TheChek News Flow

Macro :

- Joe Biden’s Easy Ride in 2020 Race Hits Pothole in a Bad Week

Keep an eye on :

- BYND US : Beyond Meat Short-Sellers Take a $155 Million Beating in Rally

- DBK GY : Deutsche Bank Downgraded to BBB by Fitch on Continued Difficulty

- DIA SM : Regulator Won’t Start Proceedings Over Ana Botin’s Tweet on DIA

- ENEL IM : Germany to Sell Stakes in Foreign Nuclear Companies: Der Spiegel

- ENGI FP : Germany to Sell Stakes in Foreign Nuclear Companies: Der Spiegel

- ENX FP : Euronext Controls 97.7% of Oslo Bors VPS Capital

- FXPO LN : Ferrexpo Investors Show Discontent With Miner’s Accounts

- FCA IM : Fiat Chrysler Recalls Nearly 300,000 Ram 1500s on Software Flaw

- HDD GY : Heideldruck Seeks Another Strategic Investor: Euro Am Sonntag

- IBE SM : Germany to Sell Stakes in Foreign Nuclear Companies: Der Spiegel

- MS I M : Mediaset, Mediaset Espana to Be Merged Into Dutch Holding

- MS IM : Berlusconi’s Fininvest May Own Over 50% Voting Rights in MFE

- MOSB LN : Gatemore Capital Takes 10% Stake in Retailer Moss Bros: Sky News

- NN NA : Dutch Insurer Vivat ‘Seems Like a Good Deal’ for NN: Degroof

- ALOCA FP : Oceasoft: Accord W/ Banking Partners on Redemption Conditions

- OTE1V FH : Outotec Awarded EU250M Copper Plant for Baikal Mining Company

- UG FP : PSA Is Always Open to New Deals, CEO Tavares Tells Expresso

- RNO FP : Renault Could Abstain on Nissan Governance at Nissan AGM: Source

- RNO FP : *ROSTEC PLANS TO SELL RENAULT ~8% OF AVTOVAZ FOR 10B RUBLES: RIA

- RNO FP : After Fiat Flop, Senard Faces Added Pressure to Fix Renault

- RVLV US : *CITRON SAYS IT EXPECTS REVOLVE STOCK TO TRADE TO $50 ( close $34 +88%)

- RDSA NA : Shell Says St. Fergus Capacity Restored After Unplanned Outage

- SEV FP : Rosneft and Suez to Consider Creation of Joint Venture

- SIE GY : Siemens Mobility Wins ~EU1.1B Order in Russia

- SIE GY : Gazprom, Siemens Discuss Creation of Russian Joint Venture

- TEG LN : *TEN ENTERTAINMENT: WOODFORD CUTS POSITION TO 5.54% VS 10.08%

- TER FP : Terreis Files Buyback Offer for Ordinary, Preference Shares

- UBI FP : EA and Ubisoft Have ‘Most at Stake’ as E3 Summons Gamers to L.A.

decade ago British Land was considered a bellwether of United Kingdom real estate. The property firm, along with rival Land Securities , accounted for 42% of the sector’s market value—but that share has been almost halved, to 22%.

Both firms have been overexposed to struggling retail sites and have also been hurt by the uncertainty around Brexit. This has hit shares, with British Land down 25% since January 2016, compared with the wider real estate sector’s slide of just 11%.

But British Land (ticker: BLND.UK), a FTSE 100 component, owns a major 53-acre development in East London, and a planning decision that is due in three months could transform its fortunes and send its shares shooting back up.

The property group is a real estate investment trust, or REIT, that traces its history back to 1856. It has a staff of 559 and a market value of five billion pounds ($6.34 billion). Its portfolio is diverse, ranging from Sheffield’s Meadowhall, one of the largest shopping malls in the country, to the “Cheese Grater,” London’s third-tallest building.

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Shopping malls have been at the center of its business for years but are now at the heart of its problems. In 2010 retail accounted for 66% of the firm’s portfolio. But shopping habits have clearly shifted. Consumers are buying more online and are spending less in the wake of the 2008 financial crisis. This is causing retailers to collapse, and British Land’s malls are fast becoming obsolete.

The REIT is urgently adjusting its strategy. Retail is now down to 45% of its portfolio after it sold £2.9 billion of retail property since 2014. It has a goal of reaching 30% in five years’ time. But news of that goal came too late for the annual results.

The value of British Land’s properties fell 4.8% to £12.3 billion in the year ended in March, driven by an 11.1% drop in its retail sites to £5.58 billion pounds. Pretax profit fell to £352 million pounds from £394 million, and RBC Capital markets said pretax profit will drop to £309 million by 2023.

