A TV Maverick Is Going All-In on a New Wireless Bet
Charlie Ergen, the poker-playing billionaire who co-founded Dish Network, has been hoarding airwaves for years. Now the U.S. government is handing him the cards he needs to make his play.
Charlie Ergen has long tried to muscle his way into the U.S. wireless business. When his rivals had no other choice, the billionaire behind Dish Network Corp. DISH 0.87% finally got his way.
John Legere, the chief executive of T-Mobile US Inc., called Mr. Ergen in late May after it became clear T-Mobile’s proposed takeover of Sprint Corp. S 7.39% was in trouble.
Mr. Ergen had been the most outspoken corporate critic of the proposed $26 billion deal—a merger that would leave the U.S. with three giant cellular companies. But the Colorado maverick also ran one of the few firms with the airwaves and know-how to create a new wireless provider that would satisfy the Justice Department’s antitrust concerns.
Two serious attempts to combine T-Mobile and Sprint in the last five years had already failed. Its third try was already a year old.
Mr. Legere, a foul-mouthed executive known for tweets poking fun at his rivals, was all business on the phone. “Justice has said that we need a fourth carrier. We should talk if you are interested,” Mr. Ergen recalled.
For years, Mr. Ergen had irked telecom rivals and federal regulators by spending more than $20 billion amassing wireless licenses but never using them. Time and again Mr. Ergen had explored various deals, including buying Sprint himself, only to frustrate the other side. Now, he was the only buyer that could build a credible fourth nationwide cellphone operator.
“With four, there’s always somebody that will be a rabble rouser,” Mr. Ergen said in an interview this week in his office south of Denver. “Somebody will say I don’t have enough market share. I’ve only got 9 million subs and want 10 million. That person is going to be more aggressive. The guy who’s got 100 million, he’s just going to hope he holds onto them.”
Whether Dish can become a formidable force in the mature U.S. cellphone market will be a key test of the landmark antitrust agreement announced Friday between the Justice Department and the companies. The carefully crafted deal gives Dish 9 million of Sprint’s prepaid customers—its Boost Mobile business and then some—plus the right to buy licenses to more airwaves that can blanket rural areas. It will let Dish operate on T-Mobile’s existing network for seven years while Dish builds its own nationwide service.
A former professional poker player and card-counting blackjack whiz who was banned by some Las Vegas casinos, Mr. Ergen co-founded Dish in 1980 after starting his career as an analyst at Frito Lay where he calculated how many Doritos should fill a bag. He and his partners bet their savings, pooling together $60,000 on selling 10-foot-wide satellite dishes from a Denver storefront.
He has said his experience gambling helped hone his business acumen—knowing how to “win with bad hands.” More than once, Mr. Ergen has compared his business plans to an “Indiana Jones” movie in which the hero narrowly dodges a never ending string of lethal threats.
He switched to hubcap-size dishes and took on cable-TV monopolies by slashing prices. His service now has 12 million customers across the country and his controlling stake in Dish is worth about $9 billion. (He is also the chairman and biggest shareholder in sister company EchoStar Corp. , which operates satellites.)
The 66-year-old tends to play by his own rules. He has made executives share hotel rooms on company trips and has done market research with what he called the “Waffle House poll,” visiting outlets around the country and asking customers how they used their phones and watched television.
His famously frugal ethos—he still drives to Dish’s Englewood, Colo., headquarters with lunch in a brown paper bag—isn’t always evident these days. The billionaire often flies in a private jet and has stopped making employees share hotel rooms on business trips, according to people familiar with the company.
Mr. Ergen, whose core satellite-TV service has been losing customers, admits he is starting from behind in the cellphone game. But he argues that gives him an advantage. “Their legacy is mishmash. Their networks are plaid,” Mr. Ergen said, pointing to his green-checked dress shirt. “We will be a solid color.”
Dish’s new network will be dwarfed by the incumbents. Verizon Communications Inc. has nearly 120 million cellphone customers. AT&T Inc. and the enlarged T-Mobile will each have more than 90 million. They are among the biggest advertisers in the country. They are holding onto their subscribers by offering unlimited data and bundling in free subscriptions to services like HBO and Netflix. All three are already rolling out faster 5G services.
“How is a company with no track record, no wireless customers and unused spectrum a more viable competitor?,” said Matt Wood, general counsel at advocacy group Free Press, which publicly opposed the T-Mobile and Sprint deal.
AT&T, Verizon and T-Mobile have built nationwide networks in pieces over decades as they acquired rivals or new airwaves licenses. T-Mobile itself will now spend years integrating Sprint’s network and customers. The incumbents updated the equipment hanging on cellular towers and the software behind their services as they moved from 3G connections to faster 4G technology, and now 5G.
