FT : Snap talks up exclusivity appeal to justify IPO valuation

Snap talks up exclusivity appeal to justify IPO valuation
Owner of messaging app faces questions over whether strategy will inhibit wider growth

Snap is doubling down on its appeal to a core audience of young mobile users who are turning away from television, as it prepares to take its business case to investors next week ahead of its initial public offering.

The focus on a narrow base of users, as well as the company’s potential to replace TV advertising, comes amid questions about whether the owner of mobile messaging service Snapchat can broaden its appeal and tap into wider advertising revenue streams to justify the valuation it has targeted.

The number of people who visit the site each day only increased by 3 per cent in the final quarter of last year compared with the preceding three months, continuing a sharp slowdown in its sequential quarterly growth rate and raising questions about the breadth of its appeal.

The slowing user growth has also prompted questions about whether Snap’s focus on how users communicate with a small group of their closest friends and family, rather than following Facebook in racing to build out the broadest possible network, will limit its reach.

In a video released online on Friday ahead of a roadshow with investors that starts next week, the Los Angeles-based company laid its focus squarely on handling the most intimate communication young people have in small groups. “We love when people are selective with the friends they add on our service,” said Evan Spiegel, co-founder and chief executive.

He also put a figure on the optimal reach of those personal networks for the first time: “We wanted to create a place where you feel comfortable talking to the seven most important people.”

Snapchat executives did not address the slowing user growth in the video, though Mr Spiegel addressed the concerns indirectly. “One of the challenges that we’ve encountered over time is to explain to people why bigger isn’t better,” he said, before taking a sideswipe at Facebook: “When we started our business, there was sort of this idea that on the internet the more friends you have, the more followers you have, the better your life will be.” 

In another apparent dig at Facebook, Mr Spiegel described a product development process designed to throw out a small number of new services that users would value highly. “It’s not a ‘throw things at the wall and see what sticks’ kind of company,” he said. Facebook has made several failed attempts with new services designed to be “Snapchat killers”, though it recently claimed more success in emulating Snap’s Stories feature with a lookalike service on its own Instagram app.

Snap’s roadshow video also put the emphasis squarely on youth, although the company has warned in its filings with the Securities and Exchange Commission that its prospects with be limited if it can’t “penetrate other demographics in a meaningful manner”. Despite dozens of images of people taking pictures and sending messages over Snapchat during the 35 minute video, none show anyone outside the company’s core demographic holding a phone.

The company’s executives emphasised the potential to attract the attention of young users as they turn their attention away from TV, in particular letting it tap a booming mobile advertising market that will grow threefold, to $196bn, in the four years to 2020, according to data from research group IDC.

FT : The long rise in profits is mostly just the flip side of falling interest r

The long rise in profits is mostly just the flip side of falling interest rates

Here’s a deeply misleading chart:

It would appear that the returns to owning capital have grown far in excess of national income. More than a seventh of all the money earned in America has gone to equity owners in the past few years, nearly double the proportion in the 1980s.

Nostalgists for the 1960s and 1970s might see this as evidence that structural changes since the 1980s mainly benefited the wealthy at the expense of regular people. Some have argued, for example, that the growth of the lobbyist-regulatory state has dampened competition and boosted aggregate profitability.

While those sorts of arguments probably explain the performance of particular companies or even entire sectors, the logic doesn’t hold up when expanded to consider the profitability of private enterprise as a whole.

In fact, the data show rising returns to equity owners have largely come at the expense of creditors, not workers or the indigent. Capital income as a whole hasn’t changed much as a share of the total. Instead, interest payments paid by businesses have plunged, and the extra money has been returned to shareholders.

The chart below from shows profits by type and net interest payments since 1947. This broader measure of capital income has been remarkably stable since the data begin:
(Both charts so far are based on tables 1.10 and 1.13 of the National Income and Product Accounts. Note that rental income and interest payments both exclude owner occupiers in the household sector. Please read Alphaville’s earlier explanation for more detail on the relationship between “imputed” rental income and mortgage interest rates.)

Since the peak in 1984, net interest payments made by businesses fell by 3.2 percentage points of gross domestic income. Over the same period, profits earned by partnerships and sole proprietors grew by about 1.8 percentage points of GDI, after-tax corporate profits grew by 1 per cent of GDI, and the earnings of people renting out homes to tenants grew by 0.3 percentage points of GDI.

