TheChek News Flow

* Euroclear considering IPO or private placement

* Undergoing review by Goldman Sachs under CEO Lieve Mostrey

* Mostrey rules out merger with another party

* ICE, LSE among shareholders of Belgium-based Euroclear

By Huw Jones

LONDON, June 10 (Reuters) - Euroclear is open to a “fundamental transformation”, either through a listing or placing shares with major investors, but is ruling out a merger, the chief executive of Europe’s biggest stock and bond settlement house said.

Euroclear is a cornerstone of Europe’s financial plumbing, ensuring the completion of securities transactions worth 791 trillion euros ($893 trillion) last year.

It looked after nearly 29 trillion euros of assets in 2018, about half the European settlement market, and announced in March it has hired Goldman Sachs to look at strategic options, barely a year after Lieve Mostrey became its chief executive.

“We are open to a fundamental transformation of our shareholding, and we would like to do that in an orderly fashion,” Mostrey told Reuters, adding that she will update Euroclear shareholders after the summer.

“We are examining two options, private placement with long term investors, or an IPO. We don’t think we should merge with any party,” the 58-year-old Belgian said.

Any attempt to take over Euroclear would inevitably face tough scrutiny from the European Union, given the company’s strategic importance to the bloc’s capital market.

UBS described Euroclear as a “hidden jewel” in 2017, saying a merger with London Stock Exchange would make sense and pose tougher competition for its main rival, Deutsche Boerse’s Clearstream.

However, it was rival exchange ICE which later that year bought just below 10% of Euroclear in two transactions, valuing the Brussels-headquartered company at 5.8 billion euros.

This had made several shareholders sit up and ask how they could offload their small stakes, Mostrey said, with many banks wanting to sell to avoid having to hold capital against an unlisted shareholding.

THREAT TO BUSINESS

LSE, a major Euroclear customer, bought a 5% stake in it in January. But most shareholdings are far smaller, making them less attractive and laborious to scoop up.

The nine largest shareholders own 55% percent of Euroclear, but there are about 115 shareholders, meaning a long tail of firms owning fractions of 1%.

“An orderly structured process can help to put big and small shareholders that want to sell a bit more at par in the process,” Mostrey, a former BNP Paribas and Fortis banker, said.

Faced with Brexit, 50-year-old Euroclear moved its holding company from Britain to Belgium and raised the cap on voting to 25% from 5%.

Mostrey said a cap would be hard to keep if the company floated, but it was essential that Euroclear remains connected to a broad range of clients, whatever its future structure.

“We believe we will continue to have a diverse shareholding ... As soon as we would be owned by one party, it would be a threat to our business,” Mostrey said.

Mostrey said Euroclear would be attractive to long-term investors like pension and sovereign wealth funds attracted by its steady dividends.

Euroclear made a net profit of 322 million euros in 2018, with 75 percent of revenues from its settlement, safekeeping and funds business, but the strongest growth is in helping to shuttle collateral around the financial system to back trades.

Macro hedge fund parts company with 7 employees after disappointing May

Element Capital’s Jeffrey Talpins, one of the hedge fund industry’s biggest but least-known stars, is cutting about a tenth of his employees, according to people with knowledge of the plans.

Although largely unknown outside the money management world, Mr Talpins’ Element has emerged as one of the most successful “macro” hedge funds in an industry whose luminaries include Paul Tudor Jones, Alan Howard and Louis Bacon.

Element’s $18bn hedge fund has averaged annual returns of more than 20 per cent since 2005, producing steady and strong gains and never suffering a down year over a turbulent period that has wrongfooted many other macro hedge funds, which bet on big economic trends.

However, the fund suffered a tough December. After another disappointing month in May — when it was down 3.5 per cent, crimping its returns to 3.2 per cent so far this year — Element has closed what it calls its “portfolio manager programme” of quasi-independent trading centres, which receive money to invest separately from Mr Talpins and his core team.

The portfolio manager programme accounted for about 10 per cent of Element’s assets under management, and the closure meant that six portfolio managers and one analyst were recently let go, according to people briefed on the decision.

They are Matthew Isherwood, a former quant at Sabre Fund Management and Capula Investment Management; Don Carson, a former Brevan Howard fund manager; former Goldman Sachs trader Pablo Duran Steinman; Mark Dragten and Tom O’Shea, two former GAM portfolio managers; portfolio analyst Graeme Hawinkels; and George Polychronopoulos, a former managing director at JPMorgan’s chief investment office.