Dish plans to lean on T-Mobile while it builds a brand-new, 5G-only network that it can roll out quickly and operate differently. For example, Mr. Ergen said, Dish would be able to offer on-demand pricing, such as charging less in the middle of the night. He also plans to target businesses, such as automakers, looking for 5G connections.
“We’ll get someplace in three years that will take the other guys 10 years,” he said.
The agreement to use T-Mobile’s stronger network will allow Dish to attract customers beyond the cities where Sprint mostly marketed its Boost service, he said. It also lets Dish build its own network first in urban areas with many customers and use the T-Mobile network to reach rural areas that have fewer customers.
Dish will need to add towers in all those less-populated and less-profitable areas under the deal it reached with the Federal Communications Commission and the Justice Department. Mr. Ergen estimates it will cost about $10 billion. But he will be able to compete for customers and generate cash from his nascent cellular business before he has to do that.
Mr. Ergen also argues wireless pricing is broken. He says U.S. carriers have many customers paying for unlimited data plans they don’t need, much as cable companies long forced subscribers to pay for big bundles of TV channels.
“This is deja vu all over again for us,” said Mr. Ergen. In wireless, he sees an opportunity for Dish to woo customers that use less data with lower monthly prices and those that are heavy data users with plans that don’t slow their connections.
AT&T CEO Randall Stephenson said this week he wasn’t concerned about the prospect of Dish jumping into the wireless market. “Our strategy is pretty well baked,” he told analysts on Wednesday. “The strategy is resilient as it relates to changes in industry structure.”
Mr. Ergen has often played the role of disrupter. In 2012, Dish introduced a DVR that let consumers easily skip commercials, sparking a legal challenge from broadcasters.
He has often brawled over programming fees with channel owners, causing blackouts on Dish’s service. The company said Friday it stopped carrying 22 regional sports networks owned by the Walt Disney Co. over a contract dispute.
Dish has also gone without HBO since November, missing the final season of “Game of Thrones.” Mr. Ergen said HBO’s proposal was unaffordable, calling it “payback” for his company’s 2018 opposition to AT&T’s purchase of Time Warner. An HBO spokesman said the terms it offered Dish were consistent with those in place for large distributors.
Dish launched one of the first live-TV streaming services, Sling TV, in early 2015. With a small package of channels and lower price, it made it easy for millions of people to cut their TV bill - even many of Dish’s own satellite customers.
But with cellular service, he has vexed federal authorities and business partners with what some called broken promises. Critics said Mr. Ergen was simply hoarding the government-issued licenses while he waited for a deep-pocketed partner to buy him out. In 2015 he angered FCC officials when he won a large chunk of wireless licenses at government auction; his bid benefitted from a $3.3 billion discount designed to bring smaller players into the wireless industry. The FCC later rejected the discount, a decision that is contested. Last year, FCC officials wrote a letter that threatened to claw back some Dish licenses if it failed to launch a cellular service by March 2020.
Mr. Ergen bristles at the notion he has been squatting on valuable airwaves. He said he simply was outbid by Japan’s SoftBank Group Corp. in 2013 when he tried to buy Sprint. He has been waiting for a catalyst that would allow him to compete with entrenched players. The rollout of new 5G networks is just the technology shift that makes it possible.
“Hoarding is actually a positive for our shareholders and a positive strategic move because you needed to accumulate spectrum to go and compete with these guys,’’ he said. “It didn’t make any sense to build a 4G network and tear it all down the next year.”
By early 2019, Dish still had no wireless customers to quell the government’s concerns. The forecast was also darkening for T-Mobile and Sprint. Their merger effort hit a snag in April, when staff lawyers at the Justice Department told the companies the deal was unlikely to earn their approval as it was structured.
The Justice Department pressed the companies to shed enough pieces of their business to create a new fourth cellphone carrier that could step into the void left by Sprint, which had been shedding customers and struggling to turn a profit.
The department met with representatives from potential partners including Dish and cable operators Altice USA Inc., Charter Communications Inc. and Comcast Corp. , according to people familiar with the talks. Dish emerged as an early favorite.
Mr. Ergen said his existing airwaves licenses made his pitch to build a new cellphone carrier more credible. He said he reached a broad agreement with Mr. Legere and Sprint Chairman Marcelo Claure in just four weeks of discussions in June.
But the discussions continued for three more weeks as the Justice Department pressed the merger partners for better terms. Government lawyers insisted the settlement include no restrictions on Dish’s ability to sell assets, other than to pure competitors, or find a deep-pocketed partner after the deal.
The Justice Department’s antitrust chief, Makan Delharim, was under the gun as government officials publicly split on the deal. FCC head Ajit Pai, a fellow Trump administration appointee, had already endorsed the T-Mobile and Sprint deal while a consortium of Democratic state attorneys general had filed a lawsuit seeking to block it, saying it would hurt consumers.
