TheChek News Flow

The head of Chinese state-owned conglomerate Sinochem has firmly denied plans to merge with rival chemicals firm ChemChina, after reports of discussions unnerved investors betting that ChemChina will buy Swiss seeds and chemicals maker Syngenta.

In response to a question of whether Sinochem planned to buy ChemChina, Ning Gaoning, known to international investors as Frank Ning, told a forum in Hong Kong: “No, this rumour is very old.”

In October, the Financial Times and other news outlets reported that the two firms were in discussions for a merger, in line with an effort by the State Assets Supervision and Administration Commission (SASAC) to streamline the number of state-owned firms controlled by the central government.

The reports added to the uncertainties around ChemChina’s $44bn bid for Syngenta, as a successful merger of the two Chinese giants would have changed ChemChina’s ownership after the deal had cleared Washington’s Committee on Foreign Investment (CFIUS) review process. Chinese reports have also questioned ChemChina’s financing for the acquisition, although ChemChina, which has bridge loans in place, has told investors it will tap its own cash and government sources to help pay for the deal.

ChemChina this month submitted remedies to European anti-competition regulators, who must weigh its bid in the context of two other megamergers: Bayer’s $56bn bid for Monsanto and Dow Chemical’s $130bn plan to merge with Dupont. They will together shrink the number of multinational seeds and agri-chemicals firms from six to three.

Syngenta shares were up 0.5 per cent on Monday afternoon, to SFr421, their highest level since ChemChina’s refusal to submit concessions to European competition authorities raised fears the deal would be delayed in October.

Meanwhile in China, a series of mergers of state-owned agribusinesses in the past six months has created three national champions, clearly separating the functions of trading, reserves, or seeds and chemicals in a throwback to the state-planning era.

In July Cofco, the state grains trader turned food conglomerate that Mr Ning once headed, absorbed Chinatex, originally formed to import cotton on behalf of Chinese textile mills.

That deal was followed late last week by a merger of China National Cotton Reserves Corp. with China Grain Reserves Corp., or Sinograin, uniting two financially troubled but politically powerful relics of the state reserves system with combined assets of RMB1.47tn ($213bn).

Even though the merger between Essilor and Ray-Ban-maker Luxottica is an old idea, it may still tickle Italy’s protectionist streak. Several domestically-controlled companies have sold or shipped out in the recent past. The Agnellis moved both Fiat and the holding company Exor to the Netherlands. Pirelli sold out to ChemChina, while Italcementi was bought by Germany’s HeidelbergCement.

The Frenchness of Essilor adds an extra frisson. Gallic raider Vincent Bollore has taken effective control of Telecom Italia, and is locked in a battle with former Prime Minister Silvio Berlusconi over ownership of broadcaster Mediaset. The fear is French companies are hoovering up Italian firms, shielded by a protectionist country that that once branded yoghurt-maker Danone a strategic asset.

The deal does have a cost for Italy. As Luxottica delists, Milan’s bourse loses a national champion. Over time, its roughly 8,000 Italian employees may feel their importance downgraded. Novelty giveaways, like the bonus shares they were given to honour the 80th birthday of founder Leonardo Del Vecchio, may be a thing of the past. Still, Luxottica was always a global company. It was first listed in New York, not Milan. And investors had been nervous over the dominance of Del Vecchio and his family, which had led to a carousel of exits by chief executives. The new structure dilutes Del Vecchio to a 31 percent voting stake. Luxottica’s business may thrive more with Essilor than alone.

The deal comes at a tricky time for Italy, which recently lost its reformist, business-friendly Prime Minister Matteo Renzi. The risk is that the country returns to a period of political instability and deters foreign investment, which under Renzi had picked up. It would be better, though, to look on the bright side. A high-profile deal turns an Italian company into a European one, and shows the country is open for business

Alibaba teams up with Samsung, Louis Vuitton and other brands to fight counterfeit goods

Louis Vuitton, Samsung and Mars are among the big names to sign up to the not-exactly-innovatively-named ‘Alibaba Big Data Anti-Counterfeiting Alliance.’ Swatch-maker Swarovski is also on board, having recently worked with Alibaba to take alleged two sellers of fraudulent watches to court in China.

The alliance aims to increase the sharing of information on fake goods between Alibaba and some of its highest profile brands. Alibaba’s said that its existing system scans over 10 million listings on its e-commerce sites each day and, it added, it helped remove 380 million fake listings, shut down some 180,000 sellers and put “hundreds of counterfeiters” behind bars.

Alibaba said alliance members will “pool resources and increase collaboration” to stamp out more fake goods and sellers, but the actual details are fairly vague.

“Alibaba will provide alliance members with big data and advanced technological support in their IP enforcement work, including helping to block, screen and take down infringing listings,” the company said in announcement.

Brands, it added, “have committed to share their expertise on IP authentication and anti-counterfeiting data with Alibaba.” That data will help the Chinese e-commerce giant collaborate with authorities and brands to pursue legal action and run further investigations.

“The most powerful weapon against counterfeiting today is data and analytics, and the only way we can win this war is to unite,” Jessie Zheng, chief platform governance officer at Alibaba, said in a statement.

But timing is also everything. This second PR push — the first was the Swarovski case — comes weeks after Alibaba returned to the U.S. government’s list of notorious counterfeit platforms after a four year absence. Alibaba CEO Daniel Zhang chalked the return down to “protectionism,” but, if nothing else, it has certainly spurred the company’s marketing team into action.

In another recent move designed to boost its reputation in the U.S., Alibaba president Jack Ma pledged to create one million new jobs in America. That came last week after a meeting with U.S. President Elect Donald Trump who, as you might have guess, was quick to take credit even though most pundits are skeptical that Alibaba can pull the ambitious goal off.

In 2017, we expect utilities to return to growth: we estimate EBITDA + 3%, halting a six-year negative trend that compressed operating profits by c.15% and net earnings by about 25%. Infrastructure capex in grids & renewables, and bottoming power generation profits should be the main growth drivers. Higher EBITDA, cheaper refinancing and accounting changes in Germany support c.10% EPS growth (+c.7% underlying), on our forecasts. We believe this is the start of a top-line secular trend triggered by a potential c.€700 bn capex super-cycle in grids & renewables, aimed at

decarbonising the power system.

We believe that 2017 may feature large, game-changing M&A moves owing to the combination of low borrowing costs, stronger balance sheets and the resurgence of pure plays. We would expect German utilities (Uniper) to be at the core of this; we also expect ongoing portfolio reorganisations by Enel and Engie to free up capital to reinvest in core activities: electricity distribution for Enel and “services” for Engie.

* Yields likely to rise but sector already implies >4% sovereign yields

Although sovereign yields are likely to rise further, the sector already discounts a 4.1% yield, which is broadly in line with the 10-year pre-crisis average. Within the sector, integrated utilities appear particularly cheap, trading at 12.0x P/E, based on our 2018 forecasts.

We favour utilities which, besides trading at a discount, offer at least three of the following four features: 

(1) secular top-line growth (power shift stories); 

(2) positive earnings momentum (i.e. scope for consensus upgrades throughout 2017); 

(3) restructuring of the portfolio/balance sheet; and 

(4) possibility of being acquired. 

Reflecting these themes, our Buy ratings include Enel (Conviction List), E.ON and Uniper. We remain cautious on fully regulated names owing to the outlook on interest rates, and our Sell ratings include National Grid, EDF and Endesa.

We revise our estimates and price targets across our coverage, mainly to reflect new commodity assumptions.