Closing Market Summary: French Vote Pushes Equities Higher on MondayBulls achieved global dominance on Monday as investors cheered yesterday's first round of the French presidential election. The major U.S. averages opened the week solidly higher with the benchmark S&P 500 adding 1.1% while the Nasdaq and the Dow settled with respective gains of 1.2% and 1.1%.
The French people narrowed their presidential race to two candidates yesterday--Emmanuel Macron and Marine Le Pen--with the run-off scheduled for May 7. Mr. Macron is described as a centrist while Ms. Le Pen's policies are seen as more radical, often deviating to the far-right of the political spectrum. For investors, the main difference between the two candidates is their stance on France's membership in the European Union; Mr. Macron defends the single market while Ms. Le Pen would like to conduct a referendum on eurozone membership. Current polls give Emmanuel Macron a 20 point lead over Ms. Le Pen, leading investors to believe that the EU has dodged a populist bullet.
Equities finished higher around the globe following the French vote with France's CAC (+4.1%) leading the charge, settling at its highest mark in nearly a decade. Likewise, U.S. equities jolted higher at the start of Monday's session, however, they had a difficult time adding much to the early gain. Several factors can be attributed to capping the bullish sentiment, but the leading culprit was the possibility of a U.S. government shutdown.
Congress will return from its spring recess tomorrow, giving legislators just four days to pass a new spending bill and keep the government afloat. The deadline was expected to be a non-event as it's in no party's interest to force a closure, however, reports indicate that President Trump may attempt to leverage the situation to fund his promised barrier along the U.S./Mexico border. The aggressive tactic could definitely complicate matters.
Furthermore, a failure to pass a fairly routine spending bill will likely send a jolt of fear throughout the market as faith in the new administration's ability to push through more difficult promises, like tax reform, is already dwindling. It is worth noting that President Trump is aiming to lower the corporate tax rate to 15.0%, according to today's report from The Wall Street Journal.
This cautious sentiment was most obviously exhibited in the bond market. Treasuries finished lower across the board, as would be expected amid today's risk-on sentiment. However, they reclaimed much of their early losses to finish at the upper end of the day's trading range. Most notably, benchmark 10-yr yield (2.27%) dipped below the technically important 2.30% mark after hovering above it for the first time in nearly two weeks.
For sector standings, the financial group (2.2%) went unchallenged from start to finish at the top of the day's leaderboard. As one would expect, cyclical sectors generally outperformed their countercyclical peers with the technology (+1.3%), industrials (+1.3%), and materials (1.2%) groups showing relative strength. The technology sector received some help from chipmakers, evidenced by the 1.5% increase in the PHLX Semiconductor Index.
On the flip side, the lightly-weighted real estate (-0.9%) and telecom services (unch) groups where the only sectors to finish in negative territory. The energy sector also underperformed amid crude oil's poor performance. The energy component settled 0.8% lower at $49.23/bbl.
Investors did not receive any economic data on Monday. However, on Tuesday, participants will receive several economic reports, including the February Case-Shiller Home Price Index (consensus 5.8%) at 9:00 ET, February FHFA Housing Price Index at 9:00 ET, March New Home Sales ( consensus 590,000) at 10:00 ET, and April Consumer Confidence (consensus 122.3) at 10:00 ET.
For Aramco Insiders, Prince’s $2 Trillion IPO Valuation Doesn’t Add Up
Valuation discrepancy raises new challenges for a deal already fraught with complexity
RIYADH—Officials at Saudi Arabian Oil Co. have told their superiors there is a hitch in the plans to take the state-owned oil company public: It is likely worth at least $500 billion less than the government previously suggested.
The country’s deputy crown prince, who is leading a push to overhaul the economy, has pegged the value of the company known as Saudi Aramco at $2 trillion. But officials working on the deal have struggled to come up with a scenario under which Saudi Aramco is worth more than $1.5 trillion, according to people familiar with the matter, even after factoring in a recent tax cut and other tools the government has to make it more attractive investors.
By selling up to 5% of shares in an initial public offering targeted for next year, the government plans to raise billions of dollars that it can use to invest in other industries as part of a plan to reduce its heavy dependence on oil.
The valuation discrepancy raises new challenges for a deal that is already fraught with complexity and facing opposition within the ranks of the kingdom’s government bureaucracy, according to people familiar with the matter.