The Justice Department wanted to make sure the final agreement would stand up in court if challenged by the states. The companies have agreed to wait to close the deal under a federal court hears the case later this year.
Mr. Ergen will have to pay $1.4 billion for the Sprint customers and $3.6 billion in three years for the extra airwaves. T-Mobile will get the bulk of Sprint’s customers and airwaves and also have the right to buy some Dish spectrum. Sprint’s owner SoftBank gets to cash out after failing to disrupt the U.S. cellular market. The Justice Department gets to keep a fourth competitor.
IRS Sending Warning Letters to More Than 10,000 Cryptocurrency Holders
‘Taxpayers should take these letters very seriously,’ IRS Commissioner Chuck Rettig said
The Internal Revenue Service has begun sending letters to more than 10,000 cryptocurrency holders, warning they may have broken federal tax laws.
The agency wasn’t specific about the possible violations it was reviewing, but those who hold digital currencies could be subject to a variety of taxes, especially on capital gains.
“Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency,” IRS Commissioner Chuck Rettig said.
The agency expects its mailing to be completed by the end of August. Three variations of the letter are being sent, depending on the information the IRS has about the recipient.
The IRS letters come as bitcoin, the world’s most popular cryptocurrency, has ridden a new wave of optimism in recent months. In mid-July, bitcoin topped $12,000, more than three times its value at the end of 2018. Investors, speculators and Facebook Inc. have extolled the potential of digital currencies.
At the same time, use by drug dealers and other nefarious actors has marred its reputation. The IRS has expressed worries about the ability of digital currencies to promote tax evasion.
An IRS spokesman declined to say how it learned about the targeted cryptocurrency holders and their transactions.
One possible source is information provided to the agency by cryptocurrency exchange Coinbase. In mid-March of 2018, Coinbase provided data—under a federal-court order—on about 13,000 accounts as requested by the IRS.
Coinbase turned over data on customers who bought, sold, sent or received digital currency worth $20,000 or more between 2013 and 2015.
The data included the customer’s name, taxpayer identification number, birth date and address, plus account statements and the names of counterparties.
A representative for Coinbase declined to comment.
“In terms of the actual people who have crypto capital gains, most of them are not prepared because they have not been filing crypto taxes based on conversations with thousands of our users” said Chandan Lodha, chief executive and co-founder of CoinTracker, a digital-currency tax software company.
Mr. Lodha said that many cryptocurrency exchanges weren’t built to provide users with transaction histories. Without such histories, investors would have had to keep track of their transactions by hand.
“This is a problem that people should have been paying attention to for a long time,” he said.
The sternest version of the letter, released Friday, asks recipients who believe they have followed the law to sign a statement declaring, under penalty of perjury, that they are in compliance with tax laws.
It also says the recipient should understand the IRS may be in touch with them.
The two other versions of the letter are less threatening. The mildest warns that the recipient “may not know the requirements for reporting transactions involving virtual currency” and then details them.
Tax professionals warned that the letters shouldn’t be ignored.
They say it is usually far better, and less expensive in the end, to go to the IRS and attempt to rectify past mistakes. By sending the letters, the agency put people on notice that they are already in its sights.
Jimmy Song, a cryptocurrency investor who teaches a course on bitcoin at the University of Texas at Austin, said he heard rumblings about a potential crackdown on Twitter this week.
The new enforcement “doesn’t feel good,” Mr. Song said. “It seems like an intrusive way to get people to pay and I personally don’t like it because I’m a libertarian and many people who own this are.”
According to an IRS spokesman, there is no explicit requirement that many cryptocurrency sales be reported to the agency by third parties. Sales of stock shares must generally be reported on Form 1099-B to the IRS by the brokerage firm.
Among the possible taxes: If an investor sells a cryptocurrency after holding it longer than a year, the profits are typically long-term capital gains.
The tax rate is 0%, 15%, or 20%, plus a 3.8% surtax in some cases, depending on the owner’s total income.
WSJCoin: To Understand Cryptocurrencies, We Created One
WSJCoin: To Understand Cryptocurrencies, We Created One
an original WSJ documentary, markets reporter Steven Russolillo ventures Japan and Hong Kong explore universe His mission: create WSJCoin, virtual token for newspaper industry. Image: Crystal Tai. Video: Clément Bürge
In general, the IRS has until three years after a return’s due date to assess a deficiency, but that limit expands to six years if income is understated by more than 25%.
There are many exceptions, however. For example, the statute of limitations doesn’t start to run until a tax return is filed, and there is no time limit to bring civil fraud charges.
