board. SoftBank has said that it won’t have the majority of voting rights or control over the company and that WeWork won’t be a full subsidiary.

The move lets SoftBank keep WeWork’s mountain of liabilities off its books, said David Gibson, chief investment adviser at Astris Advisory. SoftBank “wants to avoid consolidation of WeWork given its debt position could potentially damage SoftBank’s credit position,” he said.

FT : Corporate Italy keeps it in the family

Corporate Italy keeps it in the family
Powerful dynasties wield control over country’s business fabric

Italian capitalism is largely a family affair. Behind the largest industrial groups and even the largest banks, family owners have traditionally been the main players. While the ravages of the European debt crisis forced some to sell up and move on, recent events in Italy Inc show that Italians keeping it in the family are still providing the most dramatic corporate sagas.

Just last week a power struggle broke out within the Benedetti family — owners of newspapers including La Repubblica and La Stampa — after Carlo De Benedetti, who ceded power to his sons in 2012, made a very public offer to buy back the papers without warning them first.

In the 1980s Italy’s blue-chip index was dominated by the Agnelli family, whose patriarch Gianni Agnelli was considered the country’s de facto king, a statesman industrialist who could wield as much if not more power than the prime minister. The Agnelli clan’s power, held through companies and cross shareholdings that criss-crossed corporate Italy, became the benchmark for aspirant Italian capitalists.


Since the European debt crisis the interconnected power of family owners and entrepreneurs has diminished as they cut back on their cross-shareholdings amid concerns they would become paths for contagion. Italian political risk, worries over succession and technological disruption have also driven some family members to sell. Examples include the Recordatis, who sold their drug company to private equity, or the Pesenti family, who sold their cement group to HeidelbergCement.

Yet reports of the death of Italian family capitalism that characterised the years of Italy’s triple-dip recession are proving greatly exaggerated. More than a third of the companies on Italy’s leading FTSE MIB index have families as the major shareholder.

From the mega merger led by Ray-Ban maker Leonardo Del Vecchio to create global eyewear leader EssilorLuxottica and the Berlusconi clan’s push to make family broadcaster Mediaset a pan-European group, to the Benetton dynasty’s dilemma over the future of their diversified conglomerate and infrastructure group Atlantia, Italy’s business families are proving unexpectedly dynamic.

Guido Corbetta, professor of family capitalism at Milan’s Bocconi University, argues that a number of entrepreneurs in their forties and fifties — such as the Lavazza coffee dynasty brothers or Campari owner Luca Garavoglia — who are quietly expanding their businesses and making bigger revenues through exports.

But it is the octogenarian business leaders such as Mr Del Vecchio, former prime minister and Mediaset owner Silvio Berlusconi and Luciano Benetton whose businesses are grabbing the limelight, as the owner-founders race against time to secure their legacy at the empires they created.

Against a backdrop of growing disruption and Wall Street-led shareholder capitalism, some Italian family business owners see an opportunity for a positive reappraisal of their paternalistic style of business ownership.

Mr Corbetta remains on the fence. He argues that Italian family capitalism traditionally rates better than the Anglo Saxon variety on attention to corporate social responsibility and local communities. But, he says, “they have to better open their companies to outside managers and outside capital”.

FT : Why smaller asset managers are on the prowl for M&A deals Of the 18 deals a

Why smaller asset managers are on the prowl for M&A deals
Of the 18 deals announced so far this year, the average size has tumbled to just $121m

Competitive pressure and rising regulatory costs have spurred mergers and acquisitions in the UK investment market recently.

While consolidation has long been predicted, few large deals have taken place so far. But under the surface, smaller managers — including Liontrust Asset Management, Neptune Investment Management, Premier Asset Management and Miton — have decided it is better to join forces than face challenges on their own.

“Growth through acquisition is a lot more certain than organic growth,” says Kevin Pakenham, co-founder of Pakenham Partners, an adviser specialising in asset management M&A. Brexit uncertainty and global trade tensions mean a number of smaller outfits are more open to being taken over, he adds.

The average value of disclosed M&A deals involving European investment companies has fallen to a four-year low, according to Dealogic, the data provider. Of the 18 deals announced this year where the value was made public, the average size was $121m, down from $465m last year and $367m in 2017.

One factor skewing the trend is a lack of mega deals. By comparison, 2016-17 saw the announcement of three significant tie-ups: the £11bn merger between Standard Life and Aberdeen Asset Management, the $6bn union between Janus Capital and Henderson Global Investors, and Amundi’s €3.5bn capture of Pioneer Investments.

“Smaller deals are now very much the trend — this is something we expect to continue into the new year,” says Will Riley, co-manager of Guinness Asset Management’s Global Money Managers fund, which invests in fund managers.