The employees who were let go either declined to comment, did not respond to requests for comment, or could not immediately be reached by the FT.

Element declined to comment, but a person briefed on the cuts said the closure of the portfolio manager programme was driven by a desire to focus the hedge fund’s resources on its core team, rather than because of the fund’s performance.

Details around how the media-shy Mr Talpins manages money are sparse. The hedge fund’s website only says that it has a “modern macro” style of investing that combines traditional economic, systematic and relative-value analysis. Despite high fees of between 2 and 2.5 per cent of assets annually, plus more than 20 per cent of performance gains, Element has more than trebled its assets under management since 2005.

As a result, Mr Talpins appeared on Forbes’ list of billionaires for the first time last year, with an estimated fortune of $1.7bn. He studied economics and applied mathematics at Yale, and went on to be a star bond trader at Goldman Sachs and Citigroup. Last year, he helped endow a new economic research centre at Yale, and his family foundation focuses on improving opportunities for inner-city children, according to his biography on the American Prairie Reserve, where he sits on the board.

Element’s 3.2 per cent return so far this year means that it is suffering a bout of underperformance relative to the hedge fund industry as a whole, which is up 6.8 per cent, according to HFR. However, the average macro hedge fund is up only 2.7 per cent so far this year.

The average macro fund has only returned 3 per cent a year on average since March 2005.

Chinese owner moves ahead despite strains with U.S., market glut; Douglas Elliman will begin marketing 375 apartments

Luxury condos at the Waldorf Astoria hotel are expected to go on sale in the fall, as the historic property’s Chinese owner advances its redevelopment plans despite a market glut and political tensions with the U.S.

Beijing-based Anbang Insurance Group Co. bought the Waldorf for $1.95 billion in 2015, a record price for a U.S. hotel. In 2017, it shut down the property to renovate and convert hundreds of the more than 1,400 guest rooms into private residences.

Chinese officials took control of Anbang in 2018 after saying they suspected illegal activity by the insurer. Now, Anbang has hired Douglas Elliman Real Estate to sell 375 apartments at the Waldorf, according to the firm. The broker said it was working with London-based Knight Frank Residential to help find buyers abroad.

The Waldorf condos will range from studios to five bedrooms. Hilton Worldwide Holdings Inc. will manage the residences and the hotel. The residences are expected to be ready for move-in and the hotel to reopen in 2021.

Douglas Elliman declined to discuss how much they will ask for the apartments. But other brokers suggested the listing prices would likely be on par with the city’s highest-priced condos, around $3,500 a square foot or more.

Douglas Elliman is looking to highlight the rich history of the 88-year old Waldorf. The landmark property occupies a full city block on Park Avenue, and it gained world-wide attention for its luxury suites, lavish parties and famous guests. It has been a New York home to Gen. Douglas MacArthur, Frank Sinatra, and the Duke of Windsor after he abdicated his throne to marry American socialite Wallis Simpson.

“It’s a chance to own a piece of New York history and all the stories that go with it,” said Susan de França, chief executive of Douglas Elliman Development Marketing. In a statement, Andrew Miller, executive director of development at Anbang, called the Waldorf “one of the most special addresses in the world.”

The move at the Waldorf comes at a challenging time for Manhattan luxury apartments. The number of unsold new Manhattan condos, which have prices typically skewed toward the top 10% of the market, more than doubled to 7,983 in 2018 compared with 2015, according to real-estate appraiser Miller Samuel Inc.

The Waldorf condos will hit the market as the supply of new luxury apartments is expected to be at a peak.

“There is over building, and there is too much supply,” said Donna Olshan, head of Olshan Realty Inc., a New York brokerage firm that tracks luxury real- estate sales.

At the same time, demand for luxury condos has been falling. Wealthy Chinese buyers have pulled back under pressure from the Chinese government to keep capital in the country. Other international buyers have retreated during periods of uncertain politics at home. Owners have had to discount prices to sell their luxury condos.

Recent changes to U.S. tax law have also reduced the incentive for Americans to own property in high-tax states like New York, while stock-market volatility has made many hesitant to spend money on expensive real estate.

Simmering tensions between Beijing and Washington also could complicate sales in a building controlled by the Chinese government, some brokers say. U.S. officials recently have escalated their warnings about Chinese spying intended to steal government secrets and the heist of intellectual property from corporations and academia.

“There’s uncertainty how this is going to shake out,” said appraiser Jonathan Miller of the tensions between the U.S. and China. “So it makes it a challenging environment until that is stable, because the one thing all purchasers don’t like is uncertainty.”