Even more detail can be gathered by looking at the interest paid and profits earned by different types of companies. Among nonfinancial corporate businesses, for example, the combined amount earned in profits and paid to creditors has been remarkably stable as a share of gross domestic income over time. Via table 1.14 of the NIPAs:
Since the start of 1990, after-tax profits of nonfinancial corporations grew by about 1.8 percentage points of national income, while net interest paid by those same businesses dropped by 1.3 percentage points. (The numbers look a bit different if you switch the denominator from gross domestic income to gross value added by nonfinancial corporations, but not by much.)

Looking further back, it’s plausible corporate profitability would be lower if not for changes in tax rates and the ease with which large American firms can shift earnings to places where they don’t owe tax. After all, the average effective tax rate on corporate profits has plunged by nearly 20 percentage points since the 1950s:
But much of the decline in the effective tax rate was offset by the decline in interest that could be deducted. The result was a transfer from creditors to shareholders and taxpayers, rather than a transfer from taxpayers to shareholders.

This can be seen in the chart below, which shows the total amount of corporate taxes paid as a share of gross domestic income since 1982:
Aside from normal cyclical swings, the effective corporate tax take has been remarkably stable.

Changes in tax policy might be expected to have had a bigger impact on the profits of proprietors and partnerships, but even there, about half of the modest increase in this form of income since the early 1980s as a share of national income can be explained by falling interest burdens:
The rising share of American income coming from business profits may be cause for concern, but only insofar as it reflects how changes in interest rates have made it harder to eke out a living from holding fixed income. Conversely, anyone who thinks interest rates are going to rise significantly should probably be concerned about the outlook for business profits.

>>> Suez targets GE Water; Danaher drops - sources

MergerMarket

Suez targets GE Water; Danaher drops - sources

French environmental services group Suez [EPA:SEV] is pursuing General Electric’s [NYSE:GE] water technology business, according to two sources briefed on the matter.
Final-round bids for GE’s Water & Process Technologies unit are due early next month, said the first source and a third source who was also briefed. The unit, shopped by Citigroup and Goldman Sachs, may fetch around USD 3.2bn, this news service previously reported.
Financial sponsors Warburg Pincus, Bain Capital and Clayton Dubilier & Rice (CD&R) are also chasing the business, as reported. CD&R is bidding through its portfolio company Solenis.
Danaher [NYSE:DHR], meanwhile, has left the auction, said the second source, a fourth source, also briefed on the matter, and a sector adviser. This news service reported early last month that the diversified industrials company was looking at the asset.

Washington, DC-based Danaher is a serial acquirer and owns several water treatment and testing brands. When asked about GE Water on an earnings call late last month, CEO Thomas Joyce said the company prefers water acquisitions with high margins to infrastructure assets.

Suez, based in Paris, has made a string of small buys in recent years to expand its global water treatment business. It has a EUR 8.2bn market cap and EUR 8.7bn in net debt. It is scheduled to report full 2016 results on 1 March.

Solenis, owned by CD&R since 2014, manufactures chemicals for water treatment and develops water monitoring systems. The company has long been considered a logical suitor for GE Water.

GE, the Boston-based industrials conglomerate, has been shopping its water unit to help finance a plan to combine its oil and gas business with Baker Hughes [NYSE:BHI] and address potential antitrust concerns.
GE declined to comment. Suez was not available for comment; Danaher did not return a request for comment.

>>> Unilever suitor Kraft Heinz can find synergies to justify offer bump - secto

MergerMarket

Unilever suitor Kraft Heinz can find synergies to justify offer bump - sector advisors

Kraft Heinz [NASDAQ:KHC] can find enough cost synergies to table a higher offer than its GBP 112bn opening bid for Anglo-Dutch consumer goods group Unilever [LON:ULVR; AMS:UNA], independent sector advisors told this news service.
Unilever publicly rebuffed Kraft Heinz's offer earlier today, stating that it "fundamentally undervalues" the business and has no financial or strategic merit. The offer represented an 18% premium to Unilever's share price as of the close of trading on 16 February.

