XL/CS FP – OG Risk Arb Initial Deal View
XL/CS FP – XL = $57.60. Cash Merger. As XL is a Bermuda corporation, the shareholder vote required is majority of the vote cast assuming more than 50% of shareholders vote; the deal price reflects a 33% premium to XL close on 3/2/2018; XL trades approx. 2,309,679 shares per day and has a short interest of approx. 4%; we will initially use a XL break price or $42.31 – a recent low; the deal will be financed in EUR $3.5 B of cash on hand, EUR $6.0B from the anticipated US IPO and related transaction of CS FP, and EUR $3.0 B of subordinated debt (all backed up with a EUR $9.0 B bridge loan); the confidentiality agreement is dated 1/16/2018; we note that CS FP has traded down on some analyst saying the acquisition price is high but we note the market often assumes the probability of an overbid is higher for reinsurance deals; CS FP IR said that there was not an auction and this deal was done on a friendly basis but we note that the merger agreement makes reference to how to deal with other confidentiality agreements in the no solicit section implying there may have been some sort of a process in the past; the merger agreement allows dividends to continue to be paid up to $0.22 per quarter.
Initial deal view. OG Risk Arb will initially use an estimated close price of 9/1/2018 in line with the parties’ closing guidance in the deal press release of 2nd half of 2018 (we note that in the deal slide presentation it says expected close is end of 3rd quarter or 4th quarter 2018 (see p. 12); and in note 3 to the slides it says expected close is the end of 3Q2018). CFUIS is probably not required as XL is a Bermuda corporation. MOFCOM may be required as both companies do business there but do not provide sales numbers there. EU approval may also be required. Neither EU or MOFCOM are listed in the merger agreement which list certain required approvals but the merger agreement refers to a Schedule I with further required approvals which are not disclosed. CS FP IR is not aware of MOFCM or EU being required but said he does not know the details of the regulatory approvals. The merger agreement notes that insurance approvals are needed in NY, DE, TX and LA and financial approvals are required in Bermuda, UK, the Society of Lloyd’s, Switzerland and Ireland. We will initially use a 20% probability of a 2nd request as there are numerous strong competitors in the markets in which the parties compete. OG Risk Arb will initially use a 95% probability of deal close.
Reportedly in talks with JPMorgan over checking accounts (targeting younger customers and those without bank accounts) - press (update)
- The effort is still in its early stages and may not come to fruition, the people said. The talks with financial firms are focused on creating a product that would appeal to younger customers and those without bank accounts. Whatever its final form, the initiative wouldn’t involve Amazon becoming a bank, the people added.
- For JPMorgan or Capital One, winning the assignment would be a chance to keep a potential competitor close and strengthen ties to a company that is popular among millennials, whose financial habits are changing quickly. In a recent poll of 1,000 Amazon customers conducted by LendEDU, an online student lender, 38% said they would trust Amazon to handle their finances equally as they would a traditional bank.
Gapping up
In reaction to strong earnings/guidance:
In reaction to strong earnings/guidance:
- VCEL +8.4%, ESEA +3.6%, JT +2.2%, INAP +1.2%
M&A news:
- XL +31.4% (AXA Group (AXAHY) confirms merger agreement at $57.60 per XL share)
Other news:
- CLSD +53.5% (announces positive topline results from its pivotal Phase 3 clinical trial of suprachoroidal CLS-TA in patients with macular edema associated with non-infectious uveitis)
- CVRS +19% (receives FDA clearance for first automated robotic movement in technIQ Series for CorPath GRX platform)
- ONTX +18.4% (presents new data for Rigosertib Combination with Azacitidine)
- ZYNE +8.7% (highlights results of a 'positive' meeting held with the FDA regarding its planned development strategy for ZYN002 in Fragile X syndrome), AIMT +5.7% (presents results from Pivotal Phase 3 PALISADE Trial of AR101)
- VNDA +4.5% (announces that HETLIOZ 'demonstrated significant and clinically meaningful benefits in nighttime and daytime symptoms of jet lag disorder'), FNSR+3% (to join S&P SmallCap 600)
- AZN +1.1% (receives EMA acceptance for regulatory submission for Forxiga), .