When it comes to preparing tax returns involving cryptocurrencies, Darren Neuschwander, a certified public accountant, said many tax preparers are frustrated because the IRS has long promised new guidance on cryptocurrencies that it hasn’t yet released.
“It’s ironic that the IRS is issuing these letters because we’re still waiting to know more rules,” he said.
Pfizer in talks to merge off-patent assets with Mylan
Deal would create large seller of drugs including former blockbuster brands Lipitor and Viagra
Pfizer is in the late stages of talks to combine its off-patent assets with Mylan’s $10bn generics business in a stock deal, according to people familiar with the matter.
The deal, likely to be announced on Monday, would create a large seller of off-patent and generic medicines, including former blockbuster brands Lipitor and Viagra. Mylan shareholders will hold just over 40 per cent of the new venture, and Pfizer will sell debt of about $12bn, the people said.
The plans would also see Mylan’s chief executive Heather Bresch depart, after leading the company for seven years.
Shares in Mylan have fallen by three-quarters since their peak in 2015, as the generics maker as struggled with declining prices in the US. It also caused controversy by dramatically raising the price of EpiPens, used to treat allergic reactions.
In August 2018, Mylan’s board of directors announced it would undertake a strategic review of its options, as it feared US public markets were undervaluing the company. Last quarter, the company said sales of its multiple sclerosis drug were worse than expected, and it failed to received approval to make a generic version of Advair, an asthma medicine developed by UK pharmaceutical company GlaxoSmithKline.
If the deal goes through, Michael Goettler, who runs Upjohn, Pfizer’s off-patent drugs business based in Shanghai, will become chief executive of the new venture, while Robert Coury, Mylan chairman, would become its executive chairman, the people said. The deal was first reported by The Wall Street Journal.
Pfizer has been trying to reposition itself as a smaller company focused on more innovative medicines and vaccines. To this end, it is spinning off its consumer health business into a joint venture with GSK’s consumer business. It is also making acquisitions to bolster its position in advanced areas like oncology, buying Array Biopharma, a Colorado-based drugmaker, in June for $10.6bn.
Pfizer has also been under political pressure — including from US President Donald Trump — about raising drug prices, including for erectile dysfunction treatment Viagra and other drugs in the Upjohn business.
The deal would be the latest in a series of large pharmaceutical mergers and acquisitions this year. Bristol-Myers Squibb is seeking regulatory approval for its $90bn purchase of biotech Celgene. Last month AbbVie announced its intention to buy Allergan, the maker of Botox, for $63bn.
The unit will focus on drugs where exclusivity has expired. It will combine generic medicines — often made by different companies than the original drug — with off-patent drugs, which Pfizer used to sell as key brands before their patent protection ended.
Cobham’s largest shareholder fights £4bn Advent deal
Silchester urges defence contractor to seek better value as investors express unhappiness
The largest shareholder in Cobham has come out against the company’s agreed £4bn takeover by US private equity fund Advent International, arguing that it does not see the deal as “compelling”.
Silchester International, which owns 11.83 per cent of the FTSE 250 aerospace and defence group, said it was urging management to “seek and respond to other parties who might offer better value to the stakeholders of Cobham”.
The fund said Cobham, one of Britain’s oldest engineering groups which has undergone a restructuring under its current management led by David Lockwood, had had its balance sheet restored by public shareholders and that the fruits of the turnround would flow through in the next few years.
The rejection of the offer comes after Cobham on Thursday unveiled an all-cash 165p takeover from Advent backed by management. Mr Lockwood had earlier defended the sale, saying investors were being offered “cash certainty now” without further execution risk.
Mr Lockwood, who embarked on a turnround strategy two and a half years ago, told the Financial Times: “We are not selling out on the cheap. This is a fair price for the business today.”
Advent’s offer is a 34.4 per cent premium to the group’s closing price of 123p on July 24 and a 50.3 per cent premium to its average share price over the past three months.
Shares in Cobham soared 35 per cent on Thursday and finished at 165.5p, trading above the value of the Advent offer in a sign investors expect further bids.
Despite the premium, another top 10 shareholder, said they were “disappointed” at another UK industrial group being bought by an overseas fund.
“It is also very good timing by the private equity house as management has sorted out a lot of problems,” said the shareholder, adding that they would “wait and see” if another offer materialised.
Columbia Threadneedle, a fund manager holding 8.7 per cent of Cobham’s shares, said it was supportive of the company’s management and directors. “They have done a good job stabilising the business and starting to turn it around. The bid is opportunistic in terms of timing and price and could well generate other interests.”
Silchester was set up in 1994 by British multi-millionaire Stephen Butt and some of his former colleagues from Morgan Stanley.
Although the asset manager largely avoids the spotlight, it often exerts huge influence in the companies in which it invests, chiefly because it takes large stakes of up to a fifth of the shares. Last year, a controversial buyback plan at TVB, the Hong Kong broadcaster, was scrapped following strong criticism from Silchester.
