SKY (SKY LN)
Our Thoughts on the proposed (withdrawn) amendments to the Digital Economy Bill
On 8 February 2017, Lord Puttnam withdrew his proposed amendments to the Digital Economy Bill regarding proposed changes to the “fit and proper test” undertaken by Ofcom relating to media mergers. However, we believe it is still relevant to review how these proposed amendments (if reincarnated) could affect the Sky-Fox transaction as well as detailing the process of a passage of a Bill through both Houses of Parliament into law.
The House of Lords are currently debating the proposed amendments to the Digital Economy Bill - sponsored by Karen Bradley and Lord Ashton of Hyde and introduced to the House of Commons on 29 November 2016.
As per the explanatory notes accompanying the Bill, the Bill “contains measures related to providing a broadband universal service for the United Kingdom, granting additional powers to Ofcom in respect of information provision, consumer switching and automatic compensation in relation to communication matters, a new Electronic Communications Code and other communications infrastructure matters, introducing better controls on online pornography and protecting citizens from nuisance calls, digital intellectual property, powers to share data between public authorities and some measures relating to the BBC” The Bill “aims to enable access to fast digital communication services for citizens and businesses, to enable investment in digital communications infrastructure, to shape the emerging digital world to the benefit of children, consumers and businesses, and to support the digital transformation of government, enabling the delivery of better public services, world leading research and better statistics.”
These proposed amendments underscore the strong political opposition the Fox bid is facing. The political opponents to the deal seem to be seizing ever possible avenue to try and derail the transaction. They appear to have focussed on the “fit and proper test” which is subjective and currently there is no precise definition for what constitutes a “fit and proper person”. The proposed amendments appear to be directly targeted at James Murdoch (who has not been explicitly named) and if these amendments are passed into law, it will make it more difficult for Ofcom to justify viewing James Murdoch as a “fit and proper person” to own Sky due to his previous involvement in the News International hacking scandal. Baroness Bonham-Carter of Yarnbury in the House of Lords Digital Economy Bill debate also stated that her proposed amendments would ensure that “the present chief executive of 21st Century Fox, James Murdoch, would undergo proper scrutiny if he were to retain a senior position at Sky.”
We remind that Ofcom has an ongoing responsibility to ensure that broadcast licensees are “fit and proper” and no action was taken by Ofcom against the appointment of James Murdoch as the Chairman of Sky in October 2016. In the interim, Sky is regarded as having shown “exemplary adhesion” to the Broadcasting Code.
Evidently, politicians are using all available ploys to ensure the Sky deal remains in the forefront of political consciousness as in our view, this Bill has very little to do with media plurality and concerns about the Fox and its directors being “fit and proper” to own Sky in its entirety.
The relevant amendments to the Sky deal are as follows:
Amendments proposed by Lord Puttnam, Lord Lansley and Baroness Bonham-Carter of Yarnbury are as follows:
· 229ZA - Insert the following new Clause— “Mergers: specified considerations for mergers involving broadcasting media enterprises
(1) Section 58 of the Enterprise Act 2002 (specified considerations) is amended as follows.
After Clause 84 - continued
(2) After section (2C) insert—
“(2D) The need for those who, as a result of a merger, have increased control of media enterprises (excluding newspaper enterprises) which require a broadcasting licence, under section 3(3) of the Broadcasting Act 1990 or the Broadcasting Act 1996, to be fit and proper to hold such a licence having regard in particular to— (a) the extent of any criminal wrongdoing that has taken place by companies and other organisations under their control; and (b) the extent of any failures of corporate governance and management in such companies and organisations.
(2E) The need for there to be, in the governance arrangements of any relevant media enterprise (excluding newspaper enterprises), which provides news services, sufficient safeguards for unrestricted editorial freedom in the provision of full and accurate news services by such media enterprises.