About two dozen employees have been working since last year to try and figure how to take Aramco public, and have been working with Western consultants to explore ways to restructure Aramco to maximize its value, say people familiar with the process.
The team has determined several variables—or what some call “levers”—likely to affect the price investors will pay for shares of the world’s largest oil producer, according to internal documents reviewed by The Wall Street Journal and people familiar with the process.
But no matter how they pull those levers, which include the price of oil and Saudi tax policy, Aramco’s projected value tops out at about $1.5 trillion, these people say.
The Saudi government last month said it is reducing Aramco’s tax rate to 50% from 85%, bringing its tax rate closer to the level of the world’s biggest oil companies such as Exxon Mobil and Royal Dutch Shell.
That move would result in higher dividends for potential shareholders, and it brought Aramco’s internal value estimates to $1.3 trillion to $1.5 trillion from about half a trillion dollars, say people involved in the process.
Members of the internal Aramco IPO team took their figures to the company’s chairman, Khalid al-Falih, who is also Saudi Arabia’s energy minister, say people familiar with the matter.
One of those people said some of the Aramco team members are concerned because their calculations have consistently yielded lower numbers than the one the prince disclosed.
Saudi government officials say Aramco’s high reserves and low costs should make the company attractive to investors. “Our profitability is higher than others and the interest we have received so far is huge,” said one official who defended the $2 trillion number.
Some of the banks pitching for a role in the advising and underwriting of the deal have been given minimal information on the company’s financials, one person familiar with the pitching process said.
Bankers have offered company executives advice on how they might position the offering to investors to garner the highest valuation and how Aramco would compare with other oil and gas companies, this person said.
Yet even absent the specific financial information, this person said that it appeared highly unlikely that Aramco could achieve a valuation anywhere near $2 trillion unless it paid no taxes or royalties.
Since deputy crown prince Mohammed bin Salman announced the stock-offering plan and his $2 trillion estimate early last year, insiders and outsiders have questioned how he arrived at that number.
One Aramco official called the figure “unrealistic and mind blowing.”
A lower valuation means the IPO would fetch less money for the kingdom to invest under the Vision 2030 plan championed by the deputy crown prince.
Also, the remaining Aramco shares in Saudi hands would be less valuable than the prince forecasts, lowering the amount of money the kingdom could borrow against those shares to fund economic diversification.
Of course, regardless of where the company sells shares to the public in an IPO, its market cap or valuation will change as soon as it starts trading as investors make daily determinations of its current and future value.
Aramco produces nearly 10 million barrels of oil a day, more than twice the output of Exxon Mobil, which is valued at $337 billion. Aramco has among the world’s lowest production costs—Saudi oil tends to be cheap to pump—and says its reserves total about 260 billion barrels.
But shares in state-controlled oil companies tend to trade at a discount to their independent peers, largely out of investor concern that a controlling regime could make decisions that don’t benefit minority investors.
For example, there is no way to be assured the tax rate will remain at 50%, said Nat Kern, president of Washington-based consulting firm Foreign Reports, which focuses on the Middle East and oil. “Most oil-producing countries are taking about 90% of crude sales” in taxes and other payments, he said.
Questions about Aramco’s valuation surfaced earlier this year when a report for potential investors prepared by oil-industry consultant Wood Mackenzie Ltd. put Aramco’s value at around $400 billion, according to a client who attended a private Wood Mackenzie briefing. The estimate, based on the 85% tax rate, surfaced in other media.
That number was also close to an internal estimate Aramco’s IPO team came up with before the tax rate was reduced, say people familiar with the matter.
Now, some officials inside the company and in government have privately suggested reevaluating the listing, say people familiar with the matter, and perhaps reducing its size or delaying it.
So far, Prince Mohammed and his staff seem unlikely to do so, say people familiar with the matter. “This IPO will happen regardless of the valuation they may receive,” according to the government official who called the $2-trillion-dollar number “mind-blowing.”
JAB Exploring Strategic Options for Bally, Jimmy Choo
The company said it wants to focus on consumer goods, rather than fashion.
Shortly after announcing that it was looking for buyers or strategic options for the publicly quoted Jimmy Choo, JAB confirmed a “review of its strategic options” for Bally, including a possible sale.
According to a statement issued Monday, the Bally review process will commence shortly, and is expected to complete in the second half of the calendar year.
JAB said that since investing in Bally in 2008, it has continued to support the long-term development of the company and its leading brand, but its relationship with fashion and luxury was winding down.