While the shift from retail to more mixed-use sites may take years to gain financial traction, some analysts view it as promising. Miranda Cockburn, an analyst at broker Panmure Gordon, sees the stock heading to 570 pence ($7.23), up from 532. Peel Hunt has a target of 630 pence. But neither seems to have included the potential of Canada Water, one of London’s most significant development projects, into their models. British Land has yet to win planning permission from the local authority.

he site, a large chunk of docklands south of the River Thames, would create a new urban center that could turbocharge British Land earnings.

In May 2018, it entered into a Master Development Agreement with the local government council for 40 buildings that would contain 3,000 new homes (35% of them affordable housing), offices, leisure space, and a healthy amount of retail in the mixed-use format where it tends to work. Documents seen by Barron’s show British Land estimates the scheme could generate total profit of £612 million during the development process, which is expected to span at least 10 years.

The plans are likely to be refined if the council does not wave them through initially. Either way investors have the potential of a short-term Canada Water win, or a longer-term strategy-shift play.

Alibaba Group Holding reported rip-roaring quarterly earnings in May, smashing analysts’ estimates to deliver 50% year-over-year growth in both profit and revenue. With the drums of a trade war beating, markets didn’t care. The Chinese e-commerce giant’s stock has fallen 22% since Donald Trump took a hawkish turn toward Beijing on May 4. Shares in Tencent Holdings , China’s answer to Facebook , Netflix , Spotify, and PayPal rolled into one, are off 15%.

That spells buying opportunity to some investors. “Alibaba (ticker: BABA) and Tencent (700.Hong Kong) are our two biggest positions,” says Dara White, head of emerging markets equity at Columbia Threadneedle Investments. “They are well-positioned, and attractive at these price levels.”

White’s bull case starts with the obvious: Both companies derive nearly all their income domestically. Their macro driver is Chinese economic growth, which authorities have tools to bolster, even if Washington does its worst. Export’s share of China’s gross domestic product fell from 35% in 2006 to about 20% last year. “China has slashed its export dependence almost in half,” says Colin Gillis, director of research at hedge fund adviser Chatham Road Partners. “They can likely maintain domestic consumer strength through a trade war.”

Read more: Alibaba Stock Could Benefit From China’s Pivot to Domestic Consumers

The twin internet pillars offer attractive micro stories, too. There aren’t many new users left to sign up in China, but there’s plenty of room to squeeze more cash out of existing ones. Alibaba takes an average 4% commission from online sales, versus Amazon.com ’s (AMZN) 20%, White says. Tencent sneaks just two ads a day by social media surfers; Facebook bombards them with more than 15. And there are fast-growing new market segments. Alibaba reported a 76% jump in cloud computing revenues in its latest earnings. And it’s plowing Chinese cash flows into challenging Amazon and Walmart (WMT) in the still-up-for-grabs Indian e-commerce market. “We have a longer term buy on Alibaba, based on cloud and India expansion,” says Ken Sena, CEO of artificial intelligence-based researcher Aiera.

Tencent notched 44% growth in its fintech division, which includes cloud. Meanwhile, Chinese regulators ended a moratorium on approving new videogames, which was casting a shadow over Tencent’s current cash cow.

Baidu (BIDU), a search provider that once formed a troika with Alibaba and Tencent, faces a more muddled future. It failed to develop a constellation of complementary apps on the Google model, investors say. “There’s a lack of strategic focus,” says Edmund Harriss, lead Asia manager for Guinness Atkinson. “They still control search, but that doesn’t account for much time spent online.”

Harriss does find hot prospects, though, in several smaller Chinese internet names, including car dealer Autohome (ATHM), which has crashed nearly 25% since Trump’s trade demarche; online teacher New Oriental Education and Technology Group (EDU), down 8%; and games specialist NetEase (NTES), off 11%. “Tencent or Alibaba attract so many people that you pay up on multiples,” he says. “I prefer these other companies.”

A word of warning: Investors in Chinese internet shares should be prepared for more short-term bumps and bruises, with the political background so opaque. “Alibaba may not be an attractive trade, but as an investment, I like it,” Gillis says. A rough patch for the Chinese economy could strengthen the giant incumbents, as competitors find it harder to attract capital, White adds. “Even in this environment, they are generating a tremendous amount of cash flow, and building an even bigger moat,” he observes. Unless a deluge swamps Chinese business, that should prove profitable down the road.

It has been a while since a massive stock market rally has frightened us this much.