(2F) The need to prevent a media enterprise (excluding a newspaper enterprise) from—
(a) exercising undue influence over distribution of, and access to, rights, talent and other forms of cultural expression;
(b) promoting its own business interests through its editorial outlets, to the detriment of competitors where this is against the wider public interest;
(c) exercising undue pressure in the regulatory and political environment, to the detriment of competitors where this is against the wider public interest.”
Amendments proposed by Lord Puttnam and Baroness Bonham-Carter of Yarnbury:
· 229ZB - Insert the following new Clause— “OFCOM: relevant factors for “fit and proper” determination
(1) After section 3(3) of the Broadcasting Act 1990 (licences under Part 1) insert—
“(3A) For the purposes of this section the determination of “fit and proper” includes having specific regard to—
(a) the extent of any unlawful or improper conduct within such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance; and
(b) the extent of any corporate governance and management failures at such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance.
(2) After section 3(3) of the Broadcasting Act 1996 (licences under Part 1) insert— “(3A) For the purposes of this section the determination of “fit and proper” includes having specific regard to— 16 Digital Economy Bill
After Clause 84 - continued
(a) the extent of any unlawful or improper conduct within such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance; and
(b) the extent of any corporate governance and management failures at such companies and other organisations for which a person holding the licence has or had responsibility for management or corporate governance.”
We note that these amendments are still being debated in the House of Lords (the Report Stage at the House of Lords is scheduled for 22 February and the timing for the Third Reading at the House of Lords has yet to be announced but should take place at the end of February/early March). At the Third Reading, the members of the House of Lords will “tidy up” the bill – concentrating on ensuring that the eventual law is effective and workable – without loopholes. Amendments can also take place at this stage and are usually to clarify specific parts of the bill. The bill (with the Lords amendments) will then go back to the House of Commons who will consider the amendments – this could take place by mid-April if the Commons accept the amendments made by the Lords and do not make any further amendments (if the Commons make further amendments the bill goes back to the Lords to consider these amendments, could take some time as both Houses need to reach agreement). Once the House of Commons and House of Lords agree on the final version of the Bill, it can receive Royal Assent and become an Act of Parliament (the bill will now become Law). This could occur by the end of April at the earliest if no further amendments are made to the Bill by either House and both Houses have agreed the final version of the Bill. If further amendments are made, then the process could drag on to Q2/Q3.
Given that the government does not have a majority at the House of Lords there is an eventuality for these amendments to be accepted at the House of Lords, but the government has to accept these amendments and ultimately pass the bill into law, which we see as a very remote probability.
On 8 February, Lord Puttnam stated in a House of Lords debate in relation to the Digital Economy Bill that there is too much “wriggle room, and a lack of clarity as to the precise grounds on which a referral (to Ofcom) is based.” Lord Puttnam clarified that the purpose of his amendments is to “buttress the referral process by adding further and easily understood grounds directly to the Bill. Specifically, they would add a fit and proper persons test, which, somewhat bizarrely, exists only as an ongoing test for licence holders, not bidders, and is thus to be conducted only after the fact of any merger. I say “bizarrely” because I ask: how sensible does it seem to judge the ongoing fitness and propriety of a licence to a higher standard than the one sought at entry? Possibly when she comes to answer the Minister might help me understand what I see as an extraordinary anomaly.” Lord Puttnam also called for Leveson 2 to go ahead “without delay”. He then continued stating that he “does not think that his amendments as they stand are good enough” – and happily withdrew his proposed amendments but stated his certainty that the subject would be revisited in the “hope that the amendments put forward by the Government would be acceptable to the entire House.”
Given that we expect the EC filing to be made in March/April – within 10 days Karen Bradley can issue an intervention notice and refer the transaction to OFCOM, it appears unlikely that any amendments (if approved) will be written into law before this time. It is unlikely that the House of Lords will conclude their deliberations and send the bill back to the House of commons who will debate any changes and the bill will only be passed into law by April at the earliest.
Legal framework for the “fit and proper person test”:
1. A provider of any “relevant regulated television service” must hold a licence under the Broadcasting Act 1990 (the “1990 Act”) or the Broadcasting Act 1996 (the “1996 Act”). Depending on the type of television service in question, a provider may be licensed under either the 1990 Act or the 1996 Act.