“JAB has, however, made significant investments in coffee and related areas in recent years, and as a result, now considers its investment in luxury as non-core,” the company said. “JAB has, therefore, made the strategic decision to focus on its successful core businesses of consumer goods, including Coty Inc.”
The company said it does not intend to comment further until a decision on possible strategic options has been made. It is working with BofA Merrill Lynch or Citi on both Jimmy Choo and Bally.
Bally is a leading luxury footwear company with a growing product portfolio including handbags, small leather goods, eyewear and other accessories. As reported earlier this year, Bally is moving all of its operations from London to Milan and Caslano, Switzerland, where the company was founded, as the company streamlines its structure.
It will also work with a “creative collective,” of designers, rather than one design director and create a management structure that puts the customer at the center of the business.
Frédéric de Narp, Bally’s chief executive officer, told WWD earlier this year the decisions were about creating “speed and agility” in the business, and being more reactive to market trends.
Bally is one of many big European luxury brands to consolidate in a fast-moving – and often unpredictable – market. Accessories generate about 50 percent of the business, with shoes at 45 percent and ready-to-wear, 5 percent.
Russians, Americans Are Lapping Up London Luxury Goods
Overall tax-free shopping in the area rose 39 percent in the January-to-March period, according to the London Luxury Quarter.
LONDON – Russians and Americans have returned with a vengeance to central London, snapping up luxury goods made cheaper by the weak pound, according to a report from London Luxury Quarter, the industry association of retailers in Mayfair, St. James’s and Piccadilly.
According to the report, overall tax-free shopping in the area rose 39 percent in the January-to-March period, while in the month of March, Russian visitors’ tax-free spend grew 88 percent and American spending rose 116 percent year-on-year.
The rise in Russian spending is significant, as those tourists had virtually disappeared from London – and the rest of Europe – due to the devaluation of the rouble, geo-political issues and a recession in the country that has only just begun to wane.
The report said that in the year to date, American visitors accounted for 11 percent of London Luxury Quarter’s international tax-free shopping market. Their presence on the big shopping streets of London has grown significantly in the past year: In March, they accounted for 12 percent of total tax-free spend, compared with 7 percent in January 2016.
“The steady growth of U.S. spend and the bounce back from Russian visitors brings diversity to London Luxury Quarter, which has been dominated by Chinese and Middle Eastern visitors for some time,” said Mark Henderson, chairman of London Luxury Quarter. “Brands welcome the mix as it promotes their names in visitors’ home markets and supports their global success, rather than relying on a single market.”
Chinese visitors’ tax-free spend in London Luxury Quarter continued to increase for the year to date, rising 68 percent. Saudi Arabia, the United Arab Emirates and Hong Kong saw growth of 45 percent, 24 percent and 80 percent, respectively.
Last week, in its second-half trading update, Burberry Group plc said the U.K. saw a 90 percent surge in U.S. customers due to the weaker pound.
Is coffee a better business than fashion?
The Reimann family, the reclusive German consumer goods billionaires who control JAB Holding, seems to think so.
On Monday, the luxury shoe brand Jimmy Choo, in which JAB owns a 67.6 percent stake, announced that it was putting itself up for sale. JAB acquired the brand in 2011 for 540 million pounds, or $800 million at the time, and took it public in 2014.
JAB is also undertaking what it called a strategic review of the Swiss leather goods brand Bally, “including a possible sale of the company.” A review of Belstaff, the British motocross-inspired brand acquired in 2008, is expected to follow.
The possible sell-off of the luxury brands comes as JAB Holdings — which since 2012 has built a coffee and food empire in the United States by acquiring American coffee brands including Peet’s Coffee & Tea, Caribou Coffee and Keurig Green Mountain — agreed this month to buy the sandwich chain Panera for $7.5 billion, including debt.
According to documents seen by The New York Times, “JAB has, however, made significant investments in coffee and related areas in recent years, and as a result, now considers its investment in luxury as noncore.”
JAB, which has its headquarters in Luxembourg, wants to focus on its investments in Coty, in which it has a 36.84 percent stake, and the numerous high-end coffee businesses, which also include Stumptown Coffee Roasters and Intelligentsia Coffee & Tea.
