TheChek News Flow

Can 3G Capital Keep Thriving on Acquisitions and Cost Cutting?

The investment firm 3G Capital, the driving force behind Kraft Heinz and the company that owns the Burger King and Tim Hortons chains, seems to have found the secret sauce of deal-making.

But could that sauce now be nearing its expiration date?

Until recently, 3G looked unstoppable. Founded in 2004 by Jorge Paulo Lemann and four other Brazilian deal makers, the firm made its name by relentlessly crossing the globe to buy companies and ultimately form the world’s biggest beer maker, Anheuser-Busch InBev. Since then, 3G has built up empires in food through bold and aggressive acquisitions.

But last month, 3G’s Kraft Heinz retreated on a $143 billion takeover offer for the British-Dutch conglomerate Unilever, the maker of Hellmann’s mayonnaise and Lipton tea, as well as Dove soap and other personal products, after facing opposition from the target company and European politicians.

Still, 3G is not likely to shut down its insatiable acquisition drive after being thwarted over Unilever. Its recent setback provides an opportunity to reflect on what makes this firm different.

The 3G machine has two main profit drivers. First, there is the tried-and-true merger play of becoming more profitable through consolidation and expansion into new markets. Then, the scalpels come out and the combined company creates value by cutting costs.

And, boy, does it cut. The firm has developed a laserlike focus on the expense side with something called zero-based budgeting.

Each year, costs for every item at its portfolio companies are reassessed. Everything is on the table as the budget is recalculated annually.

Printers are gotten rid of, trash collection reduced and overhead slashed in what has been referred to as “brutal” cost-cutting.

At the Tim Hortons chain, for example, the company was able to grow margins 6 percent by firing most senior executives and reducing capital expenditures by 75 percent.

For every $1 on the menu at outlets of the parent company, Restaurant Brands, the company stands to reap a profit of 45 cents — a figure that is double the industry average.

Acquisitions take the place of product development.

At the companies that 3G controls, it puts into place young yet experienced managers who implement their cost-cutting agenda.

Restaurant Brands is led by Daniel Schwartz, a 3G executive who at 35 is steeped in the company’s ways.

The chief executive of Kraft Heinz, Bernardo Hees, also is a partner in 3G and was promoted from his job successfully running Burger King. The firm is known for a focus on talent and also on awarding lots of incentive compensation.

The focus on margins is not pretty, though. When 3G bought Heinz it fired 11 of 12 top executives almost immediately, and about a quarter of the headquarters staff.

The 3G cost-cutting machine is such a legend that its recent announcement that it bought Popeye’s Louisiana Fried Chicken resulted in Restaurant Brands’ stock price increasing more than 7 percent.

The reason was that investors were in essence betting that the 3G magic could produce that value through cuts and possibly foreign expansion for the largely domestic Popeye’s.

Restaurant Brands’ overhead is 1.3 percent of systemwide sales, compared with 2.8 percent for Popeye’s; that will no doubt be brought into line.

The chief executive of Popeye’s, Cheryl A. Bachelder, has already announced that she will be leaving, no doubt to be replaced by a 3G Capital disciple.

The company’s obsessive efforts to cut back on costs can almost make other private equity firms look like spendthrifts in comparison.

The success of 3G has been so great that one has to wonder why others don’t simply copy it. After all, there is no complex secret formula in cutting printers and other costs.

One way that 3G is different than other investment and private equity firms is its partnership with Warren E. Buffett’s Berkshire Hathaway.

Mr. Buffett backed the firm when it merged Heinz with Kraft, providing financing for a nice fat rate of interest on a preferred stock.

The two have also joined forces to profit from the fast-food industry. 3G bought Burger King, then took the company public by merging it with an investment vehicle controlled by William A. Ackman’s Pershing Square Capital Management.

The renamed Restaurant Brands then bought Tim Hortons with $3 billion of capital put in by Berkshire Hathaway.

And Restaurant Brands is about to get even bigger with an agreement to buy Popeye’s and its 2,600 locations for $1.8 billion.

But the larger question about 3G is whether it is possible to keep creating value by acquisition. At some point, you might think, the music stops playing.