On first glance, there seems no reason to be scared. The Dow Jones Industrial Average gained 1,168.90 points, or 4.7%, to 25,983.94 this past week, while the S&P 500 rose 4.4%, to 2873.34, and the Nasdaq Composite advanced 3.9%, to 7742.10. It was the best week for all three indexes since November 2018.

Credit for the rally could be given to headlines about trade—the U.S. might not raise tariffs on Mexico on June 10, after all—and hopes that the Federal Reserve will cut interest rates, even if those hopes were fueled by disappointing economic data such as this past Friday’s payrolls report. But, as Nicholas Colas, co-founder of DataTrek Research, noted after the S&P 500’s 2.1% rise last Tuesday, “happy markets don’t surge 2% in a day. Worried markets do.”

That was certainly the case back in November, which preceded a very bad December. It’s hard to see an imminent repeat of December’s market slide, however, as the latest advance didn’t attract as much buying.

The market, at its most basic level, is a math problem: The level of the S&P 500 is a function of earnings expected from S&P 500 companies multiplied by how much buyers of stocks are willing to pay for those earnings. Right now, S&P 500 companies are expected to report earnings of $168.01 a share in 2019, according to FactSet, up 3.1% from 2018. The consensus estimate for 2020 is $186.52. Dividing the S&P 500’s latest closing price by 2020 earnings estimates yields a price/earnings ratio of 15.4.

Dow Jones IndustrialAverage

Source: FactSet

Jan. ’19

July ’18

21000

22000

23000

24000

25000

26000

27000

S&P 500 Index

Source: FactSet

Jan. ’19

July ’18

2300

2400

2500

2600

2700

2800

2900

3000

NASDAQ Composite Index

Source: FactSet

Jan. ’19

July ’18

6000

6500

7000

7500

8000

8500

Barron's 400 Index

Source: FactSet

Sept. ’18

Jan. ’19

May

550

600

650

700

750

800

The trade war, however, has made relying on those numbers nearly impossible. On May 31, Citigroup strategist Tobias Levkovich introduced his 2020 earnings target of $178.50, which would mean that either the S&P 500’s P/E multiple would have to rise or the index would have to fall. But even Levkovich acknowledges that his number may be wrong. “It is extraordinarily difficult to measure the potential repercussions from a full-on trade war,” he writes.

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Even trying to get 2019 right isn’t going to be easy. Analysts expect earnings to fall by 2.3% during the second quarter, and stay basically flat during the third before a 7% rise during the fourth quarter produces any growth at all, observes DataTrek’s Colas. That seems like a lot to ask.

The Fed’s move toward easier monetary policy, which began in January, could give stocks a boost. But those kinds of shifts take about six months to work through the system, so we won’t know for sure until third-quarter earnings season. “In the third quarter, we will start to find out whetherthe easing policies are starting to work and whether they prove to be more than enough to offset the negative impact from the trade wars,” explains Leuthold Group’s Jim Paulsen.

Don’t be surprised if there are more frightening moments between now and then.

All-stock deal would create giant supplier of military equipment to US government

United Technologies is nearing an agreement to merge its aerospace business with Raytheon in a deal that would create a new giant in the sector, said people briefed on the matter.

The two groups are finalising an all-stock agreement that may be announced on Monday before US stock markets open, said one person. 

The decision to bring together the companies’ aerospace business will not impact United Technologies’ plan to spin off its Otis elevator and Carrier building-systems businesses into separate units.

Combining the two companies will help them compete globally at a time when US companies face mounting challenges due to the trade war launched by US president Donald Trump against China. 

Gregory Hayes, chairman and chief executive of United Technologies, is expected to become the chief executive of the new company, while Thomas Kennedy of Raytheon would take on the chairmanship, said a person briefed on the matter. 

The deal would create a powerhouse supplier of military equipment to the US government, bringing together the third-largest recipient of defence spending last year, Raytheon, with the eighth-largest, United Technologies. The two companies together were paid about $24.3bn by the US defence department in fiscal year 2018, not far short of the $27.4bn paid to the second-largest recipient, Boeing.

Raytheon, whose shares have fallen by 10 per cent over the past year, has a market value of $52bn and net debt of about $4bn. Shares in United Technologies have risen 3.4 per cent in past year, giving it a market value of $114bn including the units of its business that will not be part of the tie-up with Raytheon. It has net debt of $44bn. 

An agreement would cap a wave of deals in the aerospace and defence industry. UTC in 2017 agreed to buy Rockwell Collins for $23bn in a deal to create one of the largest suppliers to the aerospace industry. 