Ms. de França said the Waldorf condos would appeal to buyers because of the hotel’s glamorous past and because the property would provide residents with access to hotel amenities such as room service, its spa and venues for dining and entertaining.

“It’s uniqueness puts us in a class of our own and the wide array of unit sizes and types opens up the universe of buyers,” she said. “Some properties only appeal to the $30 million buyers.”

US president queries whether deal would decrease competition in defence sector

US President Donald Trump has waded into the planned merger of United Technologies and Raytheon, suggesting the deal that would create an aerospace and defence giant could be bad for competition in the sector.

Under the deal, which was agreed on Sunday, UTC is set to merge its aerospace business with Raytheon to form a $120bn powerhouse and the second-largest defence contractor by revenue.

But Mr Trump said on Monday it could decrease competition in a sector in which a small number of companies command strong pricing power. 

“When I hear United and I hear Raytheon . . . when I hear they are merging, does that take away more competition?” Mr Trump asked in an interview on CNBC.

The comments by Mr Trump echo his previous intervention on AT&T’s takeover of Time Warner and could prepare the ground for Raytheon and United to claim improper political interference if antitrust enforcers attempt to block the deal.

In the case of AT&T-Time Warner, the spectre of the president’s vow to block the deal on the campaign trail hung over Makan Delrahim, the antitrust chief of the Department of Justice, when he sued to block the transaction.

A federal judge cleared the deal in a decision affirmed on appeal. Mr Delrahim has always denied any political considerations played a part in his move to block the takeover.

Mr Trump on Monday said a merged Raytheon-United Technologies would be “one big, fat, beautiful company” that could result in higher costs for the US military.

“I have to negotiate — meaning the United States has to buy things — and does that make it less competitive? Because it’s already non-competitive,” he said.

The president added that the US already spent far more than “other major countries” such as China and Russia on its defence budget, insisting “part of it is that we have no competition”.

Earlier in the day, both chief executives of the merging companies had told analysts on a conference call that the deal will not harm competition or raise regulatory hurdles. 

Mr Trump has gone further than past presidents in his willingness to entangle himself in corporate matters and to openly criticise specific companies by name on a range of issues from trade to free speech and antitrust.

He has taken aim at Google and other Silicon Valley firms for allegedly discriminating against conservatives, which the firms have denied, adding weight to the political pressure on the justice department and the Federal Trade Commission to put technology giants under tougher scrutiny.

The agencies have recently taken steps towards launching antitrust probes of Google, Facebook, Apple and Amazon.

The Raytheon-United Technologies deal will be reviewed on antitrust grounds by either the DoJ or the FTC, which share responsibility for assessing whether mergers are anti-competitive. While both are led by appointees of Mr Trump, the FTC is an independent agency designed to have greater insulation from the administration.

Greg Hayes, UTC chairman and chief executive, said he didn’t see “big push back” from the US department of defence, which he predicted would reap “huge benefits” from the deal.

“From a regulatory standpoint, the beauty of this deal is there's very little overlap. You're talking on the basis of $75bn or $80bn of sales, less than 1 per cent of our sales probably have overlap. This is truly a complementary deal from a technology standpoint or from product standpoint,” he told analysts. 

“Less than 10 jurisdictions have to approve this,” he added, noting that the deal will not require the approval of the Chinese government to proceed. UTC’s acquisition of avionics specialist Rockwell Collins, announced in September 2017, did not close until November 2018 after Chinese authorities delayed a decision as trade tensions with the US grew.

“We truly believe that we're going to get this done relatively quickly. Our goal right now is to have a regulatory approval by the first quarter of next year,” he said. 

Richard Aboulafia, aerospace and defence analyst at Teal group, predicts that the deal will provoke little regulatory scrutiny. “Since there's no overlap, I don't know what the grounds would be for DOD objection. And Trump might signal concern for his populist base, but given his strong pro-business approach, it's really just smoke,” he said.

UTC shares fell 2 per cent after the New York open, which coincided with the release of Mr Trump’s comments. Raytheon shares were up 2 per cent after the open. 

As he bids to lead Taiwan, Terry Gou must respond to challenges such as the US-China trade war and a shift to niche products

Few companies epitomise the era of globalisation better than Hon Hai, the world’s largest contract electronics manufacturer. Known as Foxconn Technology Group, its formula for success includes: massive plants in China run with an abundant supply of low-cost labour, proximity to clusters of suppliers and a reliance on free trade and a seemingly insatiable global appetite for mass market devices. 