The proposed sale will test the appetite of Boris Johnson’s government for takeovers of key parts of Britain’s industrial base.
Advent on Thursday said it “understands the importance of Cobham's research and development and production sites and intends to maintain investment in this area”. It added it did not expect any “material change in the balance of skills and functions of the employees and management” of Cobham.
The £8bn hostile takeover last year of GKN by Melrose Industries, a turnround specialist although not foreign-owned, faced intense controversy with politicians and unions arguing that it risked harming Britain’s manufacturing industry.
A spokesperson for the government said in a statement while “this is a commercial matter for the companies involved”, it was “closely monitoring the transaction”.
The group is expected to start discussions with the Ministry of Defence and other relevant authorities on national security grounds as early as next week as it looks to clear regulatory hurdles. Advent does not to anticipate any major issues and the deal is expected to be cleared in the next three to four months, people close to the company indicated.
The private equity group has so far secured the backing of investors holding 5.2 per cent of the stock, including Cobham’s management as well as Artemis Investment Management.
Chuka Umunna, the Liberal Democrat business spokesman, said it was “no ordinary transaction” and poses “serious questions” for the public interest, related to national security as well as economic strategy.”
Analysts welcomed the premium but Sandy Morris at Jefferies said: “We were looking forward to a rejuvenated Cobham adjusting its portfolio and flexing its financial muscle. We feel robbed.”
Ben Bourne, analyst at Investec, said: “It’s a good price and above most analysts’ 12-month target prices.
“It’s plausible that other bidders will come out of the woodwork given the quality of the long-term recovery.”
Cobham, founded in 1934 by aviation pioneer Sir Alan Cobham, is best known for its aerial refuelling technology which is used on almost all western fast jets but it also makes parts for passenger jets, as well as components for satellite communications.
It was shaken by a string of profit warnings in 2016 and 2017 and forced to raise cash from shareholders. But Mr Lockwood had recently managed to put the group on to a more secure financial footing, notably settling a dispute with Boeing, one of its key customers.
It is financing the purchase through a combination of equity and debt. The equity is drawn from funds managed primarily by Advent as well as GSO Capital Partners and Blackstone.
This article has been amended to say that “Cobham on Thursday unveiled an all-cash 165p takeover from Advent backed by management” rather than “all-share” as first reported.
Smart beta funds fail to match hype
Research Affiliates says factor funds are prone to potential prolonged periods of underperformance
Smart beta funds have failed to live up to investor expectations over the past decade, according to research that has prompted fresh warnings about the hugely popular strategies.
A halfway house between active and passive investing, smart beta has exploded in popularity in the past 10 years as investors search for alpha-like returns combined with the transparency and low costs associated with passive investing.
Global assets in smart beta funds — also known as factor funds for the way they allocate according to factors such as value and momentum — have more than doubled in the past five years from $485bn to $1.1tn, according to Morningstar.
However, research by smart beta pioneer Research Affiliates shows that factor funds’ performance has fallen far short of what they previously advertised to investors.
Research Affiliates’ analysis, which used Bloomberg performance data to simulate investor experience of smart beta funds between 2009 and 2018, found that most of the fund types within Morningstar’s strategic beta classification yielded less than their benchmarks over the period.
Global value funds underperformed by 3.83 per cent and 4.48 per cent over 10 and five years respectively. Funds targeting momentum registered 1.38 per cent and 3.42 per cent losses over the periods.
Meanwhile, US multi-factor funds, which are frequently touted as a diversified way for investors to gain exposure to all factors, lost 1.92 per cent over 10 years and 2.55 per cent over five years.
Vitali Kalesnik, head of equity research at Research Affiliates, said the weak performance demonstrated the limits of smart beta and served as a warning that investors should be wary of hype associated with the strategies.
“In many cases, investors’ expectations about the magnitude of outperformance were somewhat exaggerated,” said Mr Kalesnik, adding that the practice of backtesting portfolios to simulate future performance was open to manipulation.
“Many investors flocking to [smart beta] were unprepared for the ride,” he said. “They did not realise that factors are prone to crashes and potential prolonged periods of underperformance.”
Most factors tend to perform poorly during bull markets, so the decade-long equity rally is part of the reason for smart beta funds’ underperformance. Value has fared particularly badly as a result of the strength of growth stocks.
“This does not imply that the factor investing strategies are flawed by definition,” said Mr Kalesnik. However, he warned that asset managers and financial advisers had not done enough to explain the risks to retail investors. “It’s not trivial to understand the risk profiles of these strategies. When they are marketed to investors, very infrequently do you hear the salesperson talking about the risks involved.”
