After Hours Summary: WSM +11.5%, OKTA +8%, MRVL +3%, UBER +2.4%, ZUO -27%, NTNX -15%, GPS -12.1%, DELL / VMW -3% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: WSM +11.5%, OKTA +7.9% (also announces first Asia Pacific infrastructure and new office in Germany), YEXT +4.3%, MRVL +3.2%, UBER +2.4%
Companies trading higher in after hours in reaction to news: BRFS +7.4% (confirms has started negotiations with Marfrig in connection with a potential business combination), WTRH +3.7% (light volume; initiated with Overweight at Piper), BREW +2.9% (entered nationwide "claims made" settlement covering purchases of specified Kona beers), RH +2.2% (WSM sympathy), RUBY +2.2% (ticking higher; initiated with a Buy at Guggenheim), LYFT +2.2% (UBER sympathy), TIVO +1.3% (names Dave Shull as President and CEO and provides improved business outlook), GPRO +1.1% (DE Shaw increases passive stake), RGLD +1% (reports gold reserves of 3.8 million attributable ounces were 8.9% lower than the prior calendar year), DISCA +0.8% (CEO of Global Direct to Consumer bought 35.9K shares), XRAY +0.5% (Pres/CEO disclosed the purchase of 10K shares)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: ZUO -27.1% (also Marc Diouane will transition from his current role of President to advisor), NTNX -15.2%, RRGB -13.1%, GPS -12.1%, SCHL -9.7%, ZS -4.4%, DELL -3.3%, VMW -3.1%, ULTA -2.6%, COST -1.2%
Companies trading lower in after hours in reaction to news: XBIT -9% (light volume; announces public offering of common shares and terminates equity distribution agreement with Piper entered into on April 30, 2019), ELTK -3.5% (modestlypulling back), ES -1.5% (announces public offering of 15.6 mln common shares)
For Renault and FCA, Past Auto Deals Hold Clues to Happier Future
The U.S. car-maker’s ill-fated 1998 alliance with Germany’s Daimler is one that offers guidance on what can doom ‘mergers of equals’
BERLIN—As the leaders of Renault SA and Fiat Chrysler Automobiles NV discuss their plans for creating a new car behemoth, they may want to study the industry’s previous deals to discover why big auto mergers often fail.
In 1998, Bob Eaton, Chrysler’s chairman and chief executive, and Jürgen Schrempp, CEO of Daimler, met in New York to seal what would become a textbook doomed merger.
The deal ran into its first roadblock even before it was finalized that day, The Wall Street Journal reported at the time, when the two men argued over what to call the new company, disagreeing over whether Daimler or Chrysler should come first in the new company’s name.
“It was a very emotional issue at the end, emotional on both sides,” Mr. Schrempp said in an interview at the time. “We both felt strongly.” Ultimately, they agreed on DaimlerChrysler.
The argument over the name exposed a cultural mismatch, common in so-called mergers of equals. The companies parted ways less than a decade later.
As Fiat Chrysler and Renault enter their possible partnership, industry and merger experts are warning against the pitfalls that have ended other such tie-ups.
When mergers fail, analysts say, it’s often because of unrealistic expectations the companies have of each other or of the benefits the deal can actually deliver. The companies also fail to grasp that in any merger, one partner will have to take the lead, analysts say.
“There is no such thing as a merger of equals. There is always a dominant partner,” said Susan Cartwright, a professor of organizational psychology at Lancaster University in the U.K. who studies the impact of mergers on employees.
In the case of FCA and Renault, the two companies are no longer led by their larger-than-life bosses—FCA’s Sergio Marchionne and Renault’s Carlos Ghosn—limiting the risk factor of outsize personalities.
FCA and Renault also have little overlap and could share technologies, lowering the need for job cuts and increasing the opportunity of cost saving. In their public statements, FCA and Renault have targeted at least €5 billion ($5.59 billion) in annual savings.
But mergers of big mass producers like car makers are driven in part by seeking scale as a way to lower a product’s unit cost. Achieving these savings, or synergies, requires succeeding in the game of give-and-take, where mergers like the one between Daimler and Chrysler fell short.