Over the past 15 years, Foxconn has grabbed a significant share of the orders to make personal computers and smartphones for brands such as Apple, Dell and Huawei. Along with rival manufacturers from Taiwan such as Quanta Computer, Pegatron and Wistron, it has led a constant race to make the manufacturing process cheaper, faster and more efficient.

This Tuesday will be a historic day for Foxconn, when it will host an investor conference for the first time ever. On the agenda at the event in the Taipei suburb of Tucheng, which translates as Dirt City, is the looming existential challenges for a company which is both the world’s largest assembler of Apple iPhones and China’s biggest private sector employer. 

The immediate order of business is to explain how the company will be run after Terry Gou, the tycoon who founded it 45 years ago, steps down as chairman to enter politics and run for the Taiwanese presidency.

But the even bigger issue will be how Foxconn plans to navigate two separate threats from politics and from artificial intelligence which have the potential to wreck the business model of the handful of Taiwanese electronic manufacturing services companies that dominate the consumer technology supply chain.

The company is caught in the middle of the escalating trade war between the US and China — the one-time champion of globalisation now suffering as more hawkish members of the Trump administration seek ways to “decouple” the two countries’ technology sectors. But it is also trying to come to terms with the impact of AI, which is leading to a shift in the market away from the mass production that fuelled its growth towards more niche, higher-margin items. 

Reflecting worries over these challenges, Hon Hai’s share price has dwindled by 51 per cent over the past two years to T$71 on Friday. Last week, Mr Gou warned of a “tsunami” in the global economy triggered by the trade war.

With the US government raising tariffs to 25 per cent on $200bn of Chinese goods and blacklisting telecoms equipment maker Huawei last month, Taiwan contract manufacturing executives have been scrambling to shift at least some production out of China.

That is an endeavour fraught with difficulties. “It is nearly impossible to replicate the ecosystem we have in China quickly,” says Jean-Frederic Kuentz, a senior partner at McKinsey, the consultancy. “The first problem is that there is not enough manpower. The second is the network of suppliers — panel makers, moulding companies, component makers. It is a big, big headache.”

The changes brought to the market by AI are at least as disruptive for the industry. Last year, global shipments of smartphones — a product that accounts for more than half of Foxconn’s revenue — dropped 4.5 per cent to 1.39bn units, and this year will see a 3.1 per cent decrease, according to Canalys, a technology research firm.

Experts believe that even if growth returns next year, underpinned by the adoption of 5G, the boom days for smartphones are over. “For many functions that are on your smartphone today, you will soon no longer need it,” says Yu Kai, co-founder of AISpeech, a Chinese voice recognition start-up that Foxconn has invested in. “Some of them will be taken over by smart speakers, others by alternative home appliances, yet more by applications in your car. We may even see the day where the concept of a device becomes obsolete altogether as you interact via voice or image recognition with your environment.”

Some of the new AI-powered market segments, such as smart speakers, are growing fast. Applications in the automobile industry, medical services and robotics also offer growing returns. But analysts say these segments are too small and technologically too demanding to allow Taiwanese firms to quickly replace revenue and profits from their current range of IT products.

“At the moment, you have mass market products with more than 2bn units. Some of the new products will be in the tens of thousands of units. Only wearables are going to be in the hundreds of millions,” says Manish Nigam, head of Asian technology research at Credit Suisse. “There is no single new mass market product out there, so there will be consolidation among the contract manufacturers.”

Analysts say a focus on scale — the very strategy that boosted Foxconn and its Taiwanese peers in the last few tech cycles featuring the laptop, the tablet and the smartphone — is now making it harder for them to adjust.

“As HP, IBM, Dell, Apple came knocking on their door with huge volumes of things to be made, the Taiwanese never really diversified into the other things with low volume but much higher margins and also much higher technology threshold,” says another technology analyst. “They really completely collectively missed this. So now it’s a lot more complicated because in those niches where there is growth, it is not the EMS industry incumbents that benefit.”

Some experts believe that some of the contract manufacturing companies in the region that lost much of their IT business to Foxconn a decade ago could end up being the biggest beneficiaries of the new market segments. They name, for instance, Singapore-based Flextronics and Venture, both of which have sizeable businesses making electronics hardware for the medical sector.

Liu Rufeng, a vice-president at AISpeech who works with manufacturers to develop hardware solutions for its voice recognition applications, says traditional EMS firms are mostly absent from these new areas.