Last October, two other US defence companies, L-3 Technologies and Harris Corp, agreed to merge to form a company with $16bn in revenue focused on defence electronics and military communications. 

The deal, if agreed, will also have far-reaching repercussions for the US defence industry, which for the past two decades has been dominated by five “prime” contractors — Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon — companies with the technological and financial firepower to deliver programmes for the Pentagon. The new L-3 Harris Technologies was pitched as a non-traditional, more innovative “sixth” prime.

It also comes at a difficult time for Boeing, which has been focused on the fallout from the 737 Max crisis in the wake of two deadly crashes. 

“It’s certainly an unexpected development,” Richard Aboulafia, defence industry analyst at Teal Group, said.

“The resulting company would be extremely diverse but exposed to extremely different markets and cycles. It would make for a much more formidable supplier, with a lot more negotiating power, spread across both their commercial and military lines.”

The Wall Street Journal first reported news of the talks. 

Patient Capital Trust is most bet-against investment trust in FTSE 350

Hedge funds are circling Neil Woodford’s investment trust, along with several companies he invests in, as the fallout from the trading freeze on his largest fund is set to continue into a second week.

The Woodford Patient Capital Trust, a closed-ended vehicle that focuses on companies with long-term prospects, is the most bet-against investment trust in the FTSE 350 by some margin. Analysts are also speculating about whether its 28 per cent discount to net asset value (NAV), a measure of an investor sell-off, would invite attention from activist hedge funds. Patient Capital shares sank to a fresh all-time low of 62.5p on Friday, down more than 30 per cent from their high in January.

“The discount will no doubt appeal to some bargain hunter,” said Peter Sudlow, a financial adviser at Sapienter Wealth Management. “The boards of investment trusts are meant to be independent and can change the investment manager. How long until the board [of Patient Capital] feels shareholder pressure?”

Short positions, or bets, against Patient Capital have risen to 4.4 per cent of stock, up from 2 per cent at the beginning of March, according to IHS Markit, the data provider. The fund with the second-biggest short position is Bankers Investment Trust, at 2 per cent, while the average short position across all 56 trusts in the FTSE 350 is 0.5 per cent.

The two investment managers with the biggest short positions in Patient Capital are Leucadia Investment Management and Lombard Odier, the Swiss group.

Several companies in which Mr Woodford invests have also been targeted by hedge funds, which are anticipating a fire sale of assets after the suspension of trading in Woodford’s Equity Income fund.

Kier, the construction group whose share price dropped 40 per cent last week, has a 13.7 per cent short exposure, while Theravance Biopharma, the drugs developer, is at 11.7 per cent.

Patient Capital’s large discount to NAV could draw in activist investors that specialise in such situations.

“This may be attractive to an activist who has lined up another investment manager to take on the portfolio, or a more constructivist activist who offers to help with governance of the trust and allows Mr Woodford to focus on the investments,” said Malcolm McKenzie, a managing director at Alvarez & Marsal, which advises companies on defending themselves against activists.

Another threat to the Patient Capital Trust is its leverage. It is close to the maximum in its £150m overdraft with Northern Trust, the fund’s depositary. The overdraft was extended this year and is due to expire in January.

Repaying the overdraft would require liquidating about a sixth of the trust’s portfolio, according to one person with knowledge of the business. “That’s assuming the current valuations stand up. In the current climate it’s not inconceivable that Northern Trust would look to wind down their exposure when the term ends rather than roll it on for another year,” the person said.

Iain Scouller, a managing director at investment bank Stifel, said the board’s intentions to cut debt from levels of close to 20 per cent of NAV pointed to “sales of unquoted investments in the weeks and months ahead”.

Woodford said it expected the overdraft facility to continue uninterrupted. “The credit facility to WPCT continues to operate as agreed and subject to WPCT maintaining ongoing compliance with the related terms and conditions contained within that facility,” it said.

In the past five years, activists have waged 92 campaigns against investment trusts and listed asset managers in the US and Europe, according to A&M. The most active are Land & Buildings, which launched 11 campaigns in that period, as well as Elliott Management, Dryden Capital and Saba Capital, which each launched five.

Among the highest profile campaigns against UK investment trusts in recent years are Edward Bramson’s successful battle with Electra and Elliott’s triumph at Alliance Trust.

Mr McKenzie said investment trusts typically traded at a 15 per cent discount to NAV when they were targeted by activists, but said Mr Woodford’s diminishing army of loyal followers and his high exposure to unfancied private companies made him less vulnerable.