Since the summer, several small and midsize British asset managers have decided to club together.

In July, Liontrust, the FTSE Small Cap listed group, agreed to buy Neptune for £40m. The deal, which completed at the beginning of October, lifted Liontrust’s assets from £14bn to £17bn.

Liontrust has taken over Neptune’s 19 funds and its investment team, managed by Robin Geffen, the City figure known for his interests in racehorses and Tudor tennis. At the time of the announcement, Liontrust chief executive John Ions said the deal allowed Mr Geffen and his team to concentrate on managing their funds rather than be “distracted by the day-to-day aspects of running a business”.

In September, Premier and Miton, two Aim-listed fund groups, agreed an all-share combination, with Miton investors owning a third of the enlarged business. Miton’s shares surged 24 per cent on the day the deal was announced.

The merger, which is expected to complete by the end of the year, creates a company known as Premier Miton with assets of £11.5bn. The combined business would have had the fifth best sales in the UK retail market for 2018, the companies said when announcing the deal. 

They added there was little overlap between the two companies’ fund ranges, but plenty of savings to be made, with up to £7m of annual costs to be trimmed within three years of deal completion.

“It is about positioning the combined group for future growth by giving it a stronger financial and operating base, with broader investment and distribution capabilities and an increased flexibility to invest in product development and people,” Mike O’Shea, chief executive of Premier, tells FTfm.

“Different businesses will have different drivers behind their M&A strategies, but the key to any successful combination is the fit between the merging businesses,” he said, adding Premier and Miton were complementary in terms of their respective investment capabilities, culture and distribution focus.

This month Merian Global Investors, the £26.4bn boutique spun off from Old Mutual, agreed to buy Kestrel Investment Partners’ multi-asset business, which would bring an additional £123m of assets. The deal was the first for Merian since Richard Buxton led its management buyout last year. Mr Buxton has since stepped back from managing the business to concentrate on running his investment portfolio.

John Ricciardi, the joint chief executive of Kestrel, who co-founded the business in 2011, will move to Merian along with his team of fund managers and analysts. He will report to Mark Gregory, Merian’s chief executive. Merian did not disclose terms of the deal.

Merian and Kestrel expect to complete the deal by December, subject to regulatory approval, at which point Kestrel’s business will be solely focused on managing £250m in UK small-cap equity strategies.

Merian said the deal would add a new area of specialism to the business, while widening the distribution reach for Kestrel’s funds.

“A theme that repeatedly comes up in our conversations with boutique fund managers is the increasing time and cost pressure of regulation, particularly as downward price pressure intensifies,” says Warren Tonkinson, managing director for distribution at Merian.

“To ambitious, but under-resourced fund managers, established firms with a developed brand and strong distribution, operations and compliance functions are increasingly attractive,” Mr Tonkinson said. “However, at the same time, they’re keen to avoid being swallowed up by a ‘giant’, where they are unlikely to get significant distribution attention and cultural alignment.”

Mr Riley says the impact of European Mifid II rules, brought in at the start of last year, were also playing a part in industry consolidation. The market reforms introduced additional costs for fund companies around paying for research and reporting requirements. “That has been an expensive change — especially for smaller managers,” Mr Riley says.

“UK-domiciled managers have also had to grapple with Brexit. Those who have been most proactive have had to deal with expensive preparations.”

This year’s dealmaking has not been confined to pure asset managers. Last month Tilney and Smith & Williamson agreed a £1.8bn merger to create the UK’s largest wealth manager with assets of £45bn.

When the deal was first mooted in August, wealth industry specialists told the FT it was being driven by rising compliance costs within the sector as the Mifid II rules on reporting and communicating with clients began to bite. One executive said the deal signalled “the death of the old-style stockbroker” as wealth managers were having to prioritise scale and process over personal relationships.

But another factor driving the deal is Permira, the private equity firm that owns Tilney, which bought the business in 2014 with the intention of pushing through consolidation in a fragmented market that was going through regulatory upheaval.

Tilney’s chief executive, Chris Woodhouse, was installed in 2017 having spent his career working for retailers, some of which were backed by Permira or rival buyout groups.

When Permira bought Tilney from Deutsche Bank in 2014, it had just merged with Bestinvest and had £9bn under management. After a series of small acquisitions, Tilney’s asset base grew to £24bn, which is set to nearly double with its merger with S & W.

Mr Pakenham points to several other wealth management deals this year, including Canaccord Genuity’s acquisition of Thomas Miller, Brewin Dolphin’s capture of Investec’s Irish wealth business and Brown Shipley’s £1bn buyout of NW Brown.