Were that to happen, it would become clear how much long-term value is actually being created, and how much of the gains are short-term lifts from acquisitions and cost cuts. Restaurant Brands, for example, has reduced costs but revenue has remained relatively flat. Last quarter, Kraft Heinz’s revenue fell 3.7 percent.

In other words, with flat revenue, income has to come from somewhere, and you can only slash so much.

It’s a model that private equity firms don’t follow. To be sure, they also cut costs, but private equity also prides itself on revenue expansion and innovation. And the reason is simple: If the merger and acquisition pipeline dries up, so does the growth.

Indeed, Anheuser-Busch InBev is hurting now that it is too big to acquire other companies of significant scale. Its profits fell last quarter. The solution it offered: more cost-cutting.

The 3G deal makers have their supporters, of course. Mr. Buffett, who reaps great benefits financing their deals, has praised the 3G founders. “Jorge Paulo and his associates could not be better partners,” Mr. Buffett has written.

In similar ways, Pershing Square has profited greatly from its partnership with 3G and Mr. Ackman has praised its methods.

These prominent investors will continue to do so, as long as the acquisition machine can continue.

And the managers at 3G are certainly smart and have made many improvements to both companies.

But one has to wonder if a firm can succeed simply by cutting. To be sure there will be some gains and value made from the cuts, but eventually part of running a business means actually building something.

Like it or not, that will require spending on new products and the business itself, something 3G’s managers appear to hate above all else, as opposed to simply acquiring more companies.

MS CALLS

COMPANY INDICATION COMMENT

ADS GY +4% FY16 INLINE; FY17 GUIDANCE IMPLIES MID-HIGH SINGLE DIGIT UPGRADES TO CONS (THOUGH SUSPECT WHISPER HIGHER).

AF FP UNCH FEB TRAFFIC WEAKER BUT BALANCED BY MORE POSITIVE YIELD COMMENTARY

AM FP -3% WEAKER NUMBERS BUT FORECASTS HIGHER 2017 SALES / DIV 12.1EUR EST WAS 12.5EUR

CNE LN UNCH CAIRN ENERGY FY LOSS/SHR 16.56C VS BLOOMVERG EST LOSS 12.24C,GY OP LOSS $148.2M,SAYS CATCHERE,KRAKEN ON TRACK FOR FIRST OIL FROM 2017

DEQ FY -3% DEUTSCHE EUROSHOP BOUGHT A SHOPPING CENTER FOR 382M EUR AND DECIDED TO RAISE CAP EX SUBSCIPTION RIGHTS / UP TO 4.7M SHS / 8.7% OF CAP / REPORTED NUMBERS ARE A TOUCH BETTER

DPW GY -1% UNDERLYING EBIT SMALL MISS AND 2017 GUIDANCE BELOW CONS.; DIVI TOUCH ABOVE; LIKELY TO SEE SOME PROFIT TAKING

ELE SM +3% PRESS REPORTS CHAIRMAN HAS BEEN APPROACHED OVER TAKEOVER

GFS LN +3% G4S FY16 ADJ REV GBP6.82B VS BLOOMBERG CONS GBP6.81B,FY16 DIV/SHR 5.82P

HILS LN +2% HILL & SMITH FY REV GBP 540.1M,FY ADJ OP PFT GBP 70.6M

ISAT LN +2% INMARSAT FY16 REV $1.33B VS BLOOMBERG EST $1.31BLN,OUTLOOK CONTINUES TO BE DIFFICULT TO PREDICT

LGEN LN -1% UNEXCITING UPDATE - NO.S BROADLY IN LINE - DIV INLINE, THERE WERE SOME HOPES OF AN INCREASE

PAGE LN +2% PAGEGROUP FY REV GBP1.20B VS BLOOMBERG CONS GBP 1.21B,FY SPECIAL DIV / SHR 6.46P

PBB GY +2% GOOD SET OF NUMBERS / DIV EUR 1.05 / KEPT FY17 OUTLOOK

CS:

Adidas +2-3% Numbers better, guidance ahead, divi better

Admiral UNCH EPS 2% beat, overall dividend light, growth still strong

Agfa Gevaert +2-3% FY revs slightly ahead, guidance ahead

Allianz -1% Regulator rejected purchase of life insurance portfolio

Assa Abloy +0.5% Investor day after close, targets cautiously conservative

Azimut -1-2% Announced that its CFO is leaving the business

Bossard UNCH FY16 EBIT 1.5% ahead, Net income 3% ahead, outlook inline

Boskalis +2% Revs 2.6b cons 2.551b, EBITDA 660m cons 600.5m

Cairn Energy M/P Net loss slightly worse but cash slightly ahead

Credit Ag +1% Said to weigh $2.4B Saudi Bank Stake

Deut Post -2% FY revs €57.3b vs cons 56.37b, EBIT slightly light

Deut Pfand +2-3% FY Pre-tax ahead, dividend better

Dorma Kaba M/P H1 Sales inline, EBITDA 1% ahead, confirms objectives

Endesa +3% Chairman said approached over takeover

Foxtons -2-3% Numbers light and guidance cautious, UK budget today

GFS +2-3% Revs £6.82bn vs cons £6.81bn, cash flow better

Hochschild -1% Revenues 1.5% light, Adjusted EBITDA 2.5% light

Inmarsat +2-3% 4Q revenues, EBITDA better, market challenging

L&G -1-2% Op profit 1.5% below cons, EPS slightly light

Miners UNCH Copper +0.55%, Brent -0.65%, Iron Ore +1.00%, China -0.20%

Novo Nord -1-2% Expects to falls short of 2020 goal of 40m patients

Oils -0.5% US API showed a build of 11.6m barrels. WTI -85bps

Page Group M/P FY 16 operating profit slightly ahead, nothing on guidance

SAS M/P Q1 pretax loss SEK697m, cons loss SEK651.5m

Schaeffler +1-2% EBIT margin at 12.7% (est 12.3) and guidance inline

Unite Group +0.5% Exchanged contracts for the disposal of Woburn Place

Verbund UNCH FY16 EBITDA small ahead, divi inline, guidance light

MF

*ADIDAS-Q4 GM 48.8%(46.6),Rev 4.69b(4.67),E-Comm 4b by '20(2).........+3.5%

*CREDIT AGRICOLE-Considers selling $2/4b Saudi stake sale(31%)........+0.5%

*DEUT POST-Q4 Ebit 1.11b(1.12),FY Ebit 3.49b(3.5),Rev 57.3b(56)... ...-0.5%

*SAP-Growth in Asia remains strong,lwed by Emerging markets...........+0.25%

*ONTEX-FY Rev 1.99b(1.99),Q4 Rev 520.2m(516),Ebitda 62.2m(61.5).......+1%

*BOSKALIS-FY Rev 2.6b(2.55),Ebitda 660m(600.5),'17 Capex 250m.........+1%

*IMCD-FY Rev 1.71b(1.72),Gross Inc 381.6m,Ebita 147.8m(142),DPS 55c...+1%

*POPULAR-Asks AGM permission for possible Capital Increase............-0.5%

*ENDESA-Chairman said approached over takeover - Confidencial.........+1%

*DORMA-H1 Ebitda 175.4m(173),Rev 1.17b(1.17),Confirms FY tgts.........+0.5%

*DSM/EVONIK-To invest €200m in Omega 3 plant - Telegraaf..............-0.3%

*BEIERSDORF-FY Rev/OG known,Ebit 1.015m(1.015),NI 709m(684),o/l gd....+0.5%

*DT PF&BRIEF-Q4 PT 55m(40),NI 10m(0),NII 112m(105),o/look +ve.........+1.5%

*DASSAULT AVIATION-FY Net 384m(427),Div 12.1(12.5),Ord intake dwn.....-3%

*AIR FRANCE-Feb traffic +2.9%,6.5m passengers,Transavia +30%..........+1%

*SCHAEFFLER-All know,Rev 13.3b,Ebit Margin 12.7%,Div increase.........U/C

Dow -0.14% S&P -0.29% Nasdaq -0.26% Russell -0.69%

Macro :

- China Imports Surged in February as Exports Missed Estimates

- Draghi’s Caution on Inflation Signals ECB Stimulus Stays for Now

- Fed Hikes Shouldn’t Derail the Equity Rally... Yet: Macro Man

- U.K. Considers Ways Tax Can Extend North Sea Projects: Telegraph

- U.K.’s May Fights Back After Another Brexit Law Defeat in Lords

Keep an eye on :