2. Under s.3(3) of each of the 1990 Act and the 1996 Act, Ofcom: (a) shall not grant a licence to any person unless satisfied that the person is a fit and proper person to hold it; and (b) shall do all that they can to secure that, if they cease to be so satisfied in the case of any person holding a licence, that person does not remain the holder of the licence.
3. Therefore, Ofcom has an ongoing duty to remain satisfied that broadcast licensees are fit and proper.
Under Sections 3(3) of each of the 1990 and 1996 Broadcasting Acts, Ofcom:
(a) Shall not grant a license to any person unless satisfied that the person is a fit and proper person to hold it; and,
(b) Shall do all that they can to secure that, if they cease to be so satisfied in the case of any person holding a license, that person does not remain the holder of the license.
Our View:We are likely to see further amendments to bills and expect a lot more political “noise” as UK politicians strive to keep this deal at the forefront of political and public consciousness. We also expect a lot more pushback from politicians about whether James and Rupert Murdoch are “fit and proper people” to be in charge of the entirety of Sky.
With regards to the proposed amendments to the Digital Economy Bill currently being debated at the House of Lords, as OFCOM is only able to rule based on what is currently law at the time of their review, it is likely that any OFCOM decision will be taken around the legislation currently in place. The bill is unlikely to be signed into law until April at the earliest.
Given the withdrawal of Lord Puttnam’s amendments, we can also expect to see more debate and opinions over the subjects raised in the coming weeks and it is highly probable that Lord Puttnam will refine his amendments and put them to the House of Lords again – possibly at the third reading (a date for the Third Reading has yet to be set, but could occur towards the end of March, early April).
Furthermore, the government is also rather preoccupied with Brexit and is likely to prioritise this over any merger transaction (no matter how politically charged). Nevertheless, there is room for volatility and bad headlines, and we think there is room for headline noise in the coming weeks.
Oil & Gas ETF, XOP US (39.18 last) - bullish base
• The ETF is now testing the neckline of the Inverted H&S pattern which stands at 38
• The H&S target based on the height of the pattern is 54 which is also were the next horizontal resistance level is placed
• The risk/reward is pretty attractive for a medium term play at these levels
Tempur Sealy adopts poison pill
09 FEB 2017
Tempur Sealy [NYSE: TPX] has adopted a limited duration poison pill in force through February 2018.
The shareholder rights plan would become exercisable if a person or group acting in concert acquires beneficial ownership of 20% or more of Tempur Sealy's common stock in a transaction not approved by Tempur's board.
Tempur Sealy stock is down more than 34% since the end of January, when the company cancelled all of its supply contracts with Steinhoff International after Steinhoff sought significant economic concessions to their current deal.
As reported, the stock plunge is a major blow to activist H Partners Management, which launched a successful campaign to oust Tempur CEO Mark Savary in May 2015. H Partners owns an approximately 12.1% stake and Chieftain Capital Management has an approximately 5.8% stake in TPX.
Morgan, Lewis & Bockius is serving as legal advisor to Tempur Sealy in connection with the rights plan.
Press release:
Tempur Sealy International, Inc. (NYSE: TPX) today announced that its Board of Directors has approved the adoption of a limited duration stockholder rights plan (the "Rights Plan") and declared a dividend distribution of one right ("Right") for each outstanding share of common stock. The record date for such dividend distribution is February 20, 2017.
The adoption of the Rights Plan is intended to protect Tempur Sealy and its stockholders from the actions of third parties that the Board of Directors determines are not in the best interests of Tempur Sealy and its stockholders, and to enable all stockholders to realize the long-term value of their investment in Tempur Sealy. The Board of Directors believes that the Rights Plan will ensure that the Board of Directors remains in the best position to discharge its fiduciary duties to Tempur Sealy and its stockholders. The Rights Plan is not intended to interfere with any sale, merger, tender or exchange offer or other business combination approved by the Board of Directors. Nor does the Rights Plan prevent the Tempur Sealy Board of Directors from considering any offer that it considers to be in the best interest of Tempur Sealy's stockholders.