“These deals are aimed at providing a full wealth management service — something clients are increasingly demanding,” he adds.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • VCRA -28%, BUD -8.9%, CLS -8.3%, GVA -7.9%, SMSI -7.4%, AVT -6.6%, KN -6.4%, AMZN -6.3%, PFPT -6.2%, EMN -6.1%, HUN -6%, MXL -5.6%, WY -5.6%, UHS -4.7%, EHTH -4.5%, DRQ -4.2%, VFC -4.2%, ILMN -3.7%, AFL -3.7%, PFG -3.4%, CSLT -3.1% (also signs Anthem to enterprise license agreement), COF -2.6%, LOGM -2.5%, FSLR -2.5%, GILD -2.2%, ABEV -1.9%, ENVA -1.7% (also intends to exit the UK market in Q4, announces new $75 mln share buyback authorization), OMCL -1.2%, SBCF -1.1%, TNET -1.1%, FLEX -0.9%, CINF -0.9%, CUBE -0.9%, POWI -0.9%, B -0.8%, CERN -0.6%, KEX -0.6%, VALE -0.5%

Other news:

  • BYSI -15% (announces proposed public offering of common shares; size not disclosed)
  • SHOP -2.1% (following AMZN results)
  • ARCE -1.9% (prices offering of 7,719,503 Class A common shares at $43.00 per share)

Analyst comments:

  • HEXO -3.6% ( downgraded to Sector Underperform at CIBC),
  • CAR -1.6% (downgraded to Hold from Buy at Deutsche Bank)
  • ODFL -1.1% (downgraded to Sell from Hold at Stifel)
  • HBAN -0.9% (downgraded to Neutral from Buy at BofA/Merrill)
  • KMI -0.7% (downgraded to Neutral from Buy at Goldman)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • BOOM +11.5%, RMD +10.4%, ANIK +8%, SPSC +7.7%, DLX +7.1%, WPP +6.9%, ALGT +6%, CHTR +5.7%, MHK +5.4%, JNPR +5.1%, CVA +4%, INTC +3.7%, AUY +3.3%, SWN +3%, VRTS +3%, PBR +3%, GBX +2.9%, OSIS +2.5%, BCS +1.5%, ALK +1.3%, DECK +1.3%, LEA +1.2%, TILE +1.1%, CCMP +1%, VZ +1%, COG +0.9%, FET +0.8%, ALV +0.8%, FII +0.7%, GLPG +0.7%, YNDX +0.7%, VTR +0.7%

Other news:

  • NCNA +25.3% (receives FDA clearance for Investigational New Drug Application for Phase III study (NuTide:121) of Acelarin in combination with cisplatin for patients with biliary tract cancer)
  • ACRS +15.5% (announces "positive" results from second Phase 3 clinical trial of A-101 45%; study met primary and all secondary endpoints)
  • SENS +9.8% (Senseonics announces that Humana is now providing coverage for the Eversense CGM System and insertion procedure)
  • KREF +6.2% (to join S&P SmallCap 600)
  • IPOA +2.8% (as disclosed earlier today, the co expects to close the Business Combination with Virgin Galactic on October 25)
  • TXMD +1.4% (prices offering of 26 mln shares of common stock at $2.75 per share)
  • BYND +1.2% (appoints Stuart Kronauge as Chief Marketing Officer)
  • ATVI +1.2% (following today's unusual options activity and Fast Money mention)
  • KMX +0.9% (promotes Enrique Mayor-Mora to CFO)

Analyst comments:

  • MNKD +2.4% (initiated with Overweight at Cantor Fitzgerald; tgt $3)
  • CDAY +2% (upgraded to Buy from Neutral at Citigroup)
  • FITB +1.4% (upgraded to Buy from Neutral at UBS)
  • PFNX +1.2% (initiated with Overweight at Cantor Fitzgerald; tgt $20)
  • SMG +0.8% (upgraded to Buy from Neutral at BofA/Merrill)

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • ACRS +20.2%, SENS +11.8%, BOOM +11.5%, RMD +10.4%, ANIK +8%, DLX +7.1%, MHK +6.1%, ALGT +6%, KREF +5.6%, JNPR +5.1%, INTC +4.4%, CSLT +4.4%, CVA +4%, IPOA +3.3%, SPSC +3.2%, AUY +3%, SWN +3%, GBX +2.9%, PFNX +2.6%, OSIS +2.5%, FET +2.5%, MNKD +2.4%, ATVI +2.2%, ALV +1.4%, ALK +1.3%, DECK +1.3%, CCMP +1%, YNDX +1%, KMX +0.9%, COG +0.9%, V +0.8%,
  • Gapping down:
    • VCRA -22.9%, BYSI -15%, CLS -8.3%, AVT -8%, UHS -6.7%, KN -6.4%, PFPT -6.2%, EMN -6.1%, HUN -6%, AMZN -5.8%, MXL -5.6%, HEXO -5.2%, ENVA -4.6%, SMSI -4.5%, EHTH -4.5%, DRQ -4.2%, ILMN -4%, VFC -4%, AFL -3.7%, NRZ -3.7%, PFG -3.4%, COF -2.6%, SHOP -2.5%, LOGM -2.5%, GILD -2%, FSLR -1.7%, OMCL -1.2%, SBCF -1.1%, TNET -1.1%, FLEX -0.9%, CUBE -0.9%, POWI -0.9%, B -0.8%, KMI -0.7%, CERN -0.6%

