Scout24 buyout talks with PE bidders stall, sources say
Talks over a private equity buyout of Scout24 [ETR: G24], the German online listings company, have stalled, three sources familiar with the situation said.
Silver Lake, the US private equity group, was involved in one private equity consortium looking to make an offer, the first source said. Silver Lake was in a consortium with Singapore fund, GIC, while other large private equity groups were also looking at the asset, the second source said.
In December, The FT reported that Scout24 was exploring a sale for more than EUR 5bn. A sale would have returned the group to private equity ownership after three years on the stock market.
The process failed before Christmas due to a gap in price expectations, the three sources said. Scout24 had been seeking a valuation of around 24x EBITDA, the second source said.
Silver Lake, the US private equity group, was involved in one private equity consortium looking to make an offer, the first source said. Silver Lake was in a consortium with Singapore fund, GIC, while other large private equity groups were also looking at the asset, the second source said.
In December, The FT reported that Scout24 was exploring a sale for more than EUR 5bn. A sale would have returned the group to private equity ownership after three years on the stock market.
The process failed before Christmas due to a gap in price expectations, the three sources said. Scout24 had been seeking a valuation of around 24x EBITDA, the second source said.
Silver Lake’s GBP 2.5bn enterprise value buyout of UK property portal ZPG was completed at 23.3x pro-forma EBITDA.
There are concerns that Scout24, which operates in property and auto listings, could be impacted by potential changes in the fee structure of property agents in Germany, according to a source familiar with the company and a sector banker. There is pressure in Germany to create a more uniform approach across the country regarding the split of commission fee structures for agents for both the sale and rental markets, the source familiar said.
At the moment there are different solutions per state in Germany and the legal regulation for property sales is still in flux, creating uncertainty, which explains the discrepancy in valuations, the source familiar with the company said.
Despite the current hiatus, there is still interest in the company, and private equity continue to eye the asset, the second source said.
A sale to private equity would have seen Scout24 used as a platform in Europe to buy equivalent, smaller companies in the listed classified space, the sector banker said.
Scout24 was previously owned by Hellman & Friedman, which acquired a controlling stake from Germany’s Deutsche Telekom [ETR:DTE] in 2013.
Scout24 was previously owned by Hellman & Friedman, which acquired a controlling stake from Germany’s Deutsche Telekom [ETR:DTE] in 2013.
Scout24 and Silver Lake declined to comment. GIC was unavailable for comment at the time of publication.
Shares in Scout24 are currently trading at EUR 41.56, giving it a market value of EUR 4.47bn.
9to5 : Tim Cook teases ‘new services’ coming in 2019, says Apple’s ‘greatest contribution to mankind’ will be health-related
In addition to addressing the iPhone XR and Apple’s ever-growing wearables business on CNBC, Tim Cook also talked about Apple’s increasing interest in services and health care. The Apple CEO teased that Apple has new services coming this year…
On CNBC’s Mad Money, Jim Cramer asked Cook how Apple planned to further grow its Services business – perhaps even to the point that it is 40 percent of the company. As usual, Cook wouldn’t go into specifics, but he did tease that Apple has new offerings in the services business coming this year:
On services, you will see us announce new services this year. There will more things coming. I don’t wanna tell you about what they are and I’m not gonna forecast precisely, the ramps and so forth. But they’re things that we feel really great about, that we’ve been working on for multiple years.
Apple is rumored to have a news subscription service launching soon, using the Texture magazine platform it acquired last year. Further, Apple continues to develop its original video content, which is also expected to launch in 2019 at some point.
Tim Cook also addressed Apple’s growing interest in health care, saying that in the future when people ask what Apple’s “greatest contribution to mankind was,” it will be about health initiatives:
On healthcare in particular and your wellbeing, this is an area that I believe, if you zoom out into the future, and you look back, and you ask the question, “What was Apple’s greatest contribution to mankind,” it will be about health.
Because our business has always been about enriching people’s lives. And as we’ve gotten into healthcare more and more through the Watch and through other things that we’ve created with ResearchKit and CareKit and putting your medical records on the iPhone, this is a huge deal.
And it’s something that is very important for people. We are democratizing it. We are taking what has been with the institution and empowering the individual to manage their health. And we’re just at the front end of this. But I do think, looking back, in the future, you will answer that question, Apple’s most important contribution to mankind has been in health.
You can read Tim Cook’s full interview with CNBC here or below.