Sharing electric-vehicle technology, one of the bigger drivers of the FCA-Renault deal, is probably the easiest to accomplish. Fiat and Chrysler have little viable electric-car technology, while Renault’s Zoe and its partner Nissan Motor Co. ’s NSANY -0.64% Leaf are the best-selling economy-size battery vehicles on the market.
“Fiat Chrysler will just adopt the electric technology from Renault,” said Stefan Bratzel, founding director of the Center of Automotive Management in Bergisch Gladbach, Germany. “The hard part comes when they start talking about the overlap in conventional engines.”
Similar vehicles built by Renault, Fiat and Chrysler also would have to use the same basic parts. Volkswagen AG improved profitability by repurposing its factories in 2012 to allow all its passenger car brands to share the same technology and produce each other’s cars.
Renault’s advantage in electric cars could create room for cooperation but also tension between Fiat and Chrysler engineers, as Daimler engineers used to lord the company’s premium technology over Chrysler’s, which was geared for mass-market vehicles, Mr. Bratzel said.
“Many engineers didn’t want to work together as a result,” he said.
FCA and Renault declined to comment for this article.
Fiat Chrysler wasn’t itself a merger of equals. Fiat initially gained a 20% stake in Chrysler in 2009 as the American company emerged from insolvency proceedings. Fiat later raised the stake to a majority and the two companies formally merged in 2014. The American side of the business has consistently generated some 90% of the overall company’s earnings.
Merger complications are nothing new. Taking advantage of the Great Depression in 1929, General Motors Co. bought a struggling Adam Opel AG. But in the 1980s, GM’s European business fell on hard times and after nearly two decades of losses, GM Chief Executive Mary Barra finally sold the company to Peugeot SA .
When Peugeot chief Carlos Tavares unveiled his plan for the German car maker at Opel’s headquarters in 2017, union representatives praised his decision to let it produce for export again, something GM had limited. The move galvanized the workforce, and within 18 months Opel was returning profits and exceeding its synergy targets.
“Just because you recognize synergies there is no guarantee that you will realize them without good management of the people,” Ms. Cartwright said.
Car makers aren’t only competing with each other, they also face a growing threat from technology companies that see vehicles as a source of data.
Despite the huge costs of developing electric cars and self-driving vehicles, BMW and Daimler have overcome any rivalry to jointly develop car-sharing and ride-hailing services. They also are combining to develop self-driving car technology.
The success of any FCA-Renault deal could hinge on the two companies’ strategy for addressing these new themes and inspiring both workers and investors, analysts say.
“If, in the end, it’s only about squeezing a few more synergies out of the old automobile world, that wouldn’t be enough,” Mr. Bratzel said. “They need to come up with a convincing strategy for these new mobility fields and technology to compete against the big data players.”
Fiat Chrysler Undervalues Renault, but So Does the Market
With the French government more focused on jobs than shareholder value, it won’t be easy for Renault to get better terms in a merger
There is a valuation conundrum at the heart of the Fiat Chrysler FCAU -1.25% - Renault RNO -0.63% megadeal: The terms proposed by the Italian-American auto maker Monday seriously undervalue its French peer, but that doesn’t mean Renault shareholders can get a much higher price.
Fiat Chrysler’s approach is opportunistic in its timing. It has offered a merger of equals—a 50-50 combination of the two companies’ equity, after paying €2.75 billion ($3.07 billion) to its own shareholders—at a rare point when its equity is worth more than Renault’s. The only other period in the past 15 years when this was the case was just after the financial crisis, as it became clear what a good deal Fiat got when it bought Chrysler out of bankruptcy.
The Italian-American car maker has been enjoying the fruits of the American truck boom through its Jeep and RAM brands. Meanwhile, Renault’s alliance with Nissan Motor has been on the rocks since the arrest of both companies’ former boss Carlos Ghosn in Japan last November, eroding their market values. Neither trend can be expected to turn imminently, but on a multiyear view the roles could easily reverse again.