“The hardware manufacturers that make smart speakers are often companies that were already making traditional speakers, such as TCL and Guanjie,” he says. “It is mainly Chinese companies, not the big Taiwanese EMS firms. In white goods, it’s the traditional white goods makers.”

As for in-car electronics, a market segment with higher technical barriers to entry but also much higher profit margins, Mr Liu says Chinese electronics contract manufacturers including Huayang and Botai were taking the lead.

Many of the big Taiwanese contract manufacturing firms are struggling to address these challenges — at a time when the US-China friction is likely to put additional strain on profit margins and is forcing some to rethink the way they organise their operations.

Pegatron, Foxconn’s closest rival, has relocated some production from China to Indonesia. The company is building a plant in Vietnam and eyeing production in India. Executives caution that such a footprint spread out over thousands of kilometres and across borders will significantly change the cost structure of production.

Tung Tzu-hsien, Pegatron chairman and chief executive, says no other country could offer as attractive an investment environment as China was able to in the past, with a massive workforce that gave companies headcounts in the hundreds of thousands, consistent policies that were backed by several generations of officials and a wide range of nearby component makers.

“That will not appear anywhere else again,” he says. “Where will we move next? I don’t know. Or will it no longer be fashionable to keep moving, and automation and robots will radically change the face of manufacturing?”

Wistron, the third-largest assembler of Apple’s iPhone, saw the contribution from its smartphone business drop to 15 per cent of revenues in the fourth quarter of 2018, less than half of what it had been a year earlier. Simon Lin, company chairman, said in March that he expected smartphone revenues to stabilise at this lower level, but at the same time the company is building a smartphone plant in India. Pressed by investors why Wistron would not phase out its smartphone business altogether if it was a drag on profits, Mr Lin said the company would be extremely cautious with any further capital investment. 

“They are like a deer in the headlights,” says a Wistron investor.

The same cannot be said of Foxconn. Mr Gou has been continuously reinventing his business empire over the years. Having started out making plastic parts for television sets, he not only diversified into game consoles, PCs, laptops and smartphones, but also expanded upstream into manufacturing higher-margin components. Foxconn also made forays into automobile electronics more than a decade ago. 

Mr Gou started to seriously work on automation several years ago. Shocked by a string of suicides among young migrant workers in the company’s vast factory towns in China, he pledged in 2011 to install as many as 1m robots in Foxconn plants within a few years.

Although the company is still far short of that target — analysts estimate the number of robots in Foxconn plants in China is less than 20,000 — Mr Gou’s automation push is part of a much bigger plan. Through Foxconn Industrial Internet, an affiliate that listed in Shanghai last year, the group is attempting to meld robotics, data analytics and the internet of things in a way that would allow revolutionary efficiency gains in its own factories and that it could also sell to others.

Foxconn calls those production lines “lights-off factories” — a term that means that it no longer needs to rely on humans to worry about problems such as tools wearing out or accidents on the line. One of the production lines where this concept is most advanced, in Foxconn’s big plant in Shenzhen, has been included in a World Economic Forum list of “lighthouse” factories highlighting future trends in manufacturing.

But industry experts say that so far Mr Gou’s beacon is little more than an experiment. “Most of FII’s revenue is still traditional, labour-intensive assembly,” says one analyst. A former Foxconn executive wants to use the new technologies to reduce inventory to zero. But he adds that progress was very slow because customers would need to share sensitive data on demand from customers — which they are all reluctant to do.

The initiative also has a flipside: FII has been listed as a leading company under Made in China 2025, the Chinese government’s plan to turbo-boost an indigenous technology industry. In that context, the Chinese government fast-tracked FII’s Shanghai IPO last year.

“We believe that Terry Gou had to promise the Chinese leaders certain things in exchange, including to help push their domestic tech industry,” says a Taiwanese banker.

Such perceptions are not helpful against the backdrop of the escalating technology and trade fight between Beijing and Washington. Foxconn is already more directly in the line of fire than most because no one else has made a bigger bet on China. About 90 per cent of the group’s over 1m employees are in China. The company is China’s largest exporter, accounting for 4.2 per cent of the country’s total exports last year.

Mr Gou appears acutely aware of the risks. In recent speeches, he oscillated between suggesting that Taiwan’s technology industry mediate between China and the US and urging the country to organise its companies to “go to America and rebuild the supply chain”.

Those were just campaign speeches. Foxconn’s investors are likely to demand that Mr Gou’s successors take a clearer stance.