Research Affiliates remains an advocate of smart beta investing but has reservations over how the market has evolved. In a paper published this year, the US company said smart beta’s widespread adoption, including by retail investors, meant it warranted closer scrutiny.
Mr Kalesnik said that in a worst-case scenario uneducated investors may abandon smart beta strategies at the wrong time, realising a loss and potentially “undermining the credibility of smart beta investing”.
Lionel Martellini, a professor at France’s Edhec Business School, said: “Smart beta is not a free lunch.
“A well-diversified exposure to rewarded factors will not always outperform. The promise is instead merely that it will provide superior risk-adjusted performance on average across market conditions in exchange for suffering pain in some market conditions.”
Just Eat and Takeaway.com in merger talks
Tie-up would create group worth £9bn, bigger than Amazon-backed Deliveroo and Uber Eats
Just Eat and Takeaway.com are in talks to combine their online food ordering businesses and create a company worth £9bn, creating a larger rival to Amazon-backed Deliveroo and Uber Eats.
A merger of London-based Just-Eat and Amsterdam-headquartered Takeaway would create a group with the capacity to process billions of euros worth of online food deliveries every year from both local restaurants and international dining chains.
The European food delivery market has seen a surge of investment in recent months. In December, Takeaway.com agreed a €930m acquisition of the German business of Delivery Hero, while Amazon led a $575m funding round for Deliveroo in May.
Uber Eats, the food delivery arm of the ride-hailing company, cut fees for food delivery in the UK and Ireland earlier this year as competition in the sector intensified.
Just Eat has come under additional pressure from hedge fund Cat Rock Capital, which in December went public with an activist campaign pressing for new leadership at the company. Connecticut-based Cat Rock has argued that merging with a peer would be the best way to find an experienced chief executive to replace Peter Plumb, who left in January after just 16 months in the role.
Just Eat has struggled to find a new chief executive in the past six months, which could leave Jitse Groen, Takeaway’s founder and chief executive, as the most likely candidate to run the combined entity, according to people close to the company.
Just Eat confirmed its discussions about a “possible combination” with Takeaway.com in a statement on Saturday afternoon, following a report from Sky News. The deal would be structured as an offer for Just Eat by Takeaway, it said. The two companies have until August 24 to agree a deal, under takeover rules.
“There can be no certainty as to whether any transaction will take place or the terms on which any combination may be agreed,” Just Eat added. Takeaway.com also confirmed the talks about a “possible all share combination” but declined to comment further.
Based on Friday’s closing prices, Just Eat has a market value of £4.3bn and Takeaway.com is worth €5bn, giving the combined company a value of more than £9bn, ensuring it a place on the FTSE 100. Both companies are due to report results next week.
London Stock Exchange confirms $27bn Refinitiv takeover talks
Takeover would create exchanges and data powerhouse 18 months after sale by Thomson Reuters
The London Stock Exchange Group has confirmed that it is in advanced talks to buy Refinitiv in a $27bn deal that would turn it into a global exchanges and data powerhouse.
The statement came after discussions between the parties were revealed by the Financial Times earlier on Friday.
The acquisition of Refinitiv — carved out of Thomson Reuters only last year in a deal with Blackstone — would transform the LSE into the main rival to billionaire Michael Bloomberg’s financial news and data empire with annual combined revenues of more than £6bn.
In a statement issued after midnight in London, the LSE said it would pay for the transaction entirely with the issuance of new shares. That will result in Refinitiv shareholders owning about 37 per cent of the combined group, though they will have less than 30 per cent of its voting rights.
The LSE closed on Friday with a market value of about £19.3bn and a net debt of about £1bn.
Refinitiv, whose Eikon terminals are the main rival on trading floors around financial centres to Bloomberg, was valued at $20bn last year. The group was bought by a private equity consortium led by Blackstone, which acquired a majority of the business from Thomson Reuters, the news and data group.
The consortium used a large amount of leverage to pay for the deal, with net debts at Refinitiv standing at around $12.5bn at the end of last year. At an enterprise value of $27bn, that means the LSE plans to issue about $14.5bn in new shares or more than £12bn to pay for the deal.
If consummated, the deal would instantly transform the LSE, which is best known for running stock exchanges and clearing derivatives, into a more diversified market data and analytics leader under David Schwimmer, the former Goldman Sachs banker.
Mr Schwimmer was named chief executive of the LSE last April after a months-long search to replace Xavier Rolet, the Frenchman who ended his eight-year run at the group following a governance crisis.
“The combined business would create a leading, UK headquartered, global financial market infrastructure provider with significant multi-asset capital markets capabilities, a leading data and analytics business and a broad post-trade offering, well-positioned for future growth in an evolving landscape,” the LSE said.
