TICKER ALERT: WRAPX
After Hours Summary: QTT -14%, NIO -11%, AVAV +10%, AMBA +6.5% among notable earnings/guidance movers; BZUN / JILL / ANF higher ahead of earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: AVAV +10.3%, AMBA +6.5%, AGS +3.1%, EGLE +3.1%
Companies trading higher in after hours in reaction to news: XXII +9.3% (after making 52-week lows following news that FDA Commissioner Scott Gottlieb is planning to resign), BZUN +2.4% / JILL +2% / ANF +1.7% (ahead of earnings tomorrow before the open), ECHO +1.7% (light volume; upgraded to Equal-Weight from Underweight at Morgan Stanley), VYGR +1.1% (initiated with Overweight at Cantor Fitzgerald)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: QTT -14.2%, NIO -11.2%, VSLR -8%, CDLX -7.9%, PRMW -7.6%, URBN -4%, ROST -3%, UNFI -1.9%, REGI -1.1%
Companies trading lower in after hours in reaction to news: LGND -6.3% (to sell Promacta assets and royalty for $827 mln in cash; updates FY19 guidance), CBAY -5.1% (announces proposed public offering of common stock), KNDI -4.9% (following NIO results), VECO -3.3% (ticking lower following downgrade at Stifel), SRPT -2.8% (to sell $350 mln in shares of common stock in underwritten public offering), CERC -2.8% (announces $8 million bought deal offering), FRPT -2.4% (announces secondary public offering of 4.0 mln shares of common stock by selling shareholders), BAND -2% (light volume; commences public offering of 2,250,000 shares of Class A common stock), HZNP -1.9% (discloses receipt of civil investigative demand from the United States Department of Justice), CRON -1.9% (pulling back from today's 10% move higher), EXAS -1.2% (announces public offering of $600 mln of convertible senior notes due 2027)
Closing Stock Market SummaryThe S&P 500 lost 0.1% on Tuesday in a session that saw little conviction from buyers or sellers. Encouraging economic data and solid earnings reports from Target (TGT 76.00, +3.33, +4.6%) and Kohl's (KSS 71.33, +4.86, +7.3%) provided some support for the market.
The Dow Jones Industrial Average lost 0.1%, and the Nasdaq Composite finished flat. The Russell 2000, meanwhile, underperformed with a loss of 0.5%.
The S&P 500 industrials (-0.6%) and materials (-0.3%) sectors underperformed the broader market. Conversely, the communication services (+0.7%), real estate (+0.3%), and consumer discretionary (+0.2%) sectors were the lone groups to finish with gains.
Stocks opened roughly flat amid lingering concerns about the U.S. striking, and enforcing, a meaningful trade deal with China. On a related note, China lowered its 2019 GDP growth forecast to 6.0%-6.5% from 6.5%, and announced some tax cuts in a bid to contend with a "tough economic battle ahead."
The S&P 500 dropped 0.4% in early action but selling efforts were tempered following the release of the stronger-than-expected New Home Sales report for December and the ISM Non-Manufacturing Index for February.
The more recent ISM Non-Manufacturing Index, which included a sizable increase for the New Orders component, helped dampen the recession narrative that has picked up amid a mixed slate of economic data.
At the same time, better-than-expected earnings results and guidance from Target and Kohl's helped keep investors at ease. Their solid results helped spur gains in the SPDR S&P Retail ETF (XRT 45.65, +0.37, +0.8%) and the S&P 500 consumer discretionary sector (+0.2%).
General Electric (GE 9.89, -0.49) for its part lost 4.7% after CEO Larry Culp said the company's industrial free cash flow will be negative in 2019.
There was also some M&A speculation within the insurance industry. Aon (AON 157.25, -13.38, -7.8%) confirmed it is in the early stages of considering an all-share business combination with Willis Towers Watson (WLTW 182.04, +8.99, +5.2%).
The U.S. Treasury market was relatively muted on Tuesday. The 2-yr yield increased one basis point to 2.55%, and the 10-yr yield was unchanged at 2.72%. The U.S. Dollar Index increased 0.2% to 96.84. WTI crude was unchanged at $56.54/bbl.