- ABN NA : ABN Amro in ‘Growth Mode’ in Asia Corporate Banking: DeRooij

- ANA SM : Acciona Buys 82.4% of Geotech Holdings for A$197m

- ADS GY : Adidas Forecasts 2017 Profit Rising 18%-20%, Raises 2020 Targets

- AGFB BB : Agfa 4Q Adj. Ebit Beats Ests.; Pension Deficit Climbs to EU976m

- AIR FP : Lockheed Unit Awarded $1b U.S. Air Force Contract

- AF FP : Air France-KLM Feb. Passengers Rise 2.9%, Lifted by Transavia

- ARM LN : Softbank Set to Sell $8b Stake in Arm to Vision Fund: FT

- APAM NA : Aperam, Sofina to Replace Ahold Delhaize, Elia in BEL20 Index

- AXIA SM : Axiare Patrimonio Offering 7.19m Shares in Placement, Terms Show, €13 / share

- BALTA IPO : Balta Said to Prepare IPO in Brussels: Tijd/L’Echo

- BKIA SM : Spain Ready to Hold 15-20% of Bankia Private Placement: Cinco

- BEFB BB : Befimmo Signs First Tenant of Quatuor in Brussels North District

- BEI GY : numbers just released

- BOKA NA : Boskalis 2016 Ebitda EU661m vs EU885 a Year Ago

- CYAD BB : Celyad Gets FDA Approval to Start NKR-2 CAR-T cells THINK Trial

- ACA FP : Credit Agricole Said to Weigh $2.4B Saudi Bank Stake Sale, Credit Agricole Earns Dilution High With Saudi Bank Sale: KBW

- CSGN VX : Credit Suisse CEO Says Hard to Find Good Lending Opportunities

- AM FP : Dassault Aviation 2016 Adj. Net Falls Short of Estimates

- DBK GY : Deutsche Bank 2018 Cost Target May Not Be Achievable, Citi Says

- DB1 GY : Deutsche Boerse Will Need Acquisitions to Grow: CEO Kengeter

- DEQ GY : Deutsche Euroshop Prelim. FY Rev EU205.1m, est. EU199.8m

- DPW GY : Deutsche Post 4Q Ebit EU1.11b vs. EU1.12b Est.; 2017 Growth Seen

- PBB GY : Deutsche Pfandbriefbank FY Pretax Profit Rises Helped by Heta

- EIT IM : Italy Must Control Any Eventual RAI Way, EI Towers Combination

- ENG SM : EU Questions Spain Over Enagas, Red Electrica Caps: Expansion

- ELE SM : CVC, KKR and Blackstone reactivate the purchase of Endesa with the support of Madrid and Rome http://bit.ly/2mkne6z

- ENI IM : Eni acquires 50% stake in Block 11 Offshore Cypris

- GLEN FP : Glencore’s Glasenberg, QIA Executive, May Join Rosneft Bd: Rtrs

- GBB FP : Bourbon to Reschedule Maturities on EU910.8M of Debt

- LIN GY : Linde, Praxair to Set Up Holding Co. in Dublin: Handelsblatt

- NOVOB DC : Novo Expects to Fall Short of 2020 Goal of 40 Million Patients

- NP3 SS : NP3 Chairman Has Sold Stake in Company, Will Step Down: Direkt

- ONTEX BB : Ontex Sees 2017 Rev. Growth Ahead of Mkts in All Divisions

- ONXEO FP : Onxeo Net Loss Widens; Co. Says Cash Provides Visiblity to 2018

- SNAP US : Instagram Stories launches geostickers as its Snap attack continues

- S US : Sprint CFO Says Unlimited Data Is Probably Not Sustainable

- SEV FP : Suez taps Quebec pension in GE Water bid, sources say

- TOM2 NA : TomTom Selected by Volvo Cars to Power Drive Me Programme

- TMG NA : TMG FY 2016 Revenue Drops 6.9% to EU421M on Lower Ad Sales

- WDI GY : Wirecard to be selective acquirer as it looks to increase international scale, executive says

Airbus has been talking about its Vahana flying autonomous vehicle project for a while now, but at this year’s Geneva Motor Show, it’s showing off a concept design created in partnership with Italdesign. The demonstration vehicle offers modular functionality, meaning it an operate both on the ground and in the air, and Airbus thinks it’s one potential answer to the growing problem of urban traffic congestion.