It added that it aimed to achieve annual cost savings of more than £350m within five years of a deal. Don Robert, LSE chairman, and David Warren, chief financial officer, are to keep their roles, along with Mr Schwimmer.
The talks come at a time when London’s role as a global financial centre is facing questions, with the UK preparing to withdraw from the EU under Boris Johnson, its new prime minister.
Only 18 months ago, the Blackstone-led consortium, which included Canada Pension Plan Investment Board and Singapore state fund GIC, agreed to purchase a 55 per cent stake in the financial and risk division of Thomson Reuters, with the latter retaining the minority stake in the division, Reuters newswire and other units.
The consortium had agreed to pay Reuters News a minimum of $325m per year for 30 years as part of the deal.
Since then, the investors rebranded the business Refinitiv and embarked on a cost-cutting campaign to make the business more efficient. In its statement, the LSE said that Refinitiv reported net revenues of $6.3bn and earnings before interest, tax, depreciation and amortisation of $1.6bn.
Shares in Thomson Reuters, which holds a 45 per cent stake in privately held Refinitiv, jumped 4.3 per cent in New York trading on the FT report. It later issued a statement confirming the talks and said it would emerge with a roughly 15 per cent stake in the LSE after the deal.
Refinitiv had been expected to sell some assets after Blackstone took control of the company. It still retained a majority stake in fixed income trading platform Tradeweb, after listing shares in the group earlier this year.
It also had been in talks with Deutsche Börse to sell its foreign exchange business FXall, an electronic currency trading platform worth about $3.5bn. Deutsche Börse issued a statement on Saturday, saying those talks had all but ended.
The transformation of the LSE that put in a position to double in size through this deal began under Mr Rolet, who stepped down as chief executive of the LSE in the autumn of 2017.
The former banker spent more than £4bn on acquiring data and clearing businesses, responding to the evolution of markets after the financial crisis.
Among the most high-profile deals were the purchase of index compilers Russell Investments and FTSE International, 50 per cent of which it already owned.
It also bought a controlling stake in LCH, the clearing house. Most notably, Mr Rolet attempted a merger with the LSE’s main European rival, Deutsche Börse, which collapsed in March 2017.
Refinitiv would bolster the LSE’s existing data and analytics offerings, which include Mergent, a service providing information on private companies, and XTF, which focuses on exchange traded funds. The group also owns The Yield Book, a fixed-income indexing service.
Exchange groups in the US and Europe have built up their data and analytics offerings in recent years as trading in stocks and bonds has become more electronic, relying on faster data sources that they can charge a premium for.
Robey Warshaw, Goldman Sachs, Morgan Stanley and Barclays are working with the LSE, while Evercore and Canson Capital Partners are working with Refinitiv and its owners, according to people involved in the deal.
Bernard Arnault Spends Money to Make Money
The billionaire ramped up investment on marketing and stores as his luxury empire posted another stellar quarter.
PARIS — Bernard Arnault may be raking in the cash as LVMH Moët Hennessy Louis Vuitton posted another quarter of strong growth, but he is also spending lavishly to make sure that Louis Vuitton, Dior and his other luxury brands maintain their market dominance once demand loses steam.
Shrugging off ongoing trade tensions, the group’s overall revenues were up 15 percent in the three months ended June 30 to 12.54 billion euros, helped by another strong performance in its key fashion and leather goods division. Sales were up 12 percent on an organic basis.
But profitability came under pressure as LVMH ramped up spending on marketing and stores by 15 percent in the first half.
Net profit rose 9 percent to 3.27 billion euros during the period, while profit from recurring operations advanced 14 percent to 5.29 billion euros, below consensus estimates. Operating profit margin stood at 21.1 percent, down from 21.4 percent in the same period a year ago, including an adverse foreign exchange hedging impact.
The numbers continue a string of strong results for the world’s luxury players, coming on the same day Moncler posted double-digit increases in profits and sales and a day after Hermès reported stellar figures.
“We are not milking the brands in good times,” Jean-Jacques Guiony, chief financial officer of LVMH, said on a conference call. “We are definitely investing behind the brands and we are investing behind all of them.”
Dior, for instance, recently opened a temporary boutique on Avenue des Champs-Élysées while its historic flagship on Avenue Montaigne undergoes renovations. Duty-free retailer DFS is gearing up for the opening next year of its T Galleria store in Paris as part of the long-delayed renovation of department store La Samaritaine.
“Investments into the brands[…]come when the business is good, with a view not only of supporting the existing momentum, but also reinforcing the brands to make them more resilient in the global environment, if the global environment was to become more difficult,” said Guiony.
“It’s certainly the right thing to do now if we want to strengthen further the strategic value of the portfolio,” he added.