Reviewing Tuesday's economic data, which included the ISM Non-Manufacturing Index for February, New Home Sales for December, and the Treasury Budget for January:
- The ISM Non-Manufacturing Index increased to 59.7 in February (consensus 57.2) from 56.7 in January. The dividing line between expansion and contraction is 50.0, so the increase in February reflects an acceleration in business activity in the non-manufacturing sector.
- The key takeaway from the report is that it featured a sizable increase for the New Orders component, which is a positive marker that will help push out the recession narrative for the U.S. economy since the non-manufacturing sector accounts for a much larger chunk of economic activity than the manufacturing sector does.
- New home sales increased 3.7% month-over-month to a seasonally adjusted annual rate of 621,000 (consensus 572,000) from a downwardly revised 599,000 (from 657,000) in November.
- The key takeaway from the report is that the improvement in new home sales coincided with a drop in both median and average selling prices. Another important takeaway is that lower-priced homes (less than $400,000) accounted for a much smaller percentage of total homes sold than in November, underscoring the point that there are supply constraints at more affordable price points.
- The Treasury Budget for January showed a surplus of $8.7 billion versus a surplus of $49.2 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the January surplus cannot be compared to the $13.5 billion deficit for December.
- The fiscal year-to-date deficit is $310.5 billion versus a deficit of $175.7 billion for the same period a year ago. The budget deficit over the last 12 months is $913.5 billion.
Looking ahead, investors will receive the ADP Employment Change for February, the weekly MBA Mortgage Applications Index, the Trade Balance Report for December, and the Fed's Beige Book for March on Wednesday.
- Russell 2000 +16.3% YTD
- Nasdaq Composite +14.2% YTD
- S&P 500 +11.3% YTD
- Dow Jones Industrial Average +10.6% YTD
Austrian banks dragged into Russian money-laundering scandal
Kremlin critic alleges hundreds of millions of euros flowed through country’s lenders
The Nordic money-laundering scandal has spread to Austria after a prominent Kremlin critic filed a complaint urging Vienna prosecutors to investigate $967m of suspicious money flows from Danske Bank to Raiffeisen and other lenders in the country.
Bill Browder, an anti-money-laundering activist and investor, said Austrian banks had for years ignored red flags and enabled Russian criminals to launder funds abroad, according to documents sent to the Vienna Public Prosecutor’s Office and seen by the Financial Times.
Raiffeisen shares fell 12.3 per cent on Tuesday. Investors were reacting to Hermitage Capital Management’s accusations, which are linked to a series of regulatory investigations and the release of an investigative report into money laundering by the Organized Crime and Corruption Reporting Project.
“Raiffeisen takes the allegations very seriously and is conducting an internal investigation,” a spokeswoman said. The bank “is not familiar with the concrete allegations,” but past investigations into some of them “confirmed [them] to be unfounded”.
Hermitage alleged that Raiffeisen handled $634m — the lion’s share of the suspect funds that flowed to Austrian banks.
Mr Browder, who runs Hermitage, said many of the entities sending money to Austrian accounts had a number of suspicious characteristics that were ignored or not properly vetted.
Some were unknown companies with no business activity; others lacked normal expenses; and many were shell companies registered in opaque jurisdictions such as Belize, the Seychelles, the British Virgin Islands or Panama, according to the complaint.
Several of the account-holders who received the money lacked clear connections to the country and conducted no business there, Hermitage said. Some of the funds were used to buy luxury houses, charter yachts and rent private jets.
“The combination of these factors should have raised immediate red flags,” Hermitage said. “This illicit scheme would not have been possible without the gross negligence or acquiescence from the employees of Austrian banks.”
On Monday, Mr Browder filed criminal complaints against Nordea in all four of the main Nordic countries, accusing the bank of handling €700m of suspect funds from Russia and other former Soviet states. Several of the countries’ prosecutors are examining the claims, although Swedish authorities are not investigating.