Chicago-based Kraft Heinz, which is part owned by Brazilian investment firm 3G Capital and Warren Buffett’s Berkshire Hathaway [NYSE:BRK.A], has a track record of ruthless cost-cutting, one of the advisors said. With big consumer deals, cost savings are generally targeted at 5%-10% of sales, and Kraft Heinz could have the playbook to cut 10% at Unilever, he said.

As a consumer-food giant, Kraft Heinz is likely to find greater cost synergies with Unilever’s food division, taking an axe to sales and accounting while also taking advantage of all available distribution synergies, the first advisor said. There are fewer such opportunities with Unilever’s personal care brands, although accounting personnel could conceivably be cut, he said.

Greater synergies are available between the companies’ food portfolios, a second advisor agreed, although he cautioned that Kraft Heinz’s model can make it difficult to sustain long-term growth and Unilever is a complex business that could be difficult to consolidate.

Unilever’s personal care portfolio could be used to Kraft Heinz’s advantage, a third advisor said. Unilever has a global footprint that offers distribution synergies in developing markets, she said.

This deal would instantly make Kraft Heinz a giant in personal care, a new category for the company, in which Unilever enjoys a near-duopoly globally with Procter & Gamble [NYSE:PG], she said. This diversification would give Kraft Heinz a dominant position in supermarkets around the world, thereby improving its negotiating power across categories, she said.

Unilever announced it is working with law firm Linklaters, PR firm Tulchan Communications and investment banks Centerview Partners, Deutsche Bank, Morgan Stanley and UBS regarding the Kraft Heinz offer. Lazard is advising Kraft Heinz.
Unilever and Kraft Heinz declined to comment for this story.

>>> US Close Dow +0.02% S&P +0.17% Nasdaq +0.41% Russell +0.05%

Closing Market Summary: Averages Close Friday at Record Highs

Buyers showed up late to the party on Friday but were still able to recoup modest morning losses and push the major averages to fresh record highs. The uptick during the final hour prevented a mixed finish with the Nasdaq (+0.3%) and the S&P 500 adding 0.4% and 0.2%, respectively, while the Dow (unch) settled just above its flat line.

Today's pause wasn't a surprise given the equity market's recent seven session winning streak. However, below the surface, some uneasiness may be developing among investors as news out of Washington wraps tax reform in a blanket of uncertainty.

The final tax reform plan hangs in the balance as the GOP negotiates the Trump administration's proposed border tax, which has created a rift within the party. This is unfortunate news for investors who await the fulfillment of a tax reform promise that catalyzed the stock market's huge post-election run.

On the other hand, retailers have profited from the stalled implementation of the border tax, evidenced by the 0.9% uptick in the SPDR S&P 500 Retail ETF's (XRT 43.82, +0.39). The news underpinned the consumer discretionary (+0.3%) and consumer staples (+0.7%) sectors, which largely depend on the free flow of goods and services to keep prices competitive.

Consumer staples also received a jolt from M&A news after Kraft Heinz (KHC 96.65, +9.37) revealed that it has proposed a merger with U.K. consumer products giant Unilever (UL 48.53, +5.96). Unilever rejected the initial bid, stating that the offer was fundamentally undervalued, but Kraft aims to keep pursuing the transaction.

In other M&A news, Softbank announced that it is once again entertaining the idea of a T- Mobile (TMUS 63.92, +3.31) and Sprint (S 9.30, +0.30) merger after the first attempt in 2014 was struck down by regulators. The announcement adds fire to a growing competitive battle within the telecom services space (+0.8%) and follows news from earlier in the week from Verizon (VZ 49.19, +0.73) and AT&T (T 41.48, +0.23). The two companies now offer unlimited data plans, a move that was seen as a response to growing competition in the wireless space as the smaller T-Mobile and Sprint have gained ground on the two wireless giants.

The telecom services sector jumped from the lower portion of today's standings to the top of the leaderboard following the news. Utilities (+0.1%), real estate (+0.3%), technology (+0.3%), health care (+0.1%), and industrials (+0.2%) also finished in the green, while the remaining sectors—financials (unch), materials (-0.3%), and energy (-0.5%)—closed with losses.

U.S. Treasuries added to Thursday's gains, closing solidly higher across the board. The benchmark 10-yr yield finished three basis points lower at 2.42%.