The Rights Plan is similar to other plans adopted by publicly-held companies. Under the Rights Plan, the rights generally would become exercisable only if a person or group (including a group of persons who are acting in concert with each other) acquires beneficial ownership of 20% or more of Tempur Sealy's common stock in a transaction not approved by Tempur Sealy's Board of Directors. In that situation, each holder of a right (other than the acquiring person or group, whose rights will become void and will not be exercisable) will have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of Tempur Sealy common stock having a market value of twice such price. In addition, if Tempur Sealy is acquired in a merger or other business combination after an acquiring person acquires 20% or more of Tempur Sealy's common stock, each holder of the right would thereafter have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of common stock of the acquiring person having a market value of twice such price. The acquiring person or group would not be entitled to exercise these Rights. In the Rights Plan, the definition of "beneficial ownership" includes derivative securities.
The Rights Plan is a limited duration rights plan and, accordingly, the Rights Plan expires, without any further action being required to be taken by Tempur Sealy's Board of Directors, on February 7, 2018.
Further details of the Rights Plan will be contained in a Current Report on Form 8-K and in a Registration Statement on Form 8-A that Tempur Sealy will be filing with the Securities and Exchange Commission (SEC). These filings will be available on the SEC's web site at www.sec.gov. Copies are also available at no charge at the Investor Relations section of Tempur Sealy's corporate website at www.tempursealy.com.
Morgan, Lewis & Bockius LLP is serving as legal advisor to Tempur Sealy.
Greece’s Never-Ending Fiscal Drama
Bailout program is held up by a dispute over country’s budgetary targets
No one wants another Greek debt crisis, least of all just ahead of a series of knife-edge elections in Europe. No one this time is trying to push Greece out of the eurozone. No one thinks what Greece needs now after eight years of acute depression is another dose of austerity. Nor does anyone seriously think Greece’s current debt burden is sustainable. So why is Greece once again back in the headlines, its future in the eurozone again called into question amid yet another standoff with its creditors?
The official explanation is that Greece’s bailout program is being held up by a dispute over the country’s fiscal targets. Under the deal struck in 2015, Greece is supposed to achieve a primary surplus before interest payments in 2018 of 3.5% and maintain this surplus for the medium term. Germany says medium term should mean 10 years; the European Commission would prefer it to mean one or two years. This matters because Germany has said it would only continue to fund Greece’s bailout if the International Monetary Fund puts money in too—and the IMF will only participate if the numbers add up. The lower the surplus target, the bigger the debt relief needed to make the numbers add up. That is a problem for Germany.
To make matters more complicated, the IMF takes a very pessimistic view of Greece’s current fiscal position. It now seems clear that Greece delivered a primary surplus of at least 2% in 2016, far above the initial program target of minus 0.5%. With the Greek economy now growing, the European Commission is confident the country can achieve the 3.5% target for 2018 with few extra fiscal measures. But the IMF says this year’s surplus was largely due to one-off factors and is sticking to its forecast that the surplus will only amount to 0.9% in 2018. Just to reach the 3.5% target in 2018, the IMF says Greece will need to legislate in advance extra austerity measures equivalent to 2% of gross domestic product. Athens says this is politically impossible. Brussels agrees.
Of course, this dispute isn’t really about deficit targets. At its heart lies a fundamental clash over how the eurozone should operate. Germany and the IMF share an extremely low opinion of the quality of Greece’s political class and institutions. But from this they have drawn different conclusions. Berlin believes Athens can’t be trusted to stick to any fiscal or reform commitments except under strong external pressure; it follows that if Greece is to remain in the eurozone, it needs to be kept on a short leash. Berlin will keep funding Athens, but it wants to maintain leverage over the country’s economic decision-making to protect German taxpayers.
