One Game Warren Buffett Doesn’t Play: Chicken
Elliott Management says it is planning to counter Berkshire’s $9 billion bid for Energy Future
Warren Buffett’s Berkshire Hathaway Inc. BRK.B -0.59% is under pressure to do something it usually doesn’t do: raise its bid.
Berkshire’s subsidiary Berkshire Hathaway Energy struck a deal last week to buy bankrupt Energy Future Holdings Corp., including Texas electricity-transmission business Oncor, for $9 billion in cash.
Paul Singer’s Elliott Management Corp., a major Energy Future creditor, said Berkshire’s bid doesn’t value Oncor highly enough and that it is working on a rival offer. “It is quite likely that the Berkshire transaction will not close, given the lack of support from the debtors’ creditors,” a lawyer for Elliott wrote in a Tuesday letter that was publicly released by the hedge fund.
For decades, Mr. Buffett has included in his company’s annual report a list of criteria for companies that might want to sell businesses to Berkshire. Berkshire is looking for large companies with little debt, the list says—and it isn’t interested in bidding wars or hostile takeovers.
“We don’t participate in auctions,” Mr. Buffett wrote in the latest annual report. “A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’”
If the Oncor deal doesn’t go through, Energy Future would pay Berkshire Hathaway Energy a $270 million fee, according to a filing. The fee would have to be approved by the bankruptcy court.
The potential Berkshire deal would need permission from a bankruptcy court and from Texas regulators. Regulators already have indicated they would support Berkshire as a buyer.
Berkshire Hathaway Energy declined to comment.
Berkshire watchers said the company is unlikely to raise its initial bid. “His trump card is his willingness to walk away,” said David Rolfe, chief investment officer at Wedgewood Partners, which manages about $6 billion and holds Berkshire shares, referring to Mr. Buffett. “He does not have a history of bidding-type competitions, and he typically has played a pretty strong hand.”
Mr. Buffett has long been known for quickly negotiating deals and sticking with his initial price offer.
“His playbook is not to negotiate,” said Robert Miles, who has written books on Berkshire. “Buffett would take the $270 million and move on to the next deal, which is what they did with Constellation.”
Berkshire’s energy unit reached a deal in 2008 to buy Constellation Energy Group Inc. but withdrew the offer after state-controlled Electricité de France SA agreed to buy a stake in Constellation. Berkshire received a $175 million breakup fee.
To be sure, many potential Berkshire deals that fall through never become public. In 2012, Mr. Buffett told shareholders that Berkshire almost spent $22 billion buying a company but couldn’t reach an agreement. He didn’t name the potential target.
A recent withdrawal occurred earlier this year when Kraft Heinz Co. , which is partly owned by Berkshire and Brazilian private-equity firm 3G Capital, backed away from a $143 billion approach to take overUnilever PLC in February after Unilever declined. Mr. Buffett revealed at his company’s May annual meeting that Berkshire would have invested $15 billion if the deal were reached.
“If it’s unwelcome, there is no offer,” Mr. Buffett told CNBC in February.
Mr. Buffett famously participated in one hostile deal decades ago—the takeover of Berkshire itself. Mr. Buffett bought shares in Berkshire, which was a New England textile company, starting in 1962. In 1965, he appeared at a board meeting to take control of the company formally and replace the management.
In retrospect, he has said, the deal was a mistake. “I found myself…invested in a terrible business about which I knew very little,” he wrote in 2014.
Mr. Buffett did raise the offer price in 1999 when he bought a majority stake in MidAmerican Energy Holdings Co., now called Berkshire Hathaway Energy. But he made the switch before the deal was announced, as he explained in his 2007 letter to shareholders.
Mr. Buffett originally offered $35 a share for MidAmerican, but after pressure from investment bankers, he raised it to $35.05, he said in the letter. “With that, I explained, they could tell their client they had wrung the last nickel out of me,” he wrote. “At the time, it hurt.”
But given MidAmerican’s growth since then, he said in the same letter, “I’m glad I wilted and offered the extra nickel.”
Exclusive: Ant Financial refiles for U.S. approval of MoneyGram deal - sources
Ant Financial, the affiliate of China's Alibaba Group Holding Ltd (BABA.N) that agreed to buy money transfer company MoneyGram International Inc (MGI.O) for $1.2 billion, has resubmitted the deal for U.S. review, people familiar with the matter said.