The shares of Dutch banks also fell after the OCCRP report said the three largest lenders in the country were used by the so-called Troika Laundromat to move cash from Russia via the Moscow-based lender Troika Dialogue.
Nordic banks have faced a torrent of money-laundering accusations in the past year linked to their lightly supervised Baltic units. Shares in Danske halved last year after it conceded that €200bn from former Soviet states had flowed through its tiny Estonian branch over a nine-year period.
The scandal has also embroiled international lenders such as Deutsche Bank, Bank of America and JPMorgan Chase, which handled many of the suspect transactions for Danske.
Swedbank lost a fifth of its value last week after Swedish television alleged $5.8bn had moved between Swedbank and Danske accounts with some of its customers showing “several risk indicators of suspected money laundering”.
US-born Mr Browder, whose company made billions in Russia until he was barred from the country in 2005, has spent years tracing the proceeds from an alleged $230m Russian tax fraud and has described himself as Russian president Vladimir Putin’s “number one foe”.
His particular focus is on the “Magnitsky list”, US legislation imposing visa bans and asset freezes on Russian officials linked to the death of Mr Browder’s former tax adviser, Sergei Magnitsky.
Magnitsky exposed a massive fraud by Russian officials and a criminal gang was arrested by Russian authorities over a tax case against Mr Browder’s firm, and he died a year later in 2009 in a Russian jail after being beaten.
Interserve rejects rescue plan from biggest investor
Risks rise that one of the UK government’s largest contractors will fall into administration
Interserve has rejected a rescue plan put forward by its biggest shareholder, the US hedge fund Coltrane Asset Management, raising the risk that one of the government’s largest contractors could be pushed into administration.
The hedge fund has unveiled proposals, aimed at countering Interserve’s original plan, that seeks to reduce debt and plug gaps in liquidity to prevent creditors forcing a default. Coltrane fears Interserve’s initiative will wipe out almost all of its shares.
The Interserve plan, which will be subject to a vote on March 15, would mean shareholders, including Coltrane, would retain 5 per cent of the company as part of a debt-for-equity swap with its lenders.
Coltrane, which holds 27 per cent of voting rights, has also threatened legal action, and asked for the removal of the entire Interserve board apart from chief executive Debbie White.
Interserve said on Tuesday that Coltrane’s proposal was unrealistic, given that the hedge fund had not even started to talk to creditors.
It said it was “unable to consent” to Coltrane’s request that the board and lenders consider its alternative plan because of the difficulties in getting lenders to agree “larger write offs” or provide more credit in the “short timeframe available”.
Interserve employs 65,000 people worldwide but earns two-thirds of revenues from the British government. With 45,000 staff in the UK alone, it employs twice the number of employees as Carillion, the outsourcer that collapsed last year.
The business was plunged into difficulties in 2016 after misjudged acquisitions and a disastrous venture into energy from waste plants, which has taken Interserve’s net debt to £738m, dwarfing the £27m equity in the company.
The stalemate between creditors and shareholders raises the chances that Interserve’s proposals will be voted down next week, potentially putting the business into administration.
The company has warned it is facing a multimillion-pound cash shortfall by the end of the month, which could threaten payments to its subcontractors, employees and pensioners and risk the delivery of essential public services.
Interserve is one of the government’s biggest providers of privatised public sector services, cleaning and maintaining Department for Work and Pensions’ jobcentres, the Foreign and Commonwealth Office and Ministry of Defence army bases.
In a statement Interserve, led by chairman Glyn Barker, warned that given its “short-term liquidity requirements”, Coltrane’s proposal risked “the future of Interserve together with its employees, pensioners, customers and suppliers”.
“Interserve’s deleveraging plan is currently the only fully funded proposal which has the agreement of lenders, bonding providers and pension trustees,” it said.
Sources close to Coltrane said Interserve’s response was “disappointing”.
“Of course we will need to speak to lenders, but we need first to understand the company’s views on our proposal — and the board have a duty to consider it, which they are currently failing to fulfil.”
