TheChek News Flow

The founder of beleaguered tech conglomerate LeEco is facing yet another huge headache. Jia Yueting has been ordered by the China Securities Regulatory Commission’s Beijing branch to return to the country by the end of this month and deal with the company’s debts. In an unusual public letter posted Monday, the CSRC said its failure to repay debts is “a serious violation of the legal rights and interests of listed companies and the interests of investors, with an extremely negative social impact.”

Shares of LeEco’s parent, Leshi Internet Information and Technology Corp., were traded on the Shenzhen Stock Exchange until April, when trading was halted to allow the company to review a restructuring plan. Leshi was launched in 2004 by Jia as a video streaming service. In 2016, it embarked on an ambitious expansion plan under the LeEco brand, which included an agreement to buy American TV maker Vizio for $2 billion (the acquisition was later called off), the launch of smartphones, smart bikes and other consumer electronics and a financial partnership with Los Angeles-based electric vehicle startup Faraday Future. To fund those ventures, LeEco borrowed billions of dollars from investors, with Jia using his own shares in Leshi Internet as collateral to secure funds from securities brokerages.

LeEco’s expansion failed to take off, however, and as pressure from lenders mounted, in July Jia resigned as chairman of Leshi Internet after promising on his social media accounts to repay the LeEco’s debts.

The CSRC said that it has sent letters to Jia asking him to return to China since September, but “so far have not seen any action taken by [Jia].” Earlier this month, Jia was placed on China’s official list of debt defaulters after he failed to pay back more than 470 million yuan ($71 million) to Ping An Securities Group and last week Hong Kong media reported that LeEco’s local branch had filed a petition with the territory’s high court to begin liquidation.

Smarter negotiating tactics from customers are adding to pressure on Airbus and Boeing to trim their own costs

The UK’s biggest energy supplier Centrica is hunting for a second joint venture partner to further boost its oil and gas production business after a recent deal with German-owned Bayerngas Norge.

Chris Cox, chief executive of the newly enlarged exploration and production business, a joint venture that is 69 per cent-owned by Centrica, said it is looking for another partner “about the size of Bayerngas or a bit bigger”.

His comments reinforce market expectations that this year’s spate of dealmaking in the European oil and gas industry will continue into 2018.

Most recently, chemicals group BASF said this month that it would merge its Wintershall energy business with another German company DEA, which is owned by Russian billionaire Mikhail Fridman.

Other major deals have included the $7.45bn acquisition by France’s Total of the oil business of Danish conglomerate AP Moller-Maersk.

Centrica’s Bayerngas deal, first announced in July, initially raised questions about the strategy of Iain Conn, chief executive of the FTSE 100 group. He had said in 2015, shortly after taking the job, that he wanted to shrink Centrica’s oil and gas business to focus on customer-facing activities such as household energy supply.

While Centrica has sold production assets in Canada and in Trinidad and Tobago, it now has an enlarged Europe-focused oil and gas production business on its balance sheet. 

Mr Cox said in an interview with the FT that the expansion of the oil and gas business — now called Spirit Energy — through joint ventures was consistent with Mr Conn’s strategy.

“Iain did say early on in his tenure that he wanted to reduce exposure to E&P but he didn’t say he wanted to get out and he has been pretty firm since then that he likes having exposure to E&P,” Mr Cox said.

“That’s partly for balance sheet strength and it’s partly frankly for exposure to commodities prices and the view that they have been low for a few years and that’s not going to last for ever and why would you get out at the bottom of the market anyway?”

What Centrica will not do is hand Spirit Energy a pile of money to go out and do further deals, said Mr Cox, because it wants to reduce spending on exploration and production.

Spirit Energy is aiming to invest about 80 per cent of its operating cash flow after tax on “growth options”, including developing new fields, while the remainder will be distributed to its parent companies as dividends.

It is looking for another partner that wants to offload assets in Europe either to concentrate on lower-cost regions, or to quit exploration and production.

Although many of the biggest energy companies have been looking to sell their North Sea assets for cash, Mr Cox believes some of them could be persuaded to enter a joint venture.

“If they [the energy majors] are interested in getting out, they could try to sell for cash today and we know a number of them have done and have been unsuccessful.

“[Or] they could put their assets into our JV and we’d probably save some money in the short term through synergies . . . we could probably run it more efficiently just because we’d have more operations we could spread our costs over and we can create that option over the next few years to potentially IPO or a trade sale to another investor at that point.”

He stresses that neither Centrica nor Stadtwerke München Group, Munich’s municipal utilities company and the majority owner of Bayerngas, have yet committed to float Spirit Energy following the expiry of a two-year lock-up period in 2019, but the option is there. 

The Bayerngas joint venture is a “good marriage” Mr Cox said, because the German group has a number of immature assets that require development but need cash to press ahead, while Centrica’s assets throw off a lot of cash but are ageing.

Centrica’s E&P business was likely to end the year with about 50m barrels of production as a standalone business, he said, but that is due to fall in coming years as older assets go into decline or have to be decommissioned.

“We started with a business that wasn’t sustainable and would . . . generate cash for the next 5-6 years but beyond that was not a sustainable business. So that’s what we are creating here,” said Mr Cox.

The EU has frequently criticised Britain for not specifying what sort of trade arrangement it wants with the bloc after Brexit. Yet one could lay much the same charge at Brussels’ door. After all, it has been largely silent on what sort of final relationship it sees itself having with the UK.

The European Commission gave some pointers last week, especially on the thorny question of financial services. First, the EU’s principal negotiator, Michel Barnier, said that any free trade deal would not preserve the single market “passport” rights of UK-based banks after Britain’s departure — the legal permit that automatically gives them the ability to trade across the bloc from a single location.