Intraday trading volume was below average, suggesting some participants took off early for the extended weekend; however, options expiration masked the reduced participation. By day's end, more than a billion shares changed hands at the NYSE floor.

Today's economic data was limited to January Leading Indicators:

  • The Conference Board's Leading Indicators report for January ticked up 0.6% (consensus +0.5%) after a 0.5% increase in December.
    • The key takeaway from the report is that the strengths among the leading indicators have become more widespread.

The stock market will be closed on Monday in observance of Presidents' Day. 

  • Nasdaq Composite +8.5% YTD
  • S&P 500 +5.0% YTD
  • Dow Jones Industrial Average +4.4% YTD
  • Russell 2000 +3.2% YTD

FT : Culture clash is biggest obstacle to Unilever takeover

When Paul Polman became chief executive of Unilever, the consumer goods company which on Friday rejected a $143bn takeover approach from Kraft Heinz, he told investors to steer clear unless they were prepared to sacrifice short-term profit for “sustainable” ideals.

The same message has been delivered to the maker of Kool-Aid drinks and Oscar Mayer hot dogs, with a flat rejection of a deal that would be the second-biggest in corporate history.

A terse exchange of statements on Friday marks the beginning of what could become a battle of wills, pitting the evangelistic Mr Polman against the hard-headed private equity investors who two years ago swore to strip $1.5bn of costs out of the iconic ketchup maker.

They are Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira, who cut their teeth on a series of private equity deals in Brazil in the 1980s.

Their hallmarks are determination, ruthless execution and the mantra that “costs are like [finger]nails; they always need to be cut”.

With the help of Warren Buffett, the billionaire investor and founder of Berkshire Hathaway, their 3G Capital vehicle orchestrated a series of takeovers of US food groups, culminating in the merger of Kraft Heinz in 2015.

3G’s strategy has been a private equity approach of acquiring business, cutting costs to boost profits and then embarking on a new acquisition cycle.

Heinz’s operating profit margins were boosted by 10 percentage points within two years of 3G’s deal, thanks to techniques that included slashing every one of the company’s budgets to zero, and then demanding an explanation from any manager who requested an increase.

“It is a radically different philosophy,” says one frequent visitor to the huge, handsome Art Deco building that houses Unilever’s global headquarters in London.

Unilever was created more than a century ago out of Victorian philanthropist Lord Leverhulme’s ambition to reduce disease through manufacturing soap. Mr Polman sees himself as the voice of responsible capitalism, encouraging long-term investors and preaching the need to balance long-term sustainability with profitability.

He has also presided over investments of about £1bn a year in developing the company’s product range, a decision that has helped the owner of brands including Ben & Jerry’s and Viennetta ice creams to sustain sales growth, which last year was 3.7 per cent.

“[Cutting costs] might work if you’re OK with having no sales growth and making Mac and Cheese,” says a person familiar with management’s thinking. “But Unilever has brands like Magnum and Dove. You have to invest behind those brands.”

Analysts say that, from the point of view of Kraft Heinz, the attractions of the deal are clear.

Unilever has 13 brands with annual sales of more than €1bn, including Dove soap, Magnum ice cream, Sunsilk shampoo and Lipton tea. Most promising for 3G capital is that Kraft Heinz’s operating profit margins of 30 per cent are twice those of Unilever’s 15 per cent, offering good cost-cutting opportunities.

Whereas the US group has been unable to stem revenue declines, Unilever has been selling off slow-growing food businesses and increasing its exposure to faster-growth home and personal care.

Acquiring Unilever would increase Kraft Heinz’s exposure to emerging markets. It makes 75 per cent of its revenues in its home market, whereas Unilever makes 58 per cent of its sales in emerging markets.

That could also help allay the fears of antitrust regulators over a deal that would combine the fourth and fifth-largest packaged food companies in the world, according to research group Euromonitor.

While a combined Kraft Heinz-Unilever would leap into the top spot in food, ahead of Nestlé, it has few national overlaps, although analysts say the companies would be likely to sell a small number of business units to secure antitrust approval.

Perhaps most importantly, analysts say, the Anglo-Dutch company is cheap. Until news of Friday’s takeover bid sent its shares up 13 per cent, it had been underperforming the FTSE 100 on concerns about its performance in emerging markets and Mr Polman’s downbeat outlook of a “challenging” year ahead.