The deal is the latest and most high-profile transaction to be refiled this year with the Committee on Foreign Investment in the United States (CFIUS), a secretive government panel which reviews acquisitions by foreign entities for potential national security risks.
Ant Financial and MoneyGram refiled after they were unable to secure clearance from CFIUS within the maximum time of 75 days that is awarded for assessing applications, the sources said on Tuesday.
Refiling resets the clock and gives up to another 75 days for the companies to complete the national security review and try to resolve potential issues.
"We are not commenting on the CFIUS process, but we are continuing to work with the various regulatory agencies and remain focused on closing the transaction by the end of the year," Ant Financial said in a statement.
MoneyGram declined to comment.
A CFIUS refile does not necessarily mean that a deal will be rejected, although it does indicate increased government scrutiny. More deals have had to be refiled with CFIUS following the inauguration of U.S. President Donald Trump in January, as several key positions at several government departments remain vacant or have taken too long to be filled.
CFIUS did not respond to a request for comment.
CFIUS had accepted notices of more than 120 transactions as of June 23, on pace to set a record, according to estimates by law firm Covington & Burling LLP. By comparison, CFIUS had received notices of just 97 transactions in all of 2013.
Ant Financial finalized its deal to buy Dallas-based MoneyGram in April, after it sweetened its bid by over a third to beat a rival offer from U.S.-based Euronet Worldwide Inc (EEFT.O).
MoneyGram's global remittance channels for sending money overseas would help Ant Financial, formerly known as Alipay, build a cross-border network after a string of recent investments in Asia.
Some U.S. lawmakers, including Republican Senators Pat Roberts and Jerry Moran, have written to Treasury Secretary Steven Mnuchin, who also serves as chairman of CFIUS, to express concern that Ant Financial's acquisition of MoneyGram could pose national security threats, arguing that the information of U.S. citizens, including military personnel, could be compromised.
Ant Financial has said that MoneyGram's data infrastructure will remain in the United States, with personal information encrypted or held in secure facilities on U.S. soil. It has also pointed to existing U.S. regulations that call for such protections.
CFIUS approved a previous deal by Ant Financial, its acquisition last year of Kansas City-based EyeVerify, the company behind a mobile eye verification technology.
In addition to CFIUS, at least 46 U.S. states must have granted money transmitter licenses before the deal closes. Ant Financial is already approved for money transfers in 23 U.S. states, according to analysts at Elevation LLC.
Colette Concept Store to Shutter in December
The store is in talks with Saint Laurent to take over the location.
Staff were informed of the decision on Wednesday morning, said Sarah Andelman, creative director and purchasing manager. Andelman is the public face of the boutique, founded by her mother, Colette Roussaux.
“As all good things must come to an end, after 20 wonderful years, Colette should be closing its doors on Dec. 20 of this year,” the store said in a statement, explaining that Roussaux was ready to retire.
“Until our last day, nothing will change. Colette will continue to renew itself each week with exclusive collaborations and offerings, also available on our website colette.fr,” it added.
The store is in talks with Saint Laurent to take over the location, it said.
“We would be proud to have a brand with such a history, with whom we have frequently collaborated, taking over our address. We are happy of the serious interest expressed by Saint Laurent in this project, and it could also represent a very good opportunity for our employees,” it added.
Colette, famed for its regularly updated window displays and frequent store events, recently launched a series of monthlong takeovers of the store, beginning with Balenciaga from June 19 to Aug. 5.
Les Vacances de Lucien, offering a selection from brands represented by Paris PR firm Lucien Pagès, will take over the space from Aug. 7 to Sept. 2; followed by Sacai, from Sept. 4 to Sept. 30; Thom Browne from Oct. 2 to Oct. 28; Chanel from Oct. 30 to Nov. 25, and wrapping with Saint Laurent from Nov. 27 to Dec. 20.
The concept store famous for its blue dot logo posted revenues of 28 million euros, or $31 million, in 2016, with online accounting for roughly 20 percent, according to a spokesman.