Apple CEO Tim Cook talks China, Wall Street negativity and innovation with CNBC’s Jim Cramer from CNBC.
Synergy Is a Myth: Cost-Cutting Breaks Mergers and Acquisitions
So, we’ve finally reached that point of the mergers and acquisitions cycle when bidders have to make increasingly audacious statements about the synergies they can extract from their megadeals.
Bristol-Myers Squibb (ticker: BMY) claims it can achieve $2.5 billion in cost savings by 2022 from its takeover of biotech firm Celgene (CELG), for which it is paying a whopping $90 billion, including debt. Those equate to around a sixth of the combined operating expenses of the two companies.
As chief executives’ frenzy for deals intensifies, the temptation is to turbocharge the synergy estimates to justify the hefty premiums being paid. When part of the deal is financed with shares, it means that the owners of the acquired companies will share in the supposed financial benefits of the combined company.
It costs more to do an acquisition today than it did in 1999 at the peak of the dot-com bubble, or in 2008, during the boom that preceded the financial crisis. In 2017, the median transaction multiple across all industries reached 14.2 times earnings before interest, taxation, depreciation and amortization—a 4.6% increase from 2016, according to the Boston Consulting Group.
The consultancy examined 1,000 of the largest deals among public companies struck during the past 10 years globally and found that the synergy estimates in deals have increased to a new high every year since 2013. In 2017, the synergies announced publicly by acquirers reached 2.1% of combined sales almost twice 2011’s level of 1.1%.
Bosses like to boast about synergies because, in theory, they should boost earnings or cash flows of the combined companies by making a target worth more to the acquirer than it is worth on a stand-alone basis. But those who are too optimistic in their ability to cut costs run the risk of accounting write-offs if the economic outlook deteriorates or the merged company fails to deliver on its revenue and cost projections.
According to financial consultancy Duff & Phelps, goodwill impairments increased by 23% to $35.1 billion in 2017 from the previous year, even though the number of impairments remained roughly stable. That suggests some bidders overstated the expected gains from their acquisitions.
Read more: The Celgene Deal Shows How the Lines Between Biotech and Big Pharma Have Blurred
Even when they deliver the expected benefits, synergies and cost savings provide a short-term fix, but they don’t, in and of themselves, help boost revenues.
Take Anheuser-Busch InBev (BUD), the world’s biggest brewer. It was created out of two blockbuster deals, both of which were almost entirely driven by cost synergies—the $52 billion acquisition of InBev in 2008 and the $67 billion takeover of SABMiller in 2015. The latter is on track to deliver $3.2 billion of synergies by 2020.
This zealous cost cutting has done little for the group’s share price, however. And the $100 billion debt load the acquiring company took on to finance the deal is another factor weighing on the company’s stock, down almost 40% during the past year. That led Moody’s to cut the brewer’s credit rating to the lowest tier of investment grade in December. Now, with the U.S. beer market stagnating and continued challenges in emerging markets, where AB InBev derives more than two-thirds of its revenue, it is difficult to see where earnings growth will come from.
The same goes for Kraft Heinz (KHC). The packaged food group has extracted more cost savings than expected from the $49 billion merger that brought Kraft Foods and H.J. Heinz together. But that deal hasn’t helped top-line growth. In the first nine months of 2018, it had organic sales growth of only 0.3%, while U.S. sales have declined by 1.2%.
To counter that, there is always the possibility of driving growth through more acquisitions. The trouble is, the bigger a company gets through M&A, the bigger the M&A needs to be to make a difference. And the bigger the deal, the bigger the possibility of running into anti-trust issues. While bidders can always divest some assets to appease regulators, they run the risk of losing more value through disposals than they might gain through the acquisition itself.
This could be the problem facing BMS. Celgene’s biggest drug, Revlimid, will face generic competition from 2022—the same year BMS expects to realize its synergy target. That means finding more growth, or more deals, to boost revenue. And that starts the cycle of expensive M&A all over again.
Scrutinising the Draghi tie indicator
Ever wondered if the powers that be like to signal their true intentions to others in the know via secret gestures or codes?
Finance Twitter has.
And the basis of the most popular conspiracy (fanned somewhat by the FT's own Katie Martin) is that the colour of Draghi's tie determines what the ECB's stance on monetary policy will be.
A red tie at night, bullish delight. A cool blue in the morning, hiking is stalling.