London patient ‘free’ of HIV after stem cell transplant
Man treated in UK is only the second person ever to go into remission from the virus
A man treated in the UK has become only the second person ever to go into remission from HIV, raising hopes of progress in finding a cure for a condition that affects 37m people worldwide.
As in the first case — in Berlin 10 years ago — the man, known only as “the London patient”, received a bone marrow stem cell transplant from a donor who was HIV resistant, researchers say.
The report on the case, authored by researchers at UCL and Imperial College London and published in Nature on Tuesday, said the patient had been in remission for the 18 months since he stopped taking antiretroviral therapy and seemed to be free of the virus, which can lead to Aids.
Prof Eduardo Olavarria from Imperial College London, one of the authors of the report, stressed it was too early to say with certainty that the patient was “cured” of HIV. But, he said, “the apparent success of hematopoietic stem cell transplantation offers hope in the search for a long-awaited cure”.
Prof Ravindra Gupta of UCL, the study’s lead author, said: “At the moment the only way to treat HIV is with medications that suppress the virus, which people need to take for their entire lives, posing a particular challenge in developing countries. Finding a way to eliminate the virus entirely is an urgent global priority, but is particularly difficult because the virus integrates into the white blood cells of its host.”
Other researchers sounded a note of caution. “The report of a second case of HIV remission is of great interest but does not move the scientific field forward very significantly over the Berlin patient,” Prof Sarah Fidler of Imperial College London said.
“Rather, it reinforces the science that this is rare but feasible. The treatment this patient received is not safe and not scalable. It is certainly not an option to be recommended for people living with HIV who are doing well on antiretroviral therapy.”
Stem cell transplants are risky and only done when there is a clinical reason. Both the London and Berlin patients received one as part of treatment for cancer. In addition, HIV-resistant donors are rare.
Nevertheless, the case “represents a world-class UK contribution to cutting edge clinical science,” she added.
Anton Pozniak, president of the International Aids Society, said that although the approach was not a viable large-scale strategy for a cure, it represented a critical moment.
“These new findings reaffirm our belief that there exists a proof of concept that HIV is curable. The hope is that this will eventually lead to a safe, cost-effective and easy strategy to achieve these results using gene technology or antibody techniques,” he said.
Almost 37m people worldwide are living with HIV and about 1m people a year die from HIV-related causes. About 59 per cent of those with the condition are receiving antiretroviral therapy.
Despite fears of new drug-resistant strains of HIV, UNAids, the body co-ordinating the global response to the disease, says new infections have fallen by 47 per cent since the peak in 1996 and Aids-related deaths have fallen by more than half since they peaked in 2004. The UN’s stated goal is to end Aids as a public health threat by 2030.
Aon/Willis Towers Watson: there may be giants
Do not expect a straightforward merger
A prolonged slump in the property and casualty market has forced insurance brokers to move away from broking and towards ancillary areas such as pension advice. A report on Tuesday that Aon may bid for rival broker Willis Towers Watson therefore came as a surprise. Their combined equity value would exceed $60bn.
But their potential mash-up of businesses — of which bringing together buyers and seller of insurance would be just a fraction — could ultimately lead to a clever transaction structure where these professional services conglomerates are re-assembled into pieces that fit better together.
Willis Towers Watson itself is the creation of a massive deal, the 2016 combination of Willis Group and Towers Watson. Towers Watson specialises in human resource consulting and Willis sought the merger to diversify away from insurance. In the process the new combined company redomiciled to Ireland to lower its tax rate. As a result, half of the group’s business is consulting on things such as staff perks and pensions.
In the past five years, Willis’s shares are up a healthy 62 per cent, ahead of the S&P 500. That still trails Aon’s performance. Its shares have nearly doubled. Without a massive merger, Aon has said it can achieve an organic growth rate in mid-single digits, better than the average for insurance brokers. As such, its forward price to earnings multiple is approaching 20 times, well ahead of Willis Tower Watson’s in the low teens.