As you can see, it’s suitably sci-fi in its design sensibilities, but it’s designed with practicality in mind. The concept vehicle is intended to work with others to form a network that can be summoned on demand, with passengers hailing a ride form an app on their mobile device. The capsule-based design can connect to either ground or air conveyance modules, letting customers specific their preferred method of transit. It’s also designed to be used in concert with other, existing transportation methods for maximum efficiency.

Airbus and Italdesign call their creation the ‘Pop.Up System,’ which includes the artificial intelligence platform that uses what it knows about any individual user, and available routes and transit options to determine the best travel options. The main vehicle itself is a passenger capsule, which holds the rider and which can be paired with either ground and air modules, as well as, Airbus suggests, with hyperloop systems down the line once that tech becomes more widely available.

There’s a third part of Pop.Up that ensures this whole project touches all bases when it comes to current tech hype – an interface that will respond and interact with the user in a “fully virtual environment” while in transit. They’ve thought of everything.

Well, except making this thing real: It’s very much still a concept, though its 8.5-foot long monocoque carbon-fibre passenger pod is built-to scale and on the show floor at Geneva, as are the wheeled ground module and quadcopter drone air transit system.

It’s unlikely to ever be ferrying passengers around, at least in this state, and in the near future, but it’s a very cool design that can at least make us want to work a bit harder to get to a place where it is a viable, everyday option for navigating our expanding and increasingly dense cities.3333

The Urban Outfitters ceo said U.S. retailers overexpanded and are now paying the price.

Richard Hayne, chief executive officer of Urban Outfitters Inc., has a new and very unfavorable comparison for retail today — the housing market of 2008.

“Our industry, not unlike the housing industry, saw too much square footage capacity added in the Nineties and early 2000s,” Hayne told Wall Street analysts Tuesday, after his company reported sagging profits as more sales shift online.

“Thousands of doors opened…and created a bubble and like housing, that bubble has now burst,” he said. “We are seeing the results, doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

J.C. Penney Co. Inc., Macy’s Inc. and Sears Holdings Corp. are all closing stores, while a number of well-known chains have faded into insolvency recently, including The Limited, BCBG and The Wet Seal Inc.

“The U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel,” said Hayne, noting America has six times the retail space per capita of either Europe or Japan.

It’s a dynamic that is driving prices in the market down as stores hit the promotional button to drive sales and attract customers.

To navigate the choppy waters, the ceo said Urban would put its money behind its best opportunities, diversify and conserve its liquidity.

“Our highest priority is where we’ve had the most recent success, digital,” Hayne said. “Last year we made many improvements to our capabilities in this channel. We developed a single platform for all brands. This enables [the company] to be more scalable and efficient in developing and growing on front-end enhancements across all brands, both on mobile and on web sites. We have improved our functionality around check-out, payment, search, inventory visibility, in-store pickup, ship-to-store, mobile capabilities and speed on all web platforms.”

Hayne was careful to say the company — parent to its namesake brand as well as Anthropologie and Free People — was not abandoning retail, but is viewing stores as an equal partner with the web.

The reading of the landscape is made all the more stark by the fact that Urban is one of the few retailers that is still growing, with plans to open 15 doors in North America this year, down from 26 stores last year and 29 the year before.

And square-footage growth might eventually get easier as the bubble deflates.

“It makes little sense to enter into many new long-term leases at this time, but all signs indicate that a similar lease will be less expensive in the near future,” Hayne said.

Last year, Urban’s earnings slid 2.8 percent to $218.1 million, or $1.86 a diluted share, on a 2.9 percent drop in sales, to $3.55 billion.

