TheChek News Flow

Negotiations on the future relationship may question the very idea of leaving the EU

In 2018 the real Brexit negotiations begin. The phase one political agreement between the UK and EU — on financial obligations, rights of expatriate people and Ireland — was a preamble. Concluding a formal treaty governing the UK’s withdrawal in March 2019 is the central task. This should establish the agreements of phase one, and many other separation-related issues, in detailed legal texts between the UK and the European Commission, which must be approved by a large majority of member states, and the British and European parliaments, before the exit date.

This will require intensive negotiation between the UK and the EU. It will also involve other governments since the withdrawal treaty will need to address Britain’s future position in agreements between the EU and other countries. We cannot assume that these will roll forward on current terms, and changes could trigger a wider ratification process in parliaments across Europe and beyond.

If the spectre of a cliff-edge Brexit is to be avoided, the withdrawal treaty should be accompanied next year by a political framework setting parameters for the UK’s future relationship with the EU. This represents a dramatic scaling back of the earlier, unrealistic British ambition to negotiate these future terms in full before March 2019 — a highly significant, if little publicised, outcome of December’s Brussels summit.

There will be two main strands in negotiations about the future: the economic relationship and the wider political relationship, including defence, security and foreign affairs.To reach the framework stage, the British government will soon have to make hard choices about the sort of Brexit it wants, notably on links to the single market and customs union, and acknowledge the limits of what is possible. The EU will negotiate, but will not change its own rules to meet British demands. At home, both the withdrawal treaty and the framework agreement will face intense parliamentary scrutiny through the year and in the final “meaningful” vote.

Because of the scale and complexity of what lies ahead, 2018 will kick off with talks on the terms of a transition period, intended to provide as much political and economic stability as possible after the UK legally leaves the EU in March 2019. The European Commission will argue that transition should end in December 2020 to match its budget cycle. The British government will probably argue for a period of two years, while trying privately to persuade its pro-Brexit faction to keep this open ended. As the deadline approaches, both sides will discover more time is required.

The transition, originally billed as a period for bedding in already agreed arrangements between the UK and the EU, has now morphed into the period in which the detail of those arrangements will be negotiated. Unless they can be agreed and implemented in parallel, this means yet a further implementation period will be needed. On even the most optimistic assumption, the process of scoping, negotiation, ratification and implementation of the new relationship will take a minimum of five years from 2018.

Another purpose of transition is to assure businesses that their operating environment will not be dramatically disrupted. But it is now clear that the longer-term trade and regulatory environment will not be defined for some years, and the commission argues that, even if a political agreement on transition is reached early in 2018, there will be no legal certainty until the UK’s withdrawal treaty is formally ratified.

We should expect more turbulence over the year ahead. There will be political strains within the British government. Germany needs a new coalition. The agenda is vast.

We do not yet know what sort of deals on withdrawal and future partnership British ministers will bring to parliament towards the end of the year. As things stand, the best we can hope for is a reasonably ordered formal exit in March 2019, followed by a continuing negotiation as an outside country on the details of our future relationship lasting several years during which we will still be bound by EU rules but have no say in future EU decisions.

By late 2018, we should have a clearer picture of options for the future. We cannot predict how this knowledge will influence public opinion, especially if the British economy shows further signs of stress. If the mood shifts, it will be late, but not yet too late, to change our mind on the whole Brexit project. Meanwhile, this prolonged uncertainty argues for keeping open the option, however difficult, for both the UK and the EU, of trying to delay our formal departure by extending or suspending the Article 50 process beyond March 2019. Once we had left in haste, any repentance would certainly be at leisure.

The writer is managing partner of Flint Global and a former permanent undersecretary at the UK Foreign and Commonwealth Office

Charity will be beneficiary of a decade-old wager that an index would top hedge funds

The real winner of Warren Buffett‘s 10-year bet against hedge funds is Girls Inc. of Omaha.

Mr. Buffett bet $1 million in 2007 that an index fund would outperform a basket of hedge funds over a decade. The proceeds would go to charity, and Mr. Buffett designated his local Girls Inc. affiliate as the recipient if he won. When the closing bell rang at the New York Stock Exchange Friday, the famed investor locked in his victory.

Mr. Buffett, the chairman of Berkshire Hathaway Inc., has said throughout this year that he is confident he would win. From the start of the bet through the end of 2016, Mr. Buffett’s S&P 500 index fund returned 7.1% compounded annually. The competing basket of funds of hedge funds selected by asset manager Protégé Partners returned an average of 2.2%.

And because of a twist in the bet’s history, Girls Inc. of Omaha is likely to get much more than $1 million.