The question is: is it just a theory or is there actually some correlation between Draghi's wardrobe choices and monetary policy outcomes?
In a bit of pre-Christmas fun that's just come our way, Louis Harreau, ECB strategist at Crédit Agricole, has set out a comprehensive analysis of the would-be Draghi-tie indicator.
Carmakers temper their enthusiasm for driverless technology
Shift in mood at Consumer Electronics Show as groups grow wary of ‘Level 3’ autonomy
The first wave of driverless car technology is nearly ready to hit the mainstream — but some carmakers and tech companies no longer seem so eager to make the leap.
The change in mood has been evident this week at the Consumer Electronics Show in Las Vegas, which has become an annual showcase for the technologies transforming the auto industry.
Two years ago, Audi executives used CES to tout the imminent launch of the first car designed, under certain circumstances, to take full control away from the driver. In driverless mode, the high-end A8 would only call on the driver to get involved if it encountered a situation too complex for it to handle — a degree of autonomy known as “Level 3”.
Level 3 would be the first point at which full responsibility — and legal liability — shifts from driver to car. But regulators have been wary about whether transferring control between car and driver can work effectively in an emergency, and the Audi software has never been activated in cars sold in the US.
At CES this week, the German carmaker was no longer boasting about its advances in automated driving. Instead, it was one of several companies to unveil a new industry group called Pave. Audi’s president of North American operations Mark Del Rosso said the group’s aim was to “educate policymakers” about how the “technical challenges of creating driverless vehicles are solvable”, and bring real advances in road safety.
The carmakers may wish they had acted earlier to put their education and safety agendas ahead of the technology race that has characterised the rush towards autonomous vehicles. The debate has intensified after a woman was killed in Arizona last March by a self-driving Uber vehicle.
“It’s a level of autonomy that scares the carmakers — but it also scares lawmakers and regulators,” Chris Jones, an auto analyst at Canalys, said of the looming Level 3 threshold.
Mike Ramsay, an analyst at Gartner, agreed, saying that technology was no longer the limiting factor.
“The regulatory framework is a problem far more in need of ironing out than any of these systems,” he said. “There will have to be some clarity about what is legal and what isn’t.”
Carmakers caught up in race to Level 3
The idea of a driverless car that can hand back control to a human with little warning has always divided the auto industry. Carmakers such as Toyota, Volvo and Ford, as well as Waymo, which began life as Google’s driverless car project, have been consistently sceptical about the idea of Level 3, arguing it is safer to wait longer for more advanced forms of automation that never require human intervention.
Daimler Trucks, the world’s biggest maker of commercial vehicles, also turned its back on Level 3 this week. Critics like Martin Daum, the company’s chief executive, said that the technology sent a confusing message to drivers: they are encouraged to switch their attention to something other than the road, but expected to be ready to retake control at a moment’s notice.
Other executives, however, remain bullish on the technology. Dirk Wisselmann, senior engineer at BMW, said the carmaker’s iNext vehicle in 2021 will feature Level 3 technology enabling hands-free, pedal-free driving. He envisions a driver watching movies while the car cruises down the highway, and it would only alert the driver to retake control in the case of a construction zone or particularly bad weather. “If the driver doesn’t take over, the car makes a safe stop,” he said.
Despite the differences of opinion, many carmakers have nevertheless found themselves caught up in a race to Level 3. That has been particularly true for producers of the most expensive luxury cars, where ever-higher levels of driver assistance and automation, like adaptive cruise control, collision avoidance and lane-holding on highways, have started to seem standard. Many see the next, inevitable step as full automation, even if only in limited circumstances like highway driving or while in traffic jams.
The race has been stoked by Elon Musk, chief executive of Tesla, who has made this one of his company’s main goals. Mr Jones at Canalys estimates that “well over two-thirds” of Tesla customers pay $5,000 for the company’s Autopilot software, its current, lower level of driver assistance — a sign of how it has made advanced technology synonymous with its brand. Mr Musk may be years behind in his promise of full autonomy, but rivals have had little choice but to try to match him, said Gartner’s Mr Ramsay.
On the cusp of Level 3, however, the focus at CES this week shifted to less ambitious — and less controversial — goals, such as enhancing the technology but stopping short of the all-important handover of responsibility.