But the IMF sees this as a recipe for perpetual can-kicking fundamentally at odds with its own institutional priorities. The IMF exists to provide short-term assistance to countries in financial difficulties, helping them put their finances so they can return quickly to borrowing from the financial markets. The IMF’s credibility has already been battered by one failed Greek program and is determined not to be sucked into another. For the IMF, therefore, this Greek program must be the last—and given its extreme low confidence in the Greek political class, a program is unlikely to be successful without very substantial debt relief. The IMF’s position has been clear for two years, but many Europeans assumed it was bluffing.
How this standoff now gets resolved is far from clear. One option is that Greece capitulates to what many in Europe consider to be the IMF’s unreasonable austerity demands. But could any Greek government of any stripe deliver austerity measures worth an additional 2% of GDP? Another option is that Germany capitulates on the deficit targets. But could Berlin execute such a humiliating U-turn, committing to writing off more than €100 million ($107 million) of Greek debt just months before an election? Another option would be for the IMF to walk away from Greece altogether, leaving the eurozone to sort out its own mess. But how could it do this without pulling the rug from under German and Dutch participation too, making Greece’s plight far worse?
Greece’s best hope is that a compromise can be thrashed out in which Berlin accepts lower medium-term surplus targets, the IMF adopts less gloomy forecasts, and Athens is left to legislate a much smaller package of extra austerity measures. But a compromise along these lines currently looks some way off. Meanwhile the clock is ticking. The Feb. 20 meeting of eurozone finance ministers is the last chance to agree on a deal before the Dutch parliament is dissolved ahead of that country’s general election in March. The next opportunity to strike a deal might not come until after the French presidential election in May. By then all the current momentum may be lost, including a package of ambitious reforms currently agreed as part of the program review. Worse, a giant bond redemption in July will be looming, raising the risk that Greece finds itself back where it was in 2015—exactly where no one wants it to be.
Sinking Feeling: Shipping Is Latest European Banking Worry
Last year, German lenders owned roughly $90 billion worth of outstanding shipping loans
The global shipping crisis is stoking another European banking headache, this time in economic powerhouse Germany.
Commerzbank AG on Thursday warned that its losses on shipping loans could be as high as €600 million ($641 million) this year after nearly doubling last year to €559 million. Last week, Deutsche Bank AG, Germany’s largest bank, said its expected losses from shipping loans nearly tripled, to €346 million, from a year earlier.
In Germany’s port of Hamburg—one of Europe’s richest cities—state-owned HSH Nordbank is racing to find a buyer or face liquidation after suffering massive losses on shipping-related debt.
Analysts say the continued wave of write-downs indicates German banks remain hesitant to take the painful measures needed to restructure their businesses, almost a decade after the global economic crisis.
Before the crisis, German lenders became the world’s biggest issuers of shipping loans. As of last year they owned roughly $90 billion worth, or almost one-fourth of all outstanding shipping loans made by large banks, according to Petrofin Global Bank Research. German banks and investors own more of the world’s containership capacity than any other country—roughly 29%, according to the German Shipowners’ Association.
Plunging world shipping rates and the bankruptcy of Korea’s Hanjin Shipping last year helped create a bloodbath for the sector, which had previously seemed a safe bet for export-oriented Germany. Banks world-wide now are racing to dump bad shipping loans while shippers scramble to unload worthless ships.
“The market is deteriorating and everybody is trying to exit,” said Basil Karatzas, founder of Karatzas Marine Advisors & Co. in New York.
Shipping losses are especially hard on German banks, which are trying to recover from the euro crisis, record-low interest rates and, at Deutsche Bank, scandals. Rather than aggressively write down shipping loans early, German banks let them linger and eat into profits. The eurozone’s banking watchdog has said it is increasing on-site inspections at several German banks to resolve shipping-loan problems. Banks are lobbying global regulators to relax rules on how much capital must be held against these loans.