Mr. Buffett and Protégé Partners originally put about $320,000 each into bonds that would appreciate to $1 million over the course of their wager. But the bonds appreciated much faster than expected as interest rates fell so the two sides agreed to go for a bigger prize. In late 2012, they agreed to buy 11,200 shares of Berkshire B shares, which cost $89.70 at the end of 2012. They’ve climbed 121% since then.

After Friday, the last day of trading in 2017, those 11,200 shares are worth $2.22 million.

“I guarantee you it will be put to good use” by Girls Inc., Mr. Buffett said in a December interview.

Following Mr. Buffett’s investing advice, Girls Inc. of Omaha plans to invest the donation passively and use the investment proceeds to cover the ongoing expenses for a new project: transitional housing for 16 young women who are aging out of foster care, said Executive Director Roberta Wilhelm. The organization bought a property in 2016 and will renovate it next year, with a goal of welcoming the first residents in 2019, she said.

“That’s a really life-changing gift for the girls, and it’s certainly a big change for our agency as well,” Ms. Wilhelm said.

Girls Inc. of Omaha is a local affiliate of Girls Inc., a national nonprofit. The Omaha organization provides after-school and summer programs for girls ages 5 to 18. Its annual budget is about $2.8 million, Ms. Wilhelm said.

Ms. Wilhelm said she has followed Mr. Buffett’s bet with “anticipation and hopefulness” for the past decade.

“Of course I had full confidence that he would win, but I thought, ‘10 years, it’s so long. Who knows?’” she said.

Mr. Buffett has previously auctioned off his car and his wallet to support Girls Inc. of Omaha. One year, he donated 17 ukuleles to the organization and taught a ukulele lesson himself.

U.S. Steelmakers Raise Their Bets on Energy, Construction

Steel prices are up, but some say expansion is risky given continuing flood of cheap imports

Steel companies have complained for years that steel from China, South Korea, Vietnam, Turkey and elsewhere is being sold in the U.S. for less than the cost to make it.

While imports are still increasing, steel prices are also on the rise globally. And demand for U.S. steel is starting to rebound, thanks to rising oil prices and a strengthening manufacturing sector, steel executives say. Still, others see expansion as a risky bet.

Some steel companies say they can capture more customers with new plants that can make more steel at less cost than older plants, and can deliver it faster to customers. They’re also counting on additional U.S. tariffs to drive out cheap, foreign-made steel, creating more opportunities for domestic producers. Stiff tariffs imposed over the past 18 months have significantly slowed steel imports from China, according to Commerce Department reports.

Nucor Corp. NUE -1.18% is building a $250 million steel mill in Sedalia, Mo. Startup Big River Steel LLC in Osceola, Ark., accelerated production early this year at one of the largest new steel sheet mills built in the U.S. in years. And Tenaris SA TS 0.25% started making pipe for oil and gas wells at a new $1.8 billion mill near Houston this month.

“Our view is the energy sector will continue to expand here for the next 10 to 20 years and justify more manufacturing in the states,” said Paolo Rocca, chief executive of Luxembourg-based Tenaris.

Domestic steel shipments rose 5% in the first 10 months of 2017 compared with a year earlier and are on track to finish the year higher for the first time since 2014. At the same time, imports were also up 15% annually in the first 10 months of 2017, as imports shifted from China to other low-cost countries. Nucor said Dec. 19 that price pressure from imports has compressed its margins, and it forecast that its fourth-quarter earnings per share will be barely above last year’s and below analysts’ expectations.

Some industry analysts say the new U.S. mills could exacerbate that pressure, swamping a still-fragile domestic market. As Tenaris’s new mill in Bay City, Texas, begins production, the company has nearby plants that remain mostly idle. Mills in the U.S. that supply well-site pipes are operating at about 60% of their maximum production, estimates market analytics firm Pipe Logix LLC.

“Building any more production capacity is just questionable,” said Seth Rosenfeld, a Jefferies analyst. “These companies’ actions don’t align with what they’ve been saying about the state of the steel market.”

But Pipe Logix also estimates that the number of oil and gas wells drilled in the U.S. increased by 60% this year over 2017, and steel executives expect more growth next year.

Tenaris hopes to benefit from that growth by doubling its U.S. pipe-making capacity to about 1 million tons annually. Tenaris plans to sell it directly to well drillers, eliminating independent distributors. Without the middlemen’s markup, Tenaris says it can beat its domestic rivals on price. It also expects continued U.S. tariff pressure on foreign competitors to drive down imports that now make about 70% of the U.S. well-pipe market.

Tenaris hopes to benefit from an increase in U.S. oil and gas wells by doubling its domestic pipe-making capacity.