Like Willis, Aon itself has diversified and has five different segments. Their concentration in some markets seems problematic when thinking about their own merger. The UK competition regulator last year looked at whether investment consultants to pension trustees such as Aon and Willis should get out of the fiduciary advice business. Those two dominate these sectors so it is not clear they could simply join forces without drawing regulatory scepticism. If these companies do find a way to merge, do not expect it to be straightforward.
AB InBev to replace chair amid conflict of interest concerns
Olivier Goudet to stand down from world’s biggest brewer as his JAB role grows
Anheuser-Busch InBev, the world’s biggest brewer, plans to replace chairman Olivier Goudet next month amid concern that his role at acquisitive investment group JAB Holdings has become a conflict of interest.
People with direct knowledge of the decision said Mr Goudet, managing partner of JAB and chairman of AB InBev since 2015, would step down and a new chairman would be announced at the company’s upcoming shareholder meeting on April 24.
One person said last year’s JAB acquisition of Keurig Dr Pepper, the coffee and fizzy drinks maker, had raised concerns on the brewer’s board that its holdings had become too close to those of AB InBev, which makes Budweiser and Stella Artois beers.
Beer companies are increasingly expanding into other categories of drinks such as spiked seltzers, or alcopops, or non-alcoholic beverages to blunt the decline of mass-market lager.
JAB Holdings, which manages the wealth of Germany’s billionaire Reimann family, has been on a $50bn-plus dealmaking spree over the past several years that has turned it into a challenger in a number of consumer industries, including beverages.
Mr Goudet confirmed that he was stepping down to “devote more time” to his “growing responsibilities as managing partner and CEO of JAB”.
“I have been privileged to serve on the board…and have been very impressed by the quality of the company’s management and I have tremendous confidence in the future our business,” said Mr Goudet.
A spokesman for JAB confirmed Mr Goudet was stepping down from the AB InBev board but said it was to “devote more time to his growing responsibilities as managing partner and CEO of JAB”.
Mr Goudet, who had a year left on his five-year term as chairman, is one of just three independent directors on AB InBev’s 15-strong board. The other positions are held by representatives of the brewer’s biggest shareholders, who control a combined 51 per cent of its voting rights.
“We are extremely grateful for Mr Goudet’s many contributions and commitment to our company over the eight years as member of the board and four years as chairperson,” said an AB InBev spokesman.
The shareholders include the three founders of Brazil’s 3G Capital — Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Herrmann Telles — and a trio of wealthy Belgian families. A further 9.6 per cent and 5 per cent are respectively held by tobacco group Altria and Colombia’s Santo Domingo family.
Mr Goudet’s departure will also mark an end to what has been a close relationship between 3G’s Brazilian trio, which orchestrated the deals that created AB InBev, and JAB. Mr Goudet’s fellow managing partner at JAB, Peter Harf, previously served as chairman of the brewer for nearly a decade before stepping down in 2011.
The search to replace Mr Goudet began last year soon after JAB expanded its bet on coffee and beverages by merging Keurig Green Mountain with Dr Pepper Snapple, the fifth-largest soft-drinks maker globally.
The board tapped a recruitment firm to find a candidate, and Mr Goudet took part in the selection process along with the other independent directors.
“The board’s succession plan has been developed since last year and we have been working with Mr Goudet on a smooth transition,” said the AB InBev spokesperson. “His successor, along with new members of our board, will be announced in due course in the context of our annual shareholders meeting.
The shake-up comes as AB InBev is trying to win back investor confidence after a tough period that saw its shares crater last year. Investors are worried about the brewer’s heavy debt load, which sits at $102.5bn after its 2016 acquisition of SABMiller.
AB InBev’s efforts to meet investor demands were slowed considerably last year when emerging markets currencies weakened against the dollar. The company responded by cutting its dividend payout by half in October. It is also considering whether to sell a minority stake in its Asian operation through an initial public offering later this year, according to people with knowledge of the deliberations.
The moves have helped AB InBev shares in 2019. So far this year, they are up 23 per cent to €71.65. However, its stock trades well below its high of €122.50 reached in late 2015 just after inking the takeover of SABMiller.