Shedding its investments in the three leather-goods companies would take JAB out of the fashion industry, ending an eight-year effort to build a viable luxury group to compete with the Big Three — LVMH Moët Hennessy Louis Vuitton, Richemont and Kering — and possibly signaling further consolidation in an industry already wrestling with slowing growth and changing consumer tastes. The strategy shift also speaks to the increasing desire of consumers to spend money on experience — including on morning drinks of choice — instead of, say, handbags.
JAB entered the luxury market with fanfare in 2007 and soon snatched up brands such as the American-based designer Derek Lam; the Italian handbag label Zagliani (then known for using Botox in its exotic-skin totes and purses to keep them supple); the British jeweler Solange Azagury-Partridge; and leather-goods names like Jimmy Choo, Bally and Belstaff, all under a new division called Labelux.
Only four years later, however, it sold its stakes in the Lam and Azagury-Partridge businesses to the brands’ founders, and in 2014 decided to refocus on leather goods, bringing the remaining brands directly under the control of JAB Holding (it closed Zagliani in 2015).
Though Jimmy Choo became the first footwear brand to list on a public market, riding a wave of accessories successes, Bally struggled to define itself in a crowded market, taking tentative steps in apparel without much impact. Belstaff, too, despite a much-heralded campaign with David Beckham, found it difficult to break through.
Now, that grand experiment is apparently at an end.
According to the JAB announcement, there have not been any bids so far for Jimmy Choo, but the industry is bound to be watching closely for declarations of intent. This is especially the case given that footwear is something of a buzzing industry at the moment, with department stores seemingly competing over who can open the largest shoe floor (a title now held by the Level Shoe District in Dubai, at 96,000 square feet).
Indeed, since the news broke, the price of Jimmy Choo shares has climbed more than 9 percent.
(MergerMarket)
Post-LSE/Deutsche Boerse macro hurdles seen tilting Europe exchange sector to mid-sized deals
- Bankers still pitching ideas amidst diversification, optimization needs
- LSE, Deutsche Boerse abstain from takeover defences
- Euronext, BME, NEX dubbed potential consolidation participants
Political protectionism and regulatory uncertainty may prevent near-term European exchange operator megadeals after London Stock Exchange (LSE) [LON:LSE] and Deutsche Boerse’s [ETR:DB1] failed merger, sector bankers said. But a number of smaller deal opportunities remain, some of them added.
Countries across Europe are turning more protectionist, and the “national flag” emotions sweeping the continent may need to subside before new high-profile exchange deals become realistic, one of the bankers argued. Political “meddling” in regulatory deal decisions may be on the rise, a second banker agreed. This risk is pronounced for exchange operators because they are heavily regulated entities with crucial roles for financial stability, he cautioned.
Another question mark after the UK’s Brexit vote is how and where euro clearing will be handled once the separation is finalized, the first banker said. Some potential large-scale deals may remain unfeasible until this is settled, he argued.
Even so, investment banks keep pitching deal ideas to exchange operators, the first banker said. The “deal fatigue” after LSE/Deutsche Boerse’s collapse will wear off and executives will continue considering growth options, he suggested. A case remains for geographic and structural diversification, and this should fuel deals in the sector, a third banker argued.
Operators could also need to optimize cost-heavy “back end” systems like custody and data, the first banker suggested. Some of this could be handled through operational investments and rationalizations, but bolt-on buys and divestments would be an option, he argued.
Deutsche Boerse could launch smaller takeovers even as regulatory hurdles may stymie major deals, a person familiar with the German company said. Coming deals could be similar to its 2015 purchase of trading platform 360T, he added.
Meanwhile, LSE sees a strong standalone future for itself and will focus on organic growth but could make smaller acquisitions, a person familiar with that company said. It could make sense for LSE to make more data and technology add-ons, in line with its 2016 acquisition of Mergent, the second banker suggested.
As reported, sector watchers have earlier believed US-based operators CME Group [NASDAQ:CME] and InterContinental Exchange (ICE) [NYSE:ICE] could approach Deutsche Boerse and LSE respectively. ICE considered a rival deal with LSE last year but eventually backed off.
Still, Deutsche Boerse and LSE see no need for specific takeover defences after their failed merger, the persons familiar with the companies said. Deutsche Boerse is not concerned about becoming a target because the European Commission (EC) and Hessen’s Exchange Supervisory Authority would likely block any attempts, the person familiar with it added.
ICE might leave LSE alone at least until Brexit is finalized, the first and a fourth sector banker agreed. Even after that, regulatory changes in areas including euro clearing could make LSE unattractive to the US operator, the first argued.