Tenaris hopes to benefit from an increase in U.S. oil and gas wells by doubling its domestic pipe-making capacity. PHOTO: MAX BURKHALTER FOR THE WALL STREET JOURNAL

Tenaris is also pledging to provide engineering and technical support to customers and to take back pipe that drillers don’t use. “This is a way of working that requires a very intimate relationships with customers,” Mr. Rocca said.

Some U.S. steel companies also see opportunities in rebar, the reinforcing bar used to strengthen concrete in construction projects. Rebar imports are on pace to drop by 17% in 2017, according to Commerce Department, as duties and higher prices for the scrap steel used to make it decrease shipments.

Nucor’s new Missouri mill will allow the North Carolina-based company to produce rebar closer to where its customers use it in buildings, bridge piers and highways. Nucor said it chose a site near Kansas City because most of the rebar used in the region now is shipped in from elsewhere.

“The closer we are to that market, the more successful we could be,” CEO John Ferriola said.

Nucor also intends to buy scrap steel for its rebar near the new mill, which is scheduled to open in 2019. “That’s going to give us a cost advantage in serving that market,” Mr. Ferriola said.

Big River, backed by Koch Industries Inc. and the Arkansas teacher’s retirement fund, designed its mill in northeast Arkansas to produce lightweight sheet steel for cars with an electric furnace, challenging established competitors that make steel for cars with coal-fired furnaces. The company says the mill can be adapted to produce different flat-rolled steel products, potentially leaving it less vulnerable to supply gluts than mills making just one or two products.

Uber BS

Uber CF Statement

29 DEC 2017

The Brazilian defense minister, Raul Jungmann, is against the sale of a controlling stake at Embraer [NYSE:ERJ], the Brazilian-based aircraft manufacturer, Valor Economico reported.

In a press conference, the minister said that the control of Embraer is a matter of national sovereignty and should not be changed. However, he is not against a partnership with Illinois-based Boeing [NYSE: BA], the item added.

As previously reported, Boeing and Embraer are in talks for a potential combination of their operations. The Brazilian government has a “golden share” in Embraer, giving it the power to block any deal that implies a change in control, as reported.

Merger planned for Hollywood Reporter, producers of Golden Globes and ‘House of Cards’

Todd Boehly, the entertainment investor, is bringing together three Hollywood companies in a complex deal that will merge the maker of House of Cards with the owner of The Hollywood Reporter magazine and the producer of The Golden Globes awards show.

Discussions to combine TV production company Media Rights Capital, the Hollywood Reporter-Billboard Media Group and Dick Clark Productions, are at an advanced stage and could be announced imminently, according to three people with knowledge of the talks — although they cautioned that the plans could yet be derailed.

The three companies would be brought together under Mr Boehly’s Eldridge Industries group.

Formerly president of Guggenheim Partners, Mr Boehly is an investor in MRC and controls DCP, the producer of live awards shows. He also controls THR-Billboard, which owns a portfolio of entertainment news titles, and is a part-owner of the Los Angeles Dodgers, the baseball franchise that lost the World Series finals this year to the Houston Astros.

Under the plans being discussed MRC, DCP and THR-Billboard would continue to be managed independently but would report into a new group wholly owned by Eldridge Industries, which Mr Boehly controls, according to one person briefed on the talks.

Eldridge Industries, which controls THR-Billboard and DCP, declined to comment. Potential deal values were not disclosed, but DCP was valued at about $1bn earlier this year, and MRC has previously been valued at more than $1bn

MRC makes House of Cards which has been rocked by the removal of star Kevin Spacey after a sexual harassment scandal. It has produced other series, such as Ozark, which also appears on Netflix, as well as movies such as Baby Driver — which starred Mr Spacey — and Ted.

The merged group would own assets spanning film and television production, entertainment news and live events. Combining the three companies under one roof would lead to cost savings and revenue synergies as well as better position the new entity for a future sale, said a person close to Mr Boehly.

The talks come nine months after Dalian Wanda, a Chinese conglomerate that owns the AMC cinema chain and Legendary Entertainment, failed to complete a purchase of Dick Clark for about $1bn. The takeover was scrapped following a crackdown on capital flight imposed by Beijing as well growing scepticism among US lawmakers over China’s growing influence in Hollywood.

Eldridge hired Moelis and Goldman Sachs in 2016 to explore a sale of its different media assets after the private equity group was approached by potential buyers.

Following the collapse of Wanda’s bid for Dick Clark, Mr Boehly had started working on a plan to combine the three media companies, said one person briefed on how the deal talks evolved.

A three-way merger would come amid a broader wave of consolidation in the media industry, from publishing to entertainment to production. Jay Penske’s Penske Media recently struck a deal to take control of Rolling Stone magazine, adding it to a portfolio that includes titles such as Variety and Robb Report, while Meredith acquired Time Inc’s stable of magazines in a $2.8bn deal backed by the billionaire Koch brothers.