It celebrated its 20th anniversary in March at Les Arts Décoratifs, where Brooklyn-based design firm Snarkitecture set up its installation “The Beach,” featuring an enclosure filled with 300,000 recyclable plastic balls.
In an interview with WWD at the time, Andelman – who has spent her entire career at Colette – responded to speculation about the future of the boutique.
“Every year, people ask us how long we plan to go on. We are always searching for newness, discovering new designers and launching new talents, so there is no reason to give up. If suddenly there were nothing interesting left anywhere, we would reconsider, but fortunately something cool comes along every day,” she said.
She said Roussaux, who still lives above the store, was the majority owner of the business and had never considered bringing in an outside investor. Andelman also said she did not know the revenues of the store.
“Our accountant does, but luckily, I function more by instinct. I never have a budget when I’m ordering. That doesn’t mean I spend money as if it didn’t belong to me. I’m careful. My orders are reasonable,” she said. “I know I own a percentage, but likewise, I don’t know what my percentage is.”
Andelman said the store’s revenues were hit by the terrorist attacks in Paris in November 2015, which sharply impacted tourism, but added the retailer was better equipped than some luxury brands to deal with with drop-off.
“We work at it, but we’re lucky in the sense that we get a steady amount of foot traffic, unlike some luxury stores on streets like Avenue Montaigne. So even if there is a drop in the number of foreign visitors, or people cut back their spending, the store keeps going at times like these,” she said. “We really felt the impact last summer. Fortunately, we also sell online and our e-commerce site is growing.”
Liquidity is a crucial metric for all marketplaces. But how can we truly evaluate this liquidity? The three keys to answering this question are density, appropriately balanced demand and supply and category concentration.
Density, geographic reach and distance between counterparts
The first step to analyzing the potential liquidity of a marketplace is understanding its geographic extent. For example, Upwork will see transactions filled between freelancers and employers all around the globe, while Tinder will (typically) only see two people dating within the same city. Tinder would therefore require a city per city launch and a city per city liquidity analysis.
In local marketplaces, there is a strong correlation between density and liquidity. The higher the number of participants within a relevant radius, the higher the liquidity of the marketplace. We define liquidity as the number of transactions filled out of the total potential transactions in a marketplace. We refer to density as the number of participants within a certain geographic area.
Let’s use Tinder as an example. If in a given week Tinder acquires 1,000 female participants in Chicago and 1,000 male participants in New York, Tinder’s number of total users increases, but its liquidity remains the same. Now, if Tinder acquires 1,000 female participants and 1,000 male participants all located in the borough of Brooklyn, this higher density of users (from both sides of the marketplace) will lead to higher liquidity.
To determine the density in a marketplace, you need to first define the limits of the geographic area within which its transactions can be filled. This distance threshold (“r” in the visual below) is different for every marketplace and you will identify it by understanding how far your customers are willing to travel to complete their transaction. For example, a seller at Letgo might not be willing to travel 30 minutes to sell a used skateboard for $30, but a babysitter at Care.com will likely travel 30 minutes to make $150 for a day of babysitting.
Once you define this distance threshold “r” you need to maximize density. But how?
You start by optimizing your marketing strategy to achieve the highest customer acquisition within the established distance threshold. As a result, you will maximize the active participants within that distance of each other, and therefore maximize density, moving from the low-density to the high-density marketplace diagram above.
The evolution of a balanced marketplace
Maintaining the optimal balance of demand and supply in a marketplace is crucial to achieve liquidity. If a marketplace doesn’t have the right number of buyers per listing, or the right number of items listed per buyer, transactions will go unfilled.
How can we analyze what is the right balance of demand and supply? By looking at several ratios:
- The average number of buyers relative to the number of sellers needed to fill a transaction
- The number of bids per buyer required to fill a transaction
- The average of items listed per seller required to fill a transaction
Let’s base our example on a used furniture marketplace in which the average ratio of bids per item listed required to fill a transaction is 100 to 1. So, every item listed needs 100 bids for it to sell. Now the conversion from this ratio to the ratio of buyers to sellers is determined by the average number of bids per buyer and the average number of items each seller is selling. This is the key to the analysis.
For simplicity, let’s assume the average items posted per seller is 1 and the average bids per buyer is 10. This means that the ratio of buyers to sellers is 10:1; it requires 10 buyers for every seller, to fill a transaction. However, it usually takes time for the average number of bids per buyer to be this high, and it will only happen once the company has reached a stable stage of liquidity.