Consolidation cases
While a transatlantic megadeal may look unlikely at this stage, a number of European deal cases could see sensible business logic and might be feasible if political hurdles are overcome.
It could make sense for Deutsche Boerse to acquire Euronext [EPA:ENX] in order to boost growth, the first and fourth bankers agreed. The German incumbent could slash costs in the cash equities area and monetize the Franco-Dutch operator’s data business, the first suggested.
But the bid case may not be strong enough to weigh against the risks, he cautioned. Overlaps on single stock options could create antitrust issues and French lawmakers might attempt to block such a deal, he said. Nationalist candidate Marine Le Pen’s showing in the French presidential election looms large over sentiment, he added.
A merger between Euronext and Spanish exchange operator BME [BME:BME] could also see some rationale, the first and third bankers said, with the first pointing to their potential for scale advantages. But such a deal could well run into Franco-Spanish political clashes over where the synergies should fall, they agreed.
BME’s Chairman-CEO Antonio Zoido may be reluctant to do deals but its General Manager Javier Hernani might be more open about the matter, a source close to the Spanish group said. A merger with Euronext “makes perfect sense”, the source conceded. However, BME is keener on Deutsche Boerse’s business model and might prefer the German company to Euronext if it should seek a tie-up, this source added. But BME could consider a proposal from either company for some collaboration, such as within systems integration, maybe as a waymark on the path to a merger, the source suggested.
Still, BME has done decently for itself and might not agree to a Deutsche Boerse takeover without a significant bid premium, the first banker said. The commercial merits of that combination may not be strong enough for that, he argued. BME stock is up around 17% over the past 12 months.
UK-based, globally focused interdealer broker NEX Group [LON:NXG] might also play some role in further European consolidation, the first banker said. It has less ties to any one geographic market than other operators, and could thus face less opposition from national politicians, he suggested.
Among other mid-sized European players, Nasdaq OMX [NASDAQ:NDAQ] might lack the scale to drive consolidation, the first banker said. It most likely option in a consolidation scenario might be to sell the Nordic OMX business, but it is hard to see any potential buyer able to motivate a big premium, he added. And a scale-boosting merger with Euronext would primarily increase Nasdaq OMX’s presence in continental European equities, which may not be in line with its growth strategy, the second banker said.
Still, the European exchange landscape should see consolidation in one form or another, the third banker said. Sector players did not stop doing deals after the EC’s 2012 block of Deutsche Boerse/NYSE – and should not do so after LSE/Deutsche Boerse either, he argued.
Spokespersons for LSE, Deutsche Boerse, Euronext and BME declined to comment.
Reportedly to expand partnership with LVMH's Sephora in beauty retail sector - press
- Plans to hire around 800 positions at 70 new sites and 32 expanded sites
- JCP has featured Sephora stores inside JCPenney since Oct 2006 and there are currently Sephora locations in over 574 JCPenney stores.
Drinking a lot of coffee might not be so bad after all
Coffee lovers can drink — and drink– to this: Downing four cups of Joe a day isn’t bad for your health, a new study has found.
The roughly 400 mg of caffeine found in that amount of coffee is safe for healthy adults, but pregnant women should stick to less than 300 mg, or three cups, a day, according to researchers with the International Life Sciences Institute, whose paper appeared Friday in the journal Food and Chemical Toxicology.
Children can consume up to 2.5 mg a day with no adverse health effects, the study also found.
ILSI’s North America branch reviewed nearly 740 caffeine-related studies conducted between 2001 and 2015 to reach its results.
“This Systematic Review provides evidence that furthers our understanding of caffeine on human health,” said Dr. Eric Hentges, the executive director of ILSI North America. “Also, this review provides the research community with data and valuable evidence to support the development and execution of future research on caffeine safety that will impact public health.
The average daily consumption of caffeine across all age groups is 165 mg, about 105 mg of which is coffee, the study found.
Last year, a UK study found that drinking more coffee could reduce the type of liver damage associated with eating and drinking too much.
That data found that drinking two additional cups of coffee a day was linked to a 44 percent lower risk of developing liver cirrhosis.
An 8-oz. cup of brewed java contains between 95 and 165 mg of caffeine.
Caffeine consumption in the past has been linked to high blood pressure and heart disease, according to WebMD.
Women who consume more than two caffeinated drinks a day are more likely to miscarry during the weeks leading up to conception, the National Institutes of Health found.