FT : US prime property is magnet for illicit wealth, warns Treasury

US prime property is magnet for illicit wealth, warns Treasury
Probe unearths string of dubious cash buyers in New York, Miami and other cities

US real estate’s reputation as a favourite destination for international money launderers has grown after a Treasury investigation confirmed fears that top-end property in New York, Miami and other cities is being used to channel illicit wealth.

The Financial Crimes Enforcement Network (FinCEN), a Treasury unit, found that one in three buyers who used shell companies for cash purchases of luxury property in leading cities had had the alarm raised about their financial dealings.

The role of US mansions, penthouses and beachside residences as a haven for tainted wealth has been under increasing scrutiny in recent years as it emerged that buyers had included figures such as Colombian drug lord Pablo Escobar and the son of Equatorial Guinea’s president.

FinCEN said on Thursday it had unearthed a string of dubious buyers using a new disclosure rule to probe all-cash deals undertaken through shell companies. The purchasers included some suspected of being involved in corruption in Asia and South America and one who engaged in $160m of suspicious activity, officials said.

The US market in existing housing alone — which excludes commercial and newly built property — turns over $1.6tn a year, according to the National Association of Realtors. About a quarter of buyers pay cash, with the proportion rising to half of foreign buyers. These account for only 4 per cent of all purchases, but this means some $32bn a year flows into US real estate from abroad in cash transactions that, until a year ago, could be conducted anonymously.

Since the Patriot Act was introduced after the September 11 2001 terror attacks, mortgage lenders have been subject to “know your customer” rules designed to stop terrorists and other criminals using agents, shell companies and other subterfuges to move illicit money into the US. But cash purchases were excluded.

A