At an early stage, the likely scenario is that the average number of bids per buyer is 1 or less, which means the ratio of buyers to sellers initially is more like 100:1. So, it requires 100 buyers for every seller to fill a transaction. The ratio of buyers to sell would evolve like this:
The first reason why average bids per buyer increase over time is that when a new buyer experiences a marketplace for the first time, they are hesitant to bid. The buyer needs to trust the marketplace before being ready to make a committing bid. Trust takes time. Furthermore, at a stable stage the diversity of inventory in the marketplace will increase the likelihood that a buyer will find something that interests them.
However, the conclusion here is not just that the bids per buyer increase over time and that this determines the evolution of a balanced marketplace. It is that you need to closely monitor the second-degree KPIs (like bids per buyer and listings per seller) to understand how to adjust your strategies to maintain a balanced marketplace over time. In the same way that it is common for average bids per buyer to increase over time, it also is usual that the average items listed per seller change over time.
Category concentration and diminishing marginal returns
Once you have defined the distance threshold under which your marketplace will fill transactions, you need to breakdown the liquidity per category within the marketplace. For example, if our used furniture marketplace has 1 million active buyers at a certain point in time, how many of them are in the market for a table? How many are looking for chairs? How many want a couch? Only a small segment of the 1 million active buyers will be interested in each category. This means you cannot just evaluate the overall liquidity of the marketplace, you need to do it on a per-category basis.
It is often the case that most participants are interested in just a few of the categories served by the marketplace. This means that as you spend marketing dollars to acquire users, the higher-concentration categories will yield liquidity faster than the rest. And in most cases, the low-concentration categories will require a much larger marketing investment to achieve liquidity.
Let’s go back to our furniture marketplace example to illustrate this point with the following assumptions:
- 50 percent of the buyers are interested in buying a couch while the other 50 percent are equally scattered across 50 other furniture categories
- We are spending $100 on marketing
- Our CAC is $1
- The liquidity threshold per category is 50 buyers (the liquidity threshold is the number of buyers needed for a transaction to fill)
We would have 50 new buyers in the couch category, and one new buyer in each of the other 50 categories. The 50 new buyers in the couch category will substantially increase the likelihood of a filled transaction within its category, while the additional one participant in any of the remaining categories barely increases its chances to fill a transaction in their respective areas.
If we take this example to scale and we assume:
- Marketing budget of $500,000
- A liquidity threshold per category of 250,000 participants
Only the couch category would reach liquidity. And even if we were to invest $1 million in marketing, only the couch category would reach liquidity because all the other areas would only reach 10,000 participants each. And the same would happen until the invested amount goes above $25 million. This means that such a marketing strategy would lead to diminishing marginal returns from a liquidity standpoint:
Again, the best way to solve this issue is to align the marketing strategy to the category concentration. In other words, allocate the majority of the marketing investment to the most predominant category (which in our example would be the couch category). The liquidity chart in that case would look like this:
This is, of course, an extreme example.
A more realistic case would have several concentrated categories and a long tail of dozens of others. To illustrate this, let’s assume 30 percent of the buyers want to buy a couch, 20 percent a chair, 10 percent a table and the remaining 40 percent are scattered across the 40 other outstanding categories. This time, the liquidity chart would look like this (which is more realistic):
Density, a balanced demand and supply and category concentration are crucial drivers of marketplace liquidity. To maximize your return on marketing investment, you need to align your marketing and liquidity strategies. To monitor the evolution of your liquidity, you need to track your second-degree KPIs.
VCs should also dig into these three principles when evaluating a marketplace investment opportunity.
Trainline’s European service (formerly known as Captain Train) is becoming your one-stop shop for French trains. The company has partnered with SNCF to get real-time data about trains, delays and your current location. You had to use SNCF’s official app before to get this kind of information.
If you’ve used Trainline to book a ticket before, you know that the app can alert you to tell you the platform of your train. But there was no way to check if your train was delayed or canceled. You had to look at the billboard even though your phone is probably more powerful than the billboard in your train station.