This will lead to “extending the envelope” of today’s driver-assistance systems, said Erez Dagan, a founder of Mobileye, an Israeli company that was acquired by Intel in 2017 and supplies many carmakers. The new capabilities include bringing the kind of lane-holding common on highways to urban streets and roads with poor lane markings, and teaching cars how to navigate through complex junctions.
But this could turn out to be an expensive detour for carmakers. Today’s driver assistance systems require only simple hardware like a front-facing camera for automated braking. Extending their capabilities to more complex situations means adding rear-facing cameras and sensors like radar and lidar that can build up a picture of everything happening around a car. It also means adding to the processing power and software in order to integrate and make sense of all the new data.
Mr Dagan said it was questionable whether customers would stomach this big step-up in costs if it brought only small incremental improvements.
A second shift in emphasis at CES has been a focus on new safety applications, as the industry makes a renewed effort to persuade customers and regulators that driverless technology is ready for the mass-market.
Amnon Shashua, head of Mobileye, said that surrounding cars with sensors and arming them with detailed road maps could give them the ability to detect when road conditions are about to get dangerous. That could lead to a new form of “predictive braking”, with cars slowing themselves gradually as risks increase, reducing or even eliminating rear-end collisions.
“We all have a moral obligation to apply automated vehicle technology to save as many lives as possible as soon as possible,” said Gill Pratt, head of Toyota Research Institute.
The Japanese carmaker, which will introduce the crash-averting “Guardian” feature to its cars from 2020, was earlier than most to make heightened safety features the goal of its first efforts in driverless technology.
But with the transition to Level 3 automation running into problems, it is an approach that more in the industry are starting to take to heart.
China's Economic Malaise Will Widen the Gap Between Luxury’s Winners and Losers
How luxury players can survive China's prolonged economic winter, Chinese New Year campaigns take a turn for the bizarre, and why Chang’e 4's moon landing matters. Read China Decoded to make sense of the market.
SHANGHAI, China — When Apple CEO Tim Cook rang in the New Year by sending letter to shareholders warning of an earnings downgrade for the first quarter due to waning Chinese demand, stocks of international consumer goods companies, including some fashion and luxury players, shuddered.
With slowing GDP growth, the world’s worst performing stock markets in 2018, real estate uncertainty and an ongoing trade war with the US, there has been little in the way of positive economic news emanating from China in recent months.
“Urban households are in the doldrums as trade war fears, Xi’s financial de-risking campaign and a strict policy on real estate have dampened confidence. China’s middle class have now grasped that they are living in a very different world under Xi,” explained Diana Choyleva, chief economist at Enodo Economics.
Adding to the bad news pile, last week saw two high profile business leaders in China publicly and uncharacteristically warning that a protracted economic cold spell could hit the country.
Baidu CEO Li Yanhong, also known in English as Robin Li, sent a New Year letter to employees that in part warned that China's economic restructuring is “as cold and real as winter to every company", in spite of Baidu's positive performance in 2018, which saw the search engine surpass 100 billion yuan, or $14.6 billion, in revenue, a 20 percent increase over 2017.
This came only days after self-made billionaire Chen Hongtian, in a speech to the Harmony Club, an elite gathering of tycoons, warned that “winter will be very cold … it’s hard to predict and all that I can say is that difficulties [for private enterprises] are much bigger than people expected.”
The assumption that consumer confidence would also wane in the face of what are complex and serious macroeconomic challenges is therefore not an unreasonable one. It’s already being felt in the watch market, with the Federation of the Swiss Watch Industry reporting a slump in China sales in November, and the country’s watchmakers lowering their expectations for orders over the next three months.
“I don't have a very positive outlook for China's economy in 2019, I'm sorry to say," Sara Hsu, associate professor of economics at the State University of New York at New Paltz, tells BoF. "I think a number of factors have to change in order for China's economy to do well again and for people to start spending more, especially on luxury goods. It's possible that this will pick up again by 2020 but it will take significant reform of the Chinese economy,” says Hsu.
On the other hand, some consumer companies have reported strong China growth in recent months. At the end of December, Nike announced that its fourth quarter sales were up 31 percent in China, and Q1 fiscal 2019 results from international beauty giants Estee Lauder and L’Oreal reported strong sales growth in the country (even so, all saw share prices drop in the wake of Apple’s poor earnings forecast last week). Luxury players Tiffany & Co., LVMH, and Richemont have called out China’s economic malaise as reason for lowered expectations and results in recent months.