No bank epitomizes the problem more clearly than HSH Nordbank, whose lending spree left it owning a commercial fleet larger than the British, French and German military navies combined. European Union authorities have ordered the bank to be privatized by early next year or shut. Taxpayers in northern Germany face losses of up to €15 billion, or over €3,000 a person.
“It’s a catastrophe,” said Rainer Kerstin, the head of the taxpayer’s association in the German state of Schleswig-Holstein, which with Hamburg owns HSH.
During the boom years, HSH bankers would mingle with local politicians and shipping magnates in a vast beer hall under Hamburg city hall. Several of those same politicians and businessmen sat on HSH’s supervisory board and encouraged it to become the world’s biggest shipping lender.
After the shipping collapse, HSH’s owners rescued it by pumping in billions of taxpayer euros and pledging to reimburse HSH for €10 billion of losses on dud loans. EU authorities deemed that illegal state aid. HSH’s government owners were ordered to sell their 85% stake by next February.
The bank is racing to make itself attractive. It created a “bad bank” that last year took ownership of 253 container ships. HSH’s management has conducted roadshows in London marketed to potential Asian investors.
Indicative bids for the bank are expected later in February. Any deal requires EU approval, adding another hurdle.
In Hamburg, the fallout is spreading. Hamburg businessman Bernd Kortüm sat on HSH’s advisory board from 2004 to June 2015, a period in which the bank extended billions of euros in credit to his shipping firm. Late last year, his company received some €500 million in debt relief from HSH. Around that time Mr. Kortüm purchased a 130-foot racing yacht.
Local politicians were outraged. “I’m totally disgusted by it,” said Wolfgang Kubicki, member of Hamburg’s state parliament for the pro-business FDP party. “We have to build schools, fund police, fix streets, but this millionaire gets debts written off. I cannot see any justification for it.”
Mr. Kortüm said that if the shipping market improves, HSH will get all its money back. He declined to say more, referring to other interviews in which he said the timing of his yacht purchase was “unfortunate.”
HSH Chief Executive Officer Stefan Ermisch recently told staff in a memo that “heated” discussions of the “sad” past events could damage the cleanup and privatization.
The short privatization time scale means the bank will probably need to sell bad loans at sharply discounted values, exhausting its €10 billion in state guarantees, Mr. Ermisch told staff. Some costs are proving hard to cut: HSH by law must maintain headquarters in both the federal states that own it.
Commerzbank: the German diseasePremium
Negative rates are a problem for many banks, bloated costs less so
Germany is Europe’s biggest, strongest economy and the world’s largest exporter. Yet it is also home to one of the continent’s weakest banking sectors, at least in terms of shareholder returns. On Thursday Commerzbank, Germany’s second-largest bank by assets, underlined this paradox by revealing abysmal annual results. There are few reasons to believe things will improve soon.
Over half of all German banks are state-backed savings institutions or co-operatives with a correspondingly diminished profit motive. This is great for consumers and companies, who benefit from access to bountiful pools of credit supplied by thrifty savers.
It is not so good for equity holders. Commerzbank reported a paltry 1 per cent return on tangible equity in 2016. It had already axed the dividend just six months after it was reinstated for the first time since the financial crisis. Even excluding a goodwill loss of €627m, pre-tax profits declined by 30 per cent (to €643m).
Bad shipping loans are one reason.Costs are a more persistent culprit. An operating cost to income ratio of 75 per cent is average for Germany. It would be seen as steep elsewhere in the eurozone and wasteful in Scandinavia. Commerzbank wants to cut to 66 per cent by 2020, helped by €600m in cost savings.
The main bugbear, however, is negative interest rates. Commerzbank complained that European Central Bank levies on its deposits cost it €212m last year, costs it is loath to pass on to its own depositors. It says a 100 basis point rise in rates over the next four years would generate up to €1bn in additional income. The prospect of higher rates, nurtured by some better eurozone economic data, is one reason why its shares have risen by a third over the past six months.
Yet three-month euribor, which would account for around half of any projected revenue increase, has been falling. The shares, trading at 17 times forecast 2017 earnings, are not pricing in much scope for disappointment.