“When you get above 20 per cent, that’s a pretty serious discount — activists will be attracted once it gets to that point. But you have got all those other issues as well,” he added.

Hagreaves Lansdown chief executive Chris Hill has apologised to tens of thousands of customers affected by the suspension of Neil Woodford’s £3.7bn equity income fund, which the company continued to support until it blocked investors from leaving last week.

In a statement on Sunday Mr Hill, chief executive of the UK’s largest online stockbroker, said he wanted to “apologise personally to all clients who have been impacted by the recent problems with the Woodford Equity Income Fund.

“We all share their disappointment and frustration. Our priority right now is to support our clients and keep them informed,” he said.

If Brussels corners Italy’s government over its fiscal plans, it will resort to dangerous fiscal tricks

A curious thing happened in the Italian parliament last week. The chamber of deputies voted unanimously in favour of a motion to introduce a parallel currency in Italy — the so-called mini-BOTs. It was a non-binding motion. I suspect that many of the MPs in the lower house probably did not know what they were voting for when they called on the Italian coalition government to consider the creation of “government bonds in small denominations”.

Mini-BOTs would look like real money. Their denominations would be the same as euro notes. Depending on how they are designed, Italians could even pay their taxes with them. For this reason they would stand a good chance of becoming an accepted means of payment. Mario Draghi, the European Central Bank president, gave his view last week: “Mini-BOTs are either money and then they are illegal, or they are debt and then the stock of debt goes up. I don’t think there is a third possibility.”

I am not sure I agree with Mr Draghi on this point. The mini-BOTs could be both at the same time — debt with money-like characteristics.

You might want to dismiss this development in Rome as an eccentric vote by an eccentric parliament. But consider the political context and Italy’s confrontation with the EU.

Matteo Salvini is only deputy prime minister but his League party captured 34 per cent of Italy’s popular vote in last month’s European elections. A simulation shows that his party, with a rightwing ally, would win a majority of seats in a general election. And Italy’s first-past-the-post system could leverage Mr Salvini’s power beyond his share of the vote.

In Brussels, meanwhile, the European Commission has triggered the early stages of what is known as an excessive deficit procedure against Italy. It is the first of a number of steps that could eventually end up in a financial penalty. The commission’s complaint relates to the 2018 rise in Italy’s debt to gross domestic product ratio.

It is possible that EU finance ministers will put the procedure on ice. But the stand-off is almost certain to recur in the autumn when Italy is due to present its 2020 budget. Mr Salvini is insisting on big income tax cuts that could push up the fiscal deficit by another 1 or 2 percentage points.

On economic grounds, one could probably justify a moderate short-term fiscal boost. But a big permanent tax cut would translate into an increase in Italy’s structural deficit. It would certainly breach EU rules.

This smacks of a looming conflict, possibly accompanied by a financial crisis. How would it play out and would the government collapse? The political situation is different from 2011, when Silvio Berlusconi was forced out in favour of a technocrat after losing his parliamentary majority The current government has a large majority. If it were to collapse, new elections could end in a landslide victory for Mr Salvini.

This is where the discussion on the so-called mini-BOTs comes in. Italy cannot leave the eurozone in a single dramatic act. Any politician who tried this would bring themselves down. But we do not know what Mr Salvini really wants.

Does he really want Italy to leave the eurozone? If so, the mini-BOTs are almost too good a vehicle to be true. The extra funds would allow him to cut taxes. And they would serve as an indispensable intermediate step for an eventual exit.

But if he does not want to leave the eurozone, he should not touch them. There is not much the EU could do to stop the issuance of mini-BOTs. Fiscal policy is within the domain of national sovereignty. But the European Commission will count these instruments as part of Italy’s official deficit and debt. It can argue that if people used mini-BOTs to pay their taxes, then surely the Italian government’s future euro tax revenues would decline. So would the country’s capacity to service its debt, which is denominated in euros. Mini-BOTs will not allow Italy to escape the excessive debt procedure. Their announcement could even precipitate an immediate financial crisis.

From an EU standpoint, mini-BOTs are more than just an instrument of fiscal irresponsibility. They would take the confrontation between Rome and Brussels to a new level. The eurozone would lose its cohesion if member states started to issue their own money — however fake it may be. After all, mini-BOTs were originally designed by Italian Eurosceptics for that very reason.

The EU should also tread with caution. There is a strong case not to proceed with an excessive deficit procedure right now and to wait until the autumn. The danger is that the more Mr Salvini is politically cornered, the more likely he is to resort to this instrument. When he does, the eurozone crisis will return. And the ECB may not be able to come to the rescue this time.