“The message is that management is willing to reinvest the dividends of scale to accelerate market share gains, especially for its most profitable fashion and leather division,” said Rogerio Fujimori, an analyst at RBC. “This should make life tougher for smaller competitors fishing in the same pond, in our view.”
In addition, LVMH remains active on the acquisition front after snapping up luxury-travel operator Belmond for $2.6 billion last year.
The group said last week it had taken a minority stake in Stella McCartney’s fashion brand, and in May, it added another prestigious wine label to its collection with the purchase of Château du Galoupet, a maker of high-end rosé.
At the same time, the conglomerate has set up a luxury maison with singer and entrepreneur Rihanna under the Fenty label, making it the first fashion brand Arnault has launched from scratch since Christian Lacroix in 1987.
“The concept is definitely to invest in different brands, not necessarily something we have experienced in the past,” said Guiony, adding that it was too early to comment on the performance of the Fenty fashion label. “There will be some learnings, there will be some value, and it’s up to us to be good enough to extract it.”
LVMH can certainly afford its largesse. Its key fashion and leather goods division, which includes Louis Vuitton, Dior and Fendi, saw revenues jump 20 percent on a like-for-like basis to 5.31 billion euros during the second quarter, zooming past consensus estimates.
The division had posted organic growth of 13 percent in the same period a year ago, and recorded a 15 percent rise in like-for-like sales in the first quarter. “The global momentum is very good for most of the brands, if not all of them, and for most of the geographies, if not all of them,” said Guiony.
Vuitton and Dior led the pack, with Vuitton seeing a “noticeable improvement” in demand from Chinese consumers versus the first quarter, and Dior growing faster than the division as a whole, the executive reported. Meanwhile, France bounced back after a first quarter marred by gilets jaunes, or yellow vests, protests.
Yet Guiony said there was no “compelling” explanation for the division’s rapid progress.
“The comparison basis is not particularly easy. The Chinese customers are there, but not the only ones,” he said. “When we look at American customers, at European customers, all of them are double-digits, so it comes really from everywhere, so it’s really a testimony to the strength in the brand, not to a specific factor.”
Even Hong Kong seems to be immune so far to protests against a controversial extradition bill. “So far, we have not experienced a very deep impact on the business,” Guiony said.
Fashion and leather goods performed better than all other segments. Wines and spirits were up 4 percent, with momentum particularly strong in the United States, Asia and emerging markets, while perfumes and cosmetics recorded organic growth of 10 percent.
Selective retailing grew 7 percent as Sephora continued to improve its performance in the U.S. against a challenging market for makeup, and growing competition from the likes of Ulta and Amazon, which is pushing into beauty with initiatives including the launch of Lady Gaga’s Haus Laboratories makeup line.
“For the time being, I don’t think there is particular evidence that Amazon will bite into Sephora or will not. It’s a bit early to say. We don’t have very precise numbers on what Amazon does on this segment,” Guiony demurred.
Online retailer 24 Sèvres, which re-branded as 24S during the quarter, remains in a “learning phase” and hopes it will capitalize on the fact that it is the only multibrand e-commerce site to stock the LVMH-owned Vuitton, Dior and Celine labels, he noted.
Watches and jewelry posted a 4 percent increase. Organic growth at Bulgari was flat compared to the first quarter, as it continues to clean up its jewelry and perfume wholesale channels, while Tag Heuer’s ongoing reengineering had a significant impact on the watchmaker’s margins.
The figures were the first to take into account IFRS 16, an accounting rule that requires companies to record all future lease rents as debt on the balance sheet. The impact on the balance sheet was an increase of 12 billion euros in non-current assets and non-current liabilities, Guiony said.
There was a positive impact of 77 million euros on profit from recurring operations, a negative effect of 68 million euros on profit before tax, and the accounting rule change gave rise to a financial charge of 145 million euros.
“All in all, I would say much ado about nothing. I would just point out the fact that the norm doesn’t allow us to restate 2018 numbers and therefore adds complexity to an already obscure and byzantine accounting modification, but that’s the way it is,” Guiony said.
Despite its heavy investments, the group sounded its customary cautious note about the economic outlook. “Obviously, the various threats to international trade should run first among our priorities. We are neither pessimistic nor optimistic, but we know our business is sensitive to tariffs and trade barriers,” said Guiony.
LVMH does not provide guidance, merely reiterating in familiar wording its plan to reinforce its global leadership position in luxury goods. “Despite buoyant demand, we will continue to manage costs and remain vigilant into the second half of the year,” Arnault said in a statement.
The luxury conglomerate’s share price is up 47 percent so far this year, propelling Arnault near the top of the Bloomberg Billionaires Index, where he briefly replaced Bill Gates as the world’s second richest person after Amazon founder and chief executive officer Jeff Bezos. Arnault is now back in third position, with a net worth of $106 billion.