Alternatively, the SNCF app displays this kind of information but doesn’t let you book a ticket — you have to use Voyages-SNCF or Trainline to buy tickets. But nobody wants to deal with two apps.
SNCF now has an official API and has released a ton of open data. Former digital minister Axelle Lemaire forced public administration and public companies like SNCF to share key data under an open data license. So Trainline took advantage of those APIs and data for its own apps.
And if your train is on time, you’re still going to see the difference as you’ll be able to see the next stops, how long you’re going to stop and your current position. The company says that it wants to display real-time information in other countries.
In other news, Audrey Détrie is now Trainline’s country manager for France, Belgium, Netherlands and Luxembourg. This is a brand new position. Détrie is going to to promote Trainline and represent the company.
*PREMIER OIL IS TAKING `REASONABLE GUESS' ON RESERVES EST.
*PREMIER SAYS `UNLIKELY' ZAMA-1 WELL RESULTS COULD BE DOWNGRADED
*PREMIER SAYS `UNLIKELY' ZAMA-1 WELL RESULTS COULD BE DOWNGRADED
VINCI Airports acquires 51% of Lojas Francas Portugal from TAP
VINCI Airports, France-based airport concession holder and operator has acquired 51% of the share capital of Portugal-based Lojas Francas.
Deal Snapshot
- Terms: Undisclosed.
-
Target (Lojas Francas de Portugal)
- Description: Manages the concessions for the duty-free and travel-retail shops at Portuguese airports.
- Ownership: Private, operates as a subsidiary of Transportes Aereos Portugueses.
- Size: Generated revenue of approximately EUR 200m in 2016 and employs around 500 people.
- Strategic Rationale: This operation allows VINCI Airports to strengthen its expertise in airport retail.
Buyer (VINCI Airports)
- Ownership: Private.
- Description: An airport concession holder and operator engaged in operating and managing a network of airports.
- Size: In 2016, its consolidated revenue amounted to EUR 1.05bn, manages 35 airports and has 11,000 employees.
- Acquisition History: This marks Vinci airports first acquisition this year.
Press Release
On 11 July 2017, VINCI Airports finalised the acquisition of 51% of the share capital of Lojas Francas Portugal (LFP), Portuguese airport retail leader, from TAG GER, subsidiary of the national airline company TAP.
LFP currently operates 31 retail outlets with a total area of around 7,500 sq. m. in seven of the ten Portuguese airports managed by VINCI Airports, including Lisbon airport. The company, founded in 1994, employs around 500 people and generated revenue of approximately EUR 200m in 2016. The remaining 49% of LFP`s capital is held by Dufry Group, world leader in airport retail (duty free and duty paid).
Traditional duty-free shops (perfumes and cosmetics, tobacco, alcohol, food products) account for the lion`s share of LFP`s activity. It also sells fashion products, jewellery and accessories in dedicated stores under the Attitude brand, together with international brand products in exclusive boutiques under licensing contracts.
This operation allows VINCI Airports to strengthen its expertise in airport retail. Through its management of 35 airports across the world, the Group already works regularly with its commercial partners to offer passengers a range of products meeting their expectation. In 2016, revenue from non-aviation activities, including airport retail, accounted for 25% of VINCI Airports` consolidated revenue.
Nicolas Notebaert, Chief Executive Officer of VINCI Concessions and Chairman of VINCI Airports, said: "With this acquisition, VINCI Airports reaffirms its ambition to drive creation of the new generation of airport retail. Backed by our expertise as airport operator, we are keen to place our knowledge of the customer pathway at the service of an optimised shopping experience."
Carillion’s record-breaking run of declines showed little sign of stopping on Wednesday, falling a further 10 per cent in early trading as analysts raise concerns about its long-term viability.
Shares in the The FTSE 250 construction and support services group dropped a total of 59.5 per cent over Monday and Tuesday, after it warned that it would need to take action to shore up its balance sheet after writing off £845m worth of construction contracts.
Analysts at UBS argued yesterday that its shares could head all the way to zero if support services trading now deteriorates – a danger given recent profit warnings from peers such as Mitie and Capita, which have seen a slowdown in contracts since the UK’s vote to leave the EU.
At publication time shares in the group were down 10 per cent (and counting) to 69p, bringing its losses for the week to over 63 per cent.