Sterling has fallen sharply since the UK voted to leave the EU. And Kraft Heinz, which made a $50 a share cash and stock offer, has been buoyed by the “Trump trade” — the rise in US equities in the aftermath of Donald Trump’s presidential election victory.

While the US group may be an enthusiastic bidder, analysts say it has a fight on its hands.

Unilever has a complicated shareholding structure, with a dual listing in the Netherlands and the UK, and a related class of securities traded in New York. The Leverhulme Trust, a charitable foundation that holds a sizeable portion of the stock, on Friday declined to discuss the proposed takeover deal.

“The idea to be owned by those guys [3G] is revolting to management, the board and many of its shareholders,” says one person who has spoken to Unilever’s management.

A higher offer might test the resolve of shareholders, however. “Kraft will likely need to raise its offer substantially if it hopes to change the outcome,” according to analysts at RBC Capital Markets. “Unilever’s focus on sustainability might make it very resistant to any further approach from Kraft.”

Still, Unilever’s stern rejection of Kraft Heinz’s offer is unlikely to spook 3G and its tight knit team of advisers, who have a long-running record of closing complicated multibillion-dollar deals. Kraft Heinz has offered to establish three Unilever headquarters: in the UK, the Netherlands and the US, people briefed on the offer said.

In 2015, Anheuser-Busch InBev — a brewer backed by the same three Brazilians as 3G — overcame several attempts by UK-based rival SABMiller to kill its takeover approach. The management of the British group eventually caved to a slightly higher offer.

While it remains unclear how much financing, if any, will come from Mr Buffett’s Berkshire Hathaway, the legendary investor has made no secret of his intention to do more deals with 3G. He also has the firepower: Berkshire had a cash pile of $85bn at the end of September and with profits continuing to pour in from its insurance to railways business portfolio, analysts expect it to have more than $100bn by the end of this year — unless it makes a big acquisition.

At Berkshire’s annual meeting last year, Mr Buffett praised 3G’s managers and defended them against a shareholder’s suggestion that they were undermining Kraft Heinz through overzealous cost-cutting. Many companies had fat that should be cut, he said, adding: “I’ve never seen anyone run things more superbly than 3G.”

FT : Insurer Generali cements 3% stake in Intesa

Insurer Generali cements 3% stake in Intesa

Italian insurer Assicurazioni Generali has formalised its 3 per cent stake in potential predator Intesa Sanpaolo by buying €1.1bn worth of shares in the lender.

Generali took an interest in Intesa four weeks ago via a stock lending deal. The move came just after Intesa’s interest in Generali became public and effectively stopped Intesa from buying shares in the insurer without making a full bid.

On Friday, Generali said that it had cancelled the stock-lending deal and bought shares in Intesa instead, a decision that lessens the costs of the transaction. However, it has also hedged the economic risk associated with the shares via a derivatives deal.

Intesa is sounding out investors over the possibility of making a formal bid for Generali but would only consider a friendly deal. The insurer is sceptical about a deal with Intesa and is planning to beef up its cost-cutting programme to convince shareholders to back its independence.

Intesa shares closed down 1 per cent on Friday, and are now down by a tenth in the year to date.

FT : T-Mobile, Sprint get a boost on reports that Softbank is eyeing an approach

T-Mobile, Sprint get a boost on reports that Softbank is eyeing an approach

Shares of US mobile carriers T-Mobile US and Sprint rose on Friday following reports that Japan’s Softbank is expected to approach T-Mobile about a possible merger in coming months.

Reuters reported that Softbank, which owns the majority of Sprint, was willing to cede control of Sprint in order to clinch a merger between the two wireless carriers. While no approach has yet been made due to legal restrictions in the US – which forbid rivals from engaging in discussions during ongoing airwave auctions – negotiations are expected to begin in April, the reports stated.

Softbank previously abandoned talks to buy T-Mobile for Sprint after it ran into opposition from US antitrust regulators. Its chief executive recently said it is “open to all options”, including a bid for T-Mobile, as the new US president, Donald Trump, is seen as being receptive to mega-deals.

T-Mobile is majority owned by Deutsche Telekom. Its shares rose about 5 per cent following the announcement, while Sprint shares jumped more than 4 per cent.