Then, as if to follow that up, the EU unveiled some draft legislation. This aims to tighten the established mechanism through which the bloc grants so-called “equivalence” status to third countries, such as the UK after Brexit. The law indicates, for instance, that Britain might have to continue to apply EU rules even on such arcane matters as bonus caps, for its own regulations to be deemed equivalent to EU standards.

The immediate reaction was that Mr Barnier’s bald statement was the bigger blow. Actually, it is the draft law that is more concerning, especially as equivalence or some variant has always been the most likely mechanism through which City of London companies would retain any EU-mandated access to the single market.

Take the issue of bonus caps — admittedly a politically smart choice for Brussels to use to illustrate its intentions with the planned law. Who after all sees it as a priority for the UK government to fight for City-based bankers to receive even higher pay? Yet the Bank of England has already said it would consider dismantling the bonus cap after Brexit, precisely because it has its own alternative in the form of longer vesting periods that would achieve the same objective.

And that is the fundamental point with equivalence: rules should not need to be identical, but only to have the same higher objective — one that critically preserves customer protection. This was certainly Mr Barnier’s view when he negotiated the EU’s largest equivalence deal to date — with the US over central counterparties after the Americans forced derivatives to be centrally cleared following the financial crisis.

Then, he stressed the principle that when two countries’ rules were “comparable and consistent” with each other’s objectives, it was “reasonable to expect [each] to rely on those rules and recognise the activities regulated under them as compliant”. Few could argue that UK rules are not equivalent to European ones — they are presently identical.

So why the more prescriptive approach? Brussels says it is necessary to deal with the systemic risks caused by Europe’s continued dependence on the City of London after Brexit.

But turning the UK into a financial rule-taker would not obviously reduce these perils. Indeed, by separating rulemaking from regulation, it could conceivably magnify them. For instance, concerns at some future point about the stability of the eurozone could encourage EU officials to impose restrictions on the functioning of markets — such as short selling bans and curbs on the ability of institutions such as credit rating agencies to issue “unhelpful” judgments on sovereign issuers and financial institutions. Mark Carney, the Bank of England governor, warned last year that such outcomes could “cause a risk to financial stability”.

Much ultimately depends on how the EU chooses to define its more granular definition. Too tight an approach, and that must likely push the UK in the direction of retaining regulatory sovereignty even at the price of losing officially sanctioned access privileges.

Even before the Brexit referendum, when the UK envisaged remaining a full EU member with voting rights, the government of David Cameron was already worried about the increasingly intrusive and mercantilist direction of EU financial regulation. Theresa May has ruled out a Norway-type end state as an unacceptable version of exit, partly because of the need to take others’ rules.

Leaving without a deal on financial services is not Britain’s objective. But it cannot be excluded if an acceptable way forward cannot be conjured.

The City’s powerful position in EU finance was largely built before the passport was invented, and it should not tangle itself in European red tape simply to preserve a portion of the 20 per cent of its business that is EU-facing.

The UK should, in those circumstances. accept Mr Barnier’s view that finance will not be part of any special treaty, maximise the legal and linguistic advantages that allow it to be competitive, and continue to expand its global trade.

Cardboard packaging might not seem like it requires out of the box thinking. But for DS Smith chief executive Miles Roberts, it is all about the box; the company churned out roughly 1bn of them in the run-up to Christmas.

As Amazon’s sole provider of cardboard boxes in England, as well as one of its major suppliers in Europe, DS Smith is riding the boom in online shopping and its shares have gained roughly 25 per cent in 2017.

Its ascent was signalled by a recent promotion to the FTSE 100 index of blue-chip stocks, joining fellow packaging makers Smurfit Kappa and Mondi, with a stock market valuation of £5.5bn. 

Founded by the Smith brothers in London in 1940, DS Smith today employs roughly 27,000 people in 37 countries and is Europe’s leading cardboard recycler, as well as the continent’s second-biggest producer of boxes behind Ireland’s Smurfit Kappa. 

Since Mr Roberts became chief executive in 2010, the UK-based group has expanded rapidly with revenues more than doubling, fuelled by a mixture of organic growth and a string of acquisitions in what is a relatively fragmented industry. 

This year it entered the US market for the first time, buying 80 per cent of Interstate Resources for $1.14bn.

Although ecommerce makes up just 10 per cent of the group’s £4.8bn annual revenue, this segment is increasing by double-digit percentages each year.

Mr Roberts said the knock-on impact on traditional bricks and mortar retail also presents an opportunity for DS Smith, as stores and consumer good companies seek more sophisticated packaging that attracts customers and easily slides on to shelves without the need for unpacking.

“They’ve got to have better quality packaging in the store to influence the shoppers,” he said. “Instead of just wanting straight brown boxes that they’ve used in the US, they want three, four, five, six colours”.

Thomas Rands, analyst at Investec, reckons DS Smith’s recent US deal will be the “foundation for strong growth” in the country.

“It isn’t as sophisticated as Europe in terms of innovation on corrugated boxes. There’s lots of opportunity to add value,” he said.

Analysts point out, however, that packaging is traditionally a cyclical industry, with earnings sensitive to activity in the wider economy.

A key challenge for DS Smith in the short term is to raise prices, in order to recover rising costs for its main raw material: paper. This squeeze led the company’s underlying operating profit margin to fall 60 basis points to 9 per cent in the half-year ended October 31, even as revenue jumped by almost one-fifth. 

Even so, Justin Jordan, analyst at Jefferies, said that like its peers DS Smith is enjoying a “triple tailwind” of increased industrial production, growth in ecommerce and higher consumer spending. In addition, paper-based and plastic packaging are taking market share globally from glass and metal.

“[Mr Roberts] has done a good job of making a pretty mundane industry seem interesting to investors,” he said.