CVC, KKR and Blackstone reactivate the purchase of Endesa with the support of Madrid and Rome

http://www.elconfidencial.com/empresas/2017-03-08/cvc-blackstone-reactivan-compra-endesa_1344129/?utm_source=twitter&utm_medium=social&utm_campaign=[CotizaliaDiarioAutomatico]

The venture capital funds want to take advantage of the new agreement between Italy and Spain to take over the power plant, an operation for which it already has credits for 15,000 million

Endesa is once again in the spotlight of the big venture capital funds. According to confirmed sources close to the board of the power company, CVC, Blackstone and KKR have rescheduled to gain control of the energy company, currently in the hands of the Italian state through Enel. The good tuning between the governments of Madrid and Rome facilitates the operation, which amounts to 15,000 million euros .

Advisors to both CVC and Blackstone have held meetings to discuss the deal with Borja Prado, the current president of Endesa, named precisely by Enel. But the group's chief executive, who can not take any decision to represent all minority shareholders, has sent them to Enel, which owns 70% of the capital of the second Spanish power company and, therefore, the only one with a real voice and vote To approve or not the proposal. To date, Francesco Starace , CEO of Rome-controlled transalpine multinational, has opposed selling Endesa to private equity funds, especially since the Spanish bank serves as a piggy bank, since under its mandate it allocates 100% of The benefits to dividends.

Starace said in November that do not want to "sell Endesa", but the truth is that its mandate expires next May and its main backer, former Prime Minister Mateo Renzi, is no longer head of government. The next March 20 It will be known whether or not he is in charge of the multinational, although the appointments in Enel tend to be peculiar.In principle, Starace is scheduled to renew as the first executive, but the same said his predecessor, Fulvio Conti, 48 hours before being replaced In April 2014. In fact, in Italy Starace sounds like relief of the current CEO of Eni, the public oil company, involved in a corruption case.

The President of the Government, Mariano Rajoy (d), and the Prime Minister of Italy, Paolo Gentiloni. (EFE).

The President of the Government, Mariano Rajoy (d), and the Prime Minister of Italy, Paolo Gentiloni. (EFE).

According to different sources, the visit of Paolo Gentiloni, Italian Prime Minister, to Mariano Rajoy at the end of January has relaxed the tension. Heads of both governments held a meeting in which they discussed the interest of CVC, KKR and Blackstone, and the two parties said they would not impede the purchase by international funds. On the contrary, Italy could do very well the nearly 15 billion that would enter for its 70% of Endesa, especially given the delicate state of health of some of its banks.

In fact, among the first measures adopted by Gentiloni after being named prime minister on December 11, is the concession of a line of credit of 20,000 million euros the day before Christmas Eve to avoid bankruptcy, among others, Monte dei Paschi Di Siena. A full-blown bailout that will worsen public accounts, already very famished and with a serious problem of structural deficit.

Just a week ago, the European Commission warned Gentiloni that it will impose disciplinary action if it does not stop the deficit from growing until, according to internal forecasts, it reaches 133% of gross domestic product (GDP). The warning puts more pressure on Rome to deliver on its promises made in a letter to the EU executive on 7 February that it has committed to reduce its red numbers by 0.2% of GDP this year through measures Would be adopted by the end of April.

'Spanishize' a covert company

CVC and Blackstone are working on the operation with the shadow help of Goldman Sachs and JP Morgan , as well as having pre-granted lines of credit from several national and international banks, financial sources have confirmed. For its part, Enel has the unofficial advice of Credit Suisse , since the interest of the two venture capital firms has not yet materialized in a firm offer. KKR , who has also probed the operation, has the support of Lazard, who has already traveled to Rome to speak first-hand with the Italian government . The funds have Borja Prado to continue as president - the stock has risen 51.85% since the OPV of November 2014,

Although CVC, Blackstone and KKR are two private equity companies -British and US- which usually operate from lax countries such as Luxembourg , and given the amount to which the Endesa purchase would go - the company capitalizes 21.4 billion - the two funds Would be willing to admit long-term Spanish investors who would take a minority stake, but enough to defend the slogan of Spanishisation of a company that was privatized at the end of the nineties of last century by the Government of Jose Maria Aznar and that Finally ended up in public hands, but Italian.

In addition, following Italy's decision to keep assets in Latin America, Endesa has been closed to an electricity company that can only operate in Spain and Portugal. Their chances of growth are minimal. They barely buy renewable assets for sale by some of the funds that have been made to companies in distress, such as Renovalia or Eolia. From the top management of the group, Endesa is considered to be "in the hood" and has become a dividend cow for Enel.