Analyst comments:
- IPI +8.1% (upgraded to Market Perform from Underperform at Cowen)
- EOLS +5.3% (initiated with a Overweight at Cantor Fitzgerald)
- VRX +4.5% (upgraded to Buy from Hold at Deutsche Bank)
- GRPN +1.6% (upgraded to Equal-Weight from Underweight at Morgan Stanley)
Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- ARQL -0.9%
M&A news:
- SPA -3% (Ultra Electronics terminates merger with Sparton)
- QCOM -1.8% (cont vol in AVGO M&A speculation; annual meeting has been delayed)
Other news:
- DEPO -10.1% (files for $300 mln mixed securities shelf offering)
- LPTX -4.8% (files for $100 mln mixed securities shelf offering)
- PK -3.4% (commences 32.95 mln common stock offering by selling stockholder HNA HLT Holdco)
- MT -1% (cont weakness)
Analyst comments:
- BRX -0.8% (downgraded to in-line at Evercore ISI)
- LPNT -2.4% (downgraded to Mkt Perf at Leerink Partners)
UK-US Open Skies talks hit Brexit turbulence
Negotiations cut short after Washington offers worse package than EU
The US is offering Britain a worse “Open Skies” deal after Brexit than it had as an EU member, in a negotiating stance that would badly hit the transatlantic operating rights of British Airways and Virgin Atlantic.
British and American negotiators secretly met in January for the first formal talks on a new air services deal, aiming to fill the gap created when Britain falls out of the EU-US open skies treaty after Brexit, according to people familiar with talks.
In a sign of the battle Britain faces to replicate its existing rights, the talks were cut short after US negotiators offered standard bilateral conditions that would reduce access and in effect exclude all main UK-based carriers because they would not meet the criteria for ownership and control.
One person attending the London meetings to “put Humpty Dumpty back together” said: “You can’t just scratch out ‘EU’ and put in ‘UK’.” A British official said it showed “the squeeze” London will face as it tries to reconstruct its international agreements after Brexit, even with close allies such as Washington.
Negotiators are confident of an eventual agreement to keep open the busy UK-US routes, which account for more than a third of current transatlantic flight traffic. But there are legal and political obstacles that could impede the two sides from reaching a deal in time to give legal certainty to airlines booking flights a year in advance.
“We have every confidence that the US and UK will sign a deal that is in everyone’s interests and that IAG will comply with the EU and UK ownership and control regulations post Brexit,” said International Airlines Group, which owns British Airways. Virgin Atlantic said it remained “assured that a new liberal agreement will be reached, allowing us to keep flying to all of our destinations in North America”.
Chris Grayling, UK transport secretary, declared in October that he was making “rapid progress” in reaching ambitious new airline agreements with the US and other international partners. According to FT estimates, the UK must renegotiate and replace about 65 international transport agreements after Brexit.
In its opening stance the US side rolled back valuable elements of the US-EU agreement, the most liberal open skies deal ever agreed by Washington. Its post-Brexit offer to the UK did not include membership of a joint committee on regulatory co-operation or special access to the Fly America programme, which allocates tickets for US government employees. Washington also asked for improved flying rights for US courier services such as FedEx.
The UK has also yet to formally offer the US access to overseas territories such as the British Virgin Islands and Cayman Islands, which were not included as part of the original US-EU deal, according to people familiar with the talks.
There are also potential issues over the continuation of antitrust exemptions, permitted by the US-EU open skies agreement, which allow airline alliances to set fares and share revenue, according to people familiar with talks.
The biggest sticking-point is a standard ownership clause in Washington’s bilateral aviation agreements that would exclude airlines from the deal if “substantial ownership and effective control” does not rest with US or UK nationals respectively. In effect it requires majority ownership by one of the two sides if an airline is to benefit.
London asked the US to adjust its long-held policy since it would exclude the three main British-based transatlantic carriers, which all fall short of the eligibility criteria. These are IAG, the owner of British Airways and Iberia; Virgin Atlantic; and Norwegian UK.
Sir Richard Branson owns 51 per cent of Virgin, making it majority UK-owned. But he is in the process of selling 31 per cent to Air France-KLM, which could complicate Virgin’s access rights to the US. US airline Delta owns the remaining stake.
The challenge is most acute for Willie Walsh, IAG chief executive, whose group must also clear the EU’s 50 per cent ownership threshold to avoid losing his European operating rights after Brexit, when UK nationals are no longer counted.
One senior EU official said the airline operator was heading for “a crunch”. “From the US point of view, there is not a single big airline that is UK-owned and controlled,” he said. “The Americans will play it hard. The mood has changed [against liberalisation], it’s the worst time to be negotiating.”