Walt Disney recently agreed to buy 21st Century Fox’s entertainment and international business — including its stake in Sky, the pan-European pay-TV group — for $66bn. Earlier in the year Discovery Communications struck a deal to acquire Scripps Networks Interactive for $14.6bn.

Tinder has 2.5m paid users — up 86% on the previous year

Dating apps are supposed to help users find love. Instead they have created a new language for rejection. Luckless singles are no longer just dumped, they are left-swiped, ghosted, breadcrumbed and blocked. Tinder, the most famous dating app of all, has come up with a clever idea to soothe wounded egos by showing users the people who like them — for a price. Its success upends the theory that free-to-use apps cannot introduce charges.

The rates are also testament to the popularity of online dating itself. Two years ago dating platforms were losing favour. Match Group, home of Tinder, listed in late 2015 at $12 per share — the lowest end of its initial pricing guidance.

This has proved overly pessimistic. A survey of US college students found 85 per cent had used Tinder at one time or another. New dating sites cater to niche preferences. Bristlr, for example, is for beard lovers. You can even date a celebrity via Loveflutter Blue so long as you consider Twitter’s blue tick of verification a measure of fame.

In theory, heightened competition should drag on Match Group’s revenue. But the sites chip away stigma around online dating. That means more users and a willingness to pay for specialist services. Tinder is free. Tinder Gold costs $14.99 a month. There are now 2.5m paid Tinder users — up 86 per cent on the previous year and more than one-third of the group’s total. Online subscription-based revenue models are a more stable source of income than online advertising.

Tinder Gold’s success has already supported a jump in Match Group’s share price. Shares are up 147 per cent since the IPO. That does not mean the rally is exhausted. Barry Diller’s IAC holds 81 per cent of Match Group. Freeing some of that up would be a bonus. Match can also apply lessons learned in Tinder to more than 40 other brands. Now that it has proved people are willing to pay to find love online — or something like it — the group’s share price should keep climbing.

SAC founder’s new venture aims to charge some of the industry’s highest fees

At a time when many titans of the hedge fund industry are quietly closing up shop or restricting their services to friends and family, one of the most infamous is readying a comeback.

Steve Cohen, whose SAC Capital was shut down by US authorities after the fund company pleaded guilty to insider trading, is expected to return to the hedge fund industry at the start of 2018. That is when a ban on him managing outside money lifts.

Mr Cohen is betting that his previous success will attract new investors willing to pay some of the highest fees in the industry at a time when many of his rivals are being forced to cut their charges. SAC Capital grew into a $15bn trading behemoth with returns often in excess of 30 per cent a year.

According to marketing documents he has sent to some prospective investors, Mr Cohen is proposing to charge a 2.9 per cent management fee and a performance fee on a sliding scale of 10 to 30 per cent. If returns exceed 20 per cent, it will trigger the 30 per cent performance fee.

A spokesman for the fund declined to comment.

Hedge funds have traditionally charged 2 per cent for management and 20 per cent performance fees, but those levels are under pressure.

Funds including Michael Platt’s BlueCrest, Richard Perry’s Perry Capital, Eric Mindich’s Eton Park Capital, and John Griffin’s Blue Ridge Capital have all shut down or converted to managing family money.

Some investors say that despite the high fees and SAC Capital’s history of insider trading, they are reluctant to let the opportunity slip away. Since SAC was shut to outside money, Mr Cohen’s family office, Point72, has been managing more than $11bn of his own fortune.

But a hedge fund adviser said that other investors were more cautious, even though the fund is expected to open to new money early in the new year then quickly close after raising a few billion dollars.

“My view of the institutional investor environment is they are more relaxed about this. They feel like if they miss it on the first go, they’ll get in later. I don’t see that same stress that people used to see,” the adviser said.

The public fund will launch on January 1, with a minimum investment of $100m, according to marketing documents sent out in the autumn. Investors will have to agree to have their money locked up for one year, and will face penalties if they withdraw in the second year.

Mr Cohen has declined to make himself available to speak to prospective investors ahead of the launch.

Mr Cohen began laying the groundwork for his return to the industry last spring by opening Stamford Harbor Capital next door to Point72. Because of the ban, he has not been allowed to personally supervise the fund.

SAC Capital pleaded guilty to insider trading in 2013 and paid a record $1.8bn in fines. Mr Cohen was never personally charged with insider trading but several of his portfolio managers were convicted of the crime and sentenced to prison terms.

The industry has grown from managing $2.6tn in 2013 to $3.2tn this year, according to data from Hedge Fund Research.