However, China’s so-called ‘coming winter’ masks a more complex market story. For luxury companies in particular, a more pertinent issue than an overall slowdown in economic output or consumer spending is the question of which consumer groups are most likely to be tightening their belts and whether there are other market forces contributing to the success or failure of individual consumer brands in the country.
Apple, for example, has seen intense competition in the Chinese marketplace from local smartphone makers who have innovated at a faster pace and offered similar quality products at a lower price point — Huawei last year overtook Apple as the world’s second largest smartphone vendor, and they, along with Xiaomi and Oppo, increased their market share in the third quarter.
In contrast, within the luxury fashion and beauty spheres, there is no domestic player to compete for market share with global giants such as LVMH and Gucci parent, Kering.
Mario Ortelli, managing partner of luxury advisors Ortelli & Co, is confident that China’s luxury spending will still increase in 2019, even if it is at a slower pace than that in 2018, with opportunities particularly apparent for those who have prepared for increased demand domestically.
“Repatriation of the luxury spend will continue and it will favour the brands with a strong retail network in China, established domestic e-commerce operations and relationship with the local digital platforms,” he said.
“I expect that the consumers will be more discerning and will polarise their purchases towards their favourite brands and therefore we will see an even higher gap between winners and losers.”
The increase of domestic luxury spend has been a major luxury industry story in China over the past 12 months, with recent research from HSBC predicting a 50/50 balance is “in sight” a far cry from the three-quarters of luxury purchases made by Chinese consumers outside of their home country as recently as 2016, according to data from McKinsey.
Some luxury companies that have become reliant on traveling Chinese spend have left themselves over-exposed to changes in consumer patterns.
“Brands like Tiffany & Co definitely run the risk of being exposed as they rely heavily on Chinese buyers shopping internationally and we may see consumers economising on overseas trips this year,” said China Market Research Consulting's senior researcher Benjamin Cavender.
The extent of the fall in overseas purchasing will be difficult to gauge until after the all-important Chinese New Year holiday at the start of February, when the extent of any overseas spending slowdown will become more pronounced.
In terms of getting an early 2019 read on overall consumption in China, the recent three-day public holiday to celebrate the Western new year saw retail sales grow more than six percent in Beijing and more than 10 percent in Shanghai over the same period last year.
China’s Ministry of Commerce is predicting a nine percent rise in retail sales this year, a similar rate to the 9.1 percent recorded over the first 11 months of 2018 (the most recent figures available).
“[But] the reality is that the majority of consumers who are driving luxury spending right now in China are still able to spend but they are worried about the future so may be holding back on purchases,” Cavender said.
“This means that there is still a lot of opportunity for luxury brands but they have to be tighter about planning their product launches and inventory and have to work harder to provide retail experiences that will bring consumers in store and get them to spend because consumers will be thinking more about each purchase."
China may indeed be entering a prolonged economic winter, but that doesn’t mean uniform suffering for luxury brands who remain responsive to the needs of Chinese consumers.
Gapping down
In reaction to disappointing earnings/guidance:
- SGH -16.4%, STZ -11.1%, TLND -7.6%, MSM -3.8%, LEN -0.9%
Other news:
- TOO -15.1% (is reducing its quarterly common unit cash distributions to zero from $0.01 per common unit to reinvest additional cash in the business and further strengthen its balance sheet)
- TROX -6.2% (provides update regarding pending Cristal acquisition; addresses partial shutdown of U.S. government and impact to proposed remedy discussions with FTC)
- NBR -1.1% (provides Q4 highlights ahead of conference presentations; targeting $200 to $250 mln net debt reduction during 2019 including dividend cut)
- HLF -1.1% (appoints Michael Johnson as Interim CEO, effective immediately, following the resignation of CEO Richard Goudis)
- PCG -0.9% (attributed to California Governor Newsom comments)
- NYMT -0.5% (upsizes and prices 12.6 mln shares of common stock at $5.96 per share)
Analyst comments:
- BF.B -3.3% (downgraded to Sell from Neutral at Goldman)
- BKNG -1.9% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- UAL -1.5% (downgraded to Underperform at Imperial Capital)
- EXPE -1.5% (downgraded to Equal-Weight from Overweight at Morgan Stanley)
- FIVE -1.2% (downgraded to Hold from Buy at Loop Capital)
- EL -1% (downgraded to Sell from Neutral at Goldman)
- DUK -0.8% (downgraded to Neutral from Buy at BofA/Merrill)