Andrew Charlton, an aviation consultant, said the negotiations with the US were likely to be “fraught with difficulties”.
“The EU has been arguing for a change to the ownership and control rule for decades but the US has never said yes. It’s been a sticking point forever. If the US has never bent before then why would they do it just for the UK?” he said, adding that such a change could set a big precedent.
British negotiators are hopeful the ownership issues can be addressed through a side agreement or memorandum of understanding giving airlines solid legal rights. But so far the US side has not gone beyond offering temporary “waivers”, on a case-by-case basis to airlines.
The UK’s EU membership also prevents the country from signing trade or aviation services agreements before the end of March 2019 when Britain is due to leave the bloc. The EU’s Brexit negotiators are insisting it seek permission for deals during any transition period.
British negotiators are hoping to convince partners such as the US to treat them as EU members during the transition period, so they do not automatically fall out of agreements during that period.
A senior UK government source said it was “nonsense to suggest that planes won’t fly between UK and US post-Brexit. Both sides have a strong interest in reaching an agreement and are very close to one.”
The US also played down fears of a looming crisis.
“Our shared aim with the United Kingdom is to ensure the smoothest possible transition in the transatlantic market,” said the state department. “Commercial aviation is key to the dynamic economic relationship between the United States and the United Kingdom. Discussions are going well and, while specific dates are not set, we plan to meet again soon.”
Early premarket gappers
Gapping up:
- CLSD +53.5%, XL +31.8%, KODK +9.5%, TOPS +8.3%, IPI +7.8%, ZYNE +7.5%, AIMT+6.3%, NKTR +4.7%, VEON +4.5%, AKAO +4%, VRX +3.7%, FNSR +2.8%, SODA+2.4%, SBGL +1.9%, USAC +1.8%
Gapping down:
- SPA -3%, TTM -2.6%, LPNT -2.4%, VIRT -2%, TENX -1.7%, QCOM -1.5%, ECYT -1.4%,FDC -1.2%, BBVA -1.2%, MT -1.2%, ERIC -1.2%, CHL -1.1%, HSBC -0.8%, VALE -0.8%
Newell Brands: Activist/4% holder Starboard Value issues letter to shareholders, reiterates serious concerns with the Company's 'significant underperformance' under the current leadership team (238.40)
Starboard also announced that it has nominated two additional director candidates, Bridget Ryan Berman and Robert A. Steele, for election to the Board of Directors (the "Board") at the Company's 2018 Annual Meeting of Stockholders in response to Newell's unilateral expansion of the Board.
A Spark That Could Light Up China’s Internet Giants
China is considering allowing its biggest technology firms to list at home
Much to the consternation of most mainland Chinese investors, the nation’s most successful internet companies are listed abroad, out of reach of many. A new plan would smooth their entry back home, but might also inspire a speculative fever in their shares.
China’s regulators are considering allowing the country’s largest technology companies to list on mainland stock exchanges via a structure called Chinese Depository Receipts, or CDRs, which allow investors to own shares of those firms indirectly, according to local media outlet Caixin. The Wall Street Journal reported last week that authorities have asked smartphone maker Xiaomi, which is planning an IPO to raise $10 billion, to go public in the mainland, as well as Hong Kong.
The government has been eager to bring these cherished household names back to the country. Foreigners have reaped billions in upside from China’s internet giant. Beijing would rather keep those profits at home. Alibaba and Tencent, the country’s two largest firms with a combined market value of nearly $1 trillion, are listed in New York and Hong Kong respectively.
The CDR structure would overcome some obstacles. First, most of these firms have a dual-class share structure, which isn’t allowed in a direct mainland listing. Second, these companies have typically used a convoluted corporate structure called variable interest entity, or VIE, to allow foreign investors to invest in sectors that are restricted by the Chinese government. Under current regulations, these firms would need to delist from foreign exchanges and unwind that structure before they can directly list on the mainland — a process that takes years.
One risk, though clearly one that companies might like taking, is that mainland investors would be willing to own these names at much higher valuations than offshore investors. Internet security firm Qihoo 360, for example, has a market value at $55 billion after its debut in Shanghai through a backdoor listing last week. The company was delisted from New York at a mere valuation of $9 billion in 2016.
With CDRs, however, the original listing onshore would remain, and because the two shares wouldn’t be fungible, the offshore listing would trade at a lower valuation. It will be the offshore investors who will suddenly feel like they are missing out.