The other reason why Fiat Chrysler’s proposal undervalues Renault is that it takes no account of Renault’s 43% stake in Nissan. This roughly $12 billion investment cements the alliance but ties up unproductive capital. The French company therefore suffers from a big stock-market discount compared with the theoretical sum of its parts. Marking the Nissan stake to market, Fiat Chrysler’s offer values Renault’s operations at just $4.1 billion, calculates Smartkarma analyst Travis Lundy—little more than a year’s operating profits.
In practice, what this means is that if the merger goes ahead, Fiat Chrysler gets a 43% stake in Nissan at a huge discount. If this stake is sold, or else leads to a full merger with Nissan once the Japanese company gets its house in order, the discount will unwind—to the arguably unjustified benefit of Fiat Chrysler’s shareholders as much as Renault’s.
The problem for Renault is that the proposed merger with Fiat Chrysler remains financially and strategically compelling. The cost savings will be shared—hence the jubilant share-price reaction—and many analysts see the initial €5 billion estimate as conservative.
Renault’s prospects as a standalone company look dim by comparison. A deal with Nissan won’t happen for some time, if ever. The French company could sell down its Nissan stake, unwinding the sum-of-the-parts discount itself, but this would be an odd financial strategy for a company controlled by the French state to pursue. Nissan’s stock is also close to a 6½-year low, so it isn’t a great time to sell.
In any case, these alternatives may be moot: The French government, which owns 15% of Renault and 30% of voting rights in big decisions, seems eager for a deal. Its priority is preserving jobs and factories, not shareholder value. President Emmanuel Macron likes the concept of European champions. He previously pushed a big Franco-German rail merger that was eventually blocked by the European antitrust regulator.
If the French state weren’t so involved, there might be an opportunity for an activist investor to agitate for a higher price. As it is, independent shareholders should still push for a better valuation while accepting that it won’t approach anything like the sum of the parts. Renault stock is currently trading about 2% above the price implied by Fiat Chrysler’s merger terms.
One quirk of this deal that investors can celebrate, if it goes through, is that it will hand the French state just 7.5% of voting rights in the new vehicle. Fiat Chrysler-Renault would be freer to act in shareholders’ interest than Renault ever will be.
Fed Would Consider Interest-Rate Cuts if Growth Outlook Darkens
Central bank’s vice chairman, Richard Clarida, says any persistent inflation shortfall would also prompt policy reassessment
Federal Reserve Vice Chairman Richard Clarida said the U.S. economy remains “in a very good place” but indicated the central bank would be prepared to consider interest-rate cuts if economic data revealed a material risk of a sharper slowdown than officials currently expect.
Fed officials have been surprised by weakness in inflation so far this year that has defied forecasts of a sustained return to its 2% goal. Mr. Clarida said officials maintained their make-no-moves policy footing at their April 30–May 1 meeting in part because they expect some of the recent inflation softness to be temporary.
Officials met days before a breakdown in trade talks between the U.S. and China led President Trump to raise tariffs on roughly $200 billion in goods to 25% from 10%, representing a significant escalation in tensions. In recent days, bond investors have increasingly calculated that economic weakness would prompt interest-rate cuts to bolster growth.
Mr. Clarida offered no suggestion that any cuts are imminent and affirmed the Fed’s current policy stance in remarks prepared for delivery Thursday at the Economic Club of New York.
But he added an important caveat: “If the incoming data were to show a persistent shortfall in inflation below our 2% objective, or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the committee would take into account in assessing the appropriate stance for monetary policy.”
Mr. Clarida said the Fed is as close to meetings its twin goals of boosting employment while maintaining stable inflation as it has been in 20 years. Policy needed to be “nimble” to sustain recent progress, he said.
The central bank’s No. 2 official also said the economy’s performance over the past year suggested the economy may have greater capacity to grow without pushing inflation to undesirable levels than Fed models had previously anticipated.
“While predicting the future is difficult, with available data it appears that in 2018 and in the first quarter of 2019, the supply side of the economy—employment, participation, and productivity—expanded faster than most forecasters outside and inside the Fed expected,” he said.