>>> US Gapping down

Gapping down

In reaction to disappointing earnings/guidance:

  • TWTR -19.3%, NOK -18.4%, NTGR -12.4%, FTI -9.7%, EBAY -7.9%, GGG -7.9%, BAX -5.6%, F -4.6%, RBS -3.5%, LMAT -2.8%, SWK -2.6%, KRA -2.5%, DHR -2.5%, GNC -2.1%, ADS -2%, MMM -1.7%, ARI -1.4%, CUZ -1.4%, WPG -1.1%, CVBF -1.1%, HSY -1.1%, PKG -0.8%, GPI -0.7%, MSM -0.6%

Other news:

  • OPGN -56.3% (prices offering of 4.7 mln common units at $2.00 per unit)
  • TXMD -15.8% (launches public offering of 22.0 mln shares of common stock and reports prelim Q3 revs of $7.82-8.3 mln vs. $7.85 mln S&P Capital IQ Consensus)
  • ACOR -7.6% (implements corporate restructuring, provides third quarter 2019 update)
  • PACB -3.6% (UK's CMA provisionally finds that the proposed merger between Illumina (ILMN) and PacBio will result in a substantial loss of competition)
  • PINS -1.2% (TWTR sympathy) GM -1.1% (following F earnings)
  • SNAP -1.1% (TWTR sympathy)
  • FB -0.9% (TWTR sympathy)

Analyst comments:

  • ARWR -2.1% (downgraded to Neutral from Outperform at Robert W. Baird)
  • IRBT -1.4% (downgraded to Neutral from Buy at BofA/Merrill)

.>>> US Gapping up

Gapping up

In reaction to strong earnings/guidance:

  • GNCA +22.9%, TSLA +18.1%, CMRE +12%, QEP +11.9%, MKSI +9.9%, MX +8.6%, PYPL +8%, LRCX +7.6%, FFIV +7.4%, ALGN +7.2%, NOW +6.4%, TAL +6.4%, STM +6.3%, EW +6%, VAR +5.8% (also appoints J. Michael Bruff as CFO, effective December 1), FCN +5.1%, KRC +5%, AMP +5%, ARGX +4.7%, PTC +4.6%, SAVE +4.6%, PTEN +4.3%, CTXS +4%, SEIC +3.9%, PDS +3.8%, RELX +3.8%, ASGN +3.6%, NXGN +3.5% (also announces additional investment by South Bend Clinic and acquisition of Topaz Information LLC; terms not disclosed), ORLY +3.4%, DOW +3.4%, PLXS +3.3%, RRC +2.9%, AZN +2.8%, CMCSA +2.5%, RS +2.3%, SLM +2.2%, LUV +1.9%, CLB +1.7%, TECK +1.7%, DHT +1.4%, RTN +1.2%, VLO +1.1%, KIM +1.1%, MSFT +1%, BMRN +1%, .

Other news:

  • MR +9.1% (anticipates third quarter 2019 production to be above the high end of the previously announced guidance of between 600-615 MMcfe per day and to exceed current consensus expectations)
  • AYR +8.8% (Marubeni (28.8% active stake) says recently decided to pursue a potential acquisition of all of the Common Shares it does not already own; Board is evaluating strategic alternatives, has received preliminary non-binding expressions of interest from multiple third parties)
  • AMAT +4.2% (following LRCX earnings)
  • AYX +3.5% (being attributed to Capitalize for Kids conference mention by Tudor)
  • KLAC +2.1% (following LRCX earnings)
  • TWLO +2% (NOW sympathy)
  • SQ +1.7% (higher with PYPL; also Square and simPRO partner to provide payment processing options to field service professionals)
  • SPLK +1.2% (NOW sympathy)
  • TEAM +1.2% (NOW sympathy)

Analyst comments:

  • OSK +1.7% (upgraded to Outperform from Neutral at Robert W. Baird)
  • LYFT +1.2% (initiated with an Equal-Weight at Morgan Stanley)