He didn’t elaborate on the policy implications of any such rethinking, though at a minimum it would suggest even less need for the central bank to raise interest rates. The Fed raised interest rates four times last year to a range between 2.25% and 2.5% in an effort to keep inflation running close to its 2% target.
Since they last raised interest rates in December, some Fed officials have grown uneasy in recent months about their difficulty in generating enough price pressures to keep inflation at their target. In March, inflation excluding volatile food and energy categories rose 1.6% from a year ago, according to the Fed’s preferred gauge, down from 1.8% in January and 2% in December.
At issue is a framework that has long animated thinking in mainstream economics and inside the Fed. It holds that inflation rises as slack across the economy declines, and that the disappearance of slack can best be measured as unemployment declines below a level estimated to be consistent with stable prices.
While the relationship between declining unemployment and rising wages has held up in recent years, the relationship between declining unemployment and rising prices has been very weak.
Fed officials have revised down their estimates of the lowest unemployment rate consistent with stable prices, from 4.7% two years ago to 4.3% in March. Mr. Clarida said Thursday that the range of plausible estimates “may extend to 4% or even below.” The unemployment rate stood at 3.6% in April, a half-century low.
Meanwhile, the workforce participation rate of individuals in their prime working years, between 25 and 54 years old, has risen in recent years, suggesting further scope to boost employment without yielding unwanted inflation. Because prime-age labor-force participation rates remain below prior cyclical peaks, those gains could “have some more room to run,” said Mr. Clarida.
If that is the case, the economy’s capacity to expand without generating more inflation “could be higher than many estimates suggest,” he said.
As he has done since taking office last September, Mr. Clarida urged humility in using macroeconomic models to guide policy making. Economic discipline requires understanding how and whether fluctuations in supply and demand have changed relative to historical experience “and the predictions of our models,” Mr. Clarida said Thursday.
EE launches UK’s first 5G service
Britain ahead of most of Europe to make new wireless technology commercially available
The next generation of mobile phone networks has launched in the UK after EE turned on the country’s first commercially available 5G signals.
The commercial launch means the UK, one of the last major economies to launch 4G, is ahead of much of Europe, where the new wireless technology has so far only gone live in Switzerland and a handful of smaller countries including Monaco, Jersey and San Marino. Vodafone is to launch 5G in the UK next month.
The technology has also already been launched in the US and South Korea.
The launch of 5G in Europe has been overshadowed by the debate about the role of Huawei, the Chinese equipment supplier, in the industry. EE, alongside all the UK networks, has continued to use Huawei equipment in its radio access network although it has, along with Vodafone, “paused” the launch of 5G handsets from the company as a result of the export ban placed on the supplier by the US government.
However, EE’s launch partly allays fears that Huawei’s problems could delay 5G’s arrival in Europe.
“Many commentators argue that Europe is trailing in 5G, and in some respects this is true,” said Ben Wood, an analyst with CCS Insight. “But it’s important to recognise that fledgling debuts in the region, including EE’s today, arrive ahead of launches in China and Japan and are not much behind those in South Korea. It’s full speed ahead in the UK from now on.”
EE was also the first to launch 4G in the UK, which gave it a competitive advantage over its main rivals and ultimately led to the £12.5bn acquisition of the company by BT. It has moved to push ahead with 5G as BT, under new chief executive Philip Jansen, works to put network investment — both fibre and 5G — at the heart of its strategy.
The launch is limited to certain parts of six of the UK’s largest cities, where it will be key to alleviating data congestion. EE expects to add about 100 new sites per month as it expands the network but expects consumer take-up to be gradual.
The variant of 5G that has been launched in effect shares a signal with 4G networks. A full standalone version of the new network will not be available until 2022, with a more advanced version offering ultra-reliable low-latency signals not coming until 2023, according to EE.
Roughly 450,000 EE customers have registered their interest in upgrading to a 5G handset, with about 1,500 shipped on Thursday. About 100 customers flocked to St Pauls in London on Thursday morning to get a OnePlus 5G handset.
EE is charging a premium of about £5 for 5G packages but will bundle in content including BT Sports and Netflix to justify the extra cost. Vodafone has said it will not charge a premium compared with its top-level 4G packages.
Initial tests by the Financial Times using the OnePlus handset in central London showed speeds of 127 Mbps compared with 16.3 Mbps on a 4G handset.
Gapping down
In reaction to disappointing earnings/guidance:
- JILL -41.3%, TLYS -14.2%, PVH -11.3%, MOV -9.8%, PANW -7.7%, DSGX -6%, DLTR -4.3%, NGL -3.7%, BURL -0.7%, SAFM -0.6%, SPWH -0.5%
Other news:
- SOLY -10.2% (after closing at new post-IPO highs)
- MYOV -8.1% (announces public offering of $100 mln of its common shares)
- FOLD -7.2% (commences public offering of $150 mln of its common stock)
- TWLO -2.8% (commences underwritten public offering of $750 mln of Class A common stock shares ; files mixed securities shelf offering )
- MFA -1.8% (commences public offering of $200 mln convertible senior notes due 2024)
- ENPH -1.2% (announces offering of $120 mln of convertible senior notes due 2024 in private placement)
Analyst comments:
- TSLA -0.5% (price target cut to $150 (from $192) at Barclays -- Underweight rating unchanged)
Gapping up
In reaction to strong earnings/guidance:
- BITA +10.7%, EXPR +9.1%, VEEV +7.9%, KEYS +7.7%, SY +7%, DBI +6.2%, DG +4.5%, CSIQ +4.1%, VRNT +1.5%, SMTC +1.5%, TITN +1.1%
Other news:
- UBX +9.5% (Unity Biotechnology and UC San Francisco enter exclusive license agreement relating to alpha-Klotho protein)
- BYND +5% (after closing at new post-IPO highs)
- VIAV +2.3% (disclosed that it adopted the Company's Executive Variable Pay Plan for fiscal year 2020)
- EPZM +0.4% (submits NDA to the FDA for accelerated approval of tazemetostat for the treatment of patients with metastatic or locally advanced epithelioid sarcoma not eligible for curative surgery)
Analyst comments:
- HUYA +1.8% (initiated with Buy and $26 tgt at BofA/Merrill)
Early premarket gappersGapping up:
- BITA +9.2%, KEYS +8.1%, VEEV +7.8%, EXPR +6.9%, CSIQ +4.9%, SY +4.3%, BYND +4.1%, UBX +3%, VIAV +2.3%, DG +2.1%, VRNT +1.5%, TITN +1.1%, HUYA +0.9%, SMTC +0.8%, NGL +0.8%
Gapping down:
- TLYS -13.2%, PVH -11.4%, SOLY -11.2%, MYOV -8.1%, FOLD -7.2%, JILL -6.6%, PANW -6%, DSGX -5.9%, BURL -2.7%, TWLO -2.5%, MFA -1.8%, ENPH -1.7%, MOV -0.7%
Via Varejo sparks interest from Starboard, Apollo
Via Varejo [BVMF: VVAR3], a Brazilian retailer, has attracted the interest of Starboard Capital Partners and Apollo Global Management funds, O Estado de São Paulo reported, without giving sources.
Starboard, in partnership with Apollo, will meet with Casino Guichard Perrachon [EPA:CO] within 15 days to discuss the matter, according to the news report.
The funds consider the possibility of merging Via Varejo's operations with Maquina de Vendas, a rival where Starboard owns a 72% stake, the Portuguese-language paper said.
Casino holds a 36.2% stake in Via Varejo through its Brazilian subsidiary Companhia Brasileira de Distribuicao [BVMF:PCAR4].
Via Varejo and Casino did not comment, the item added.
Amazon [NASDAQ:AMZN], Tencent [HKG:0700] and Michel Klein have been previously cited as parties interested in the target, which has a market cap of BRL 5.9bn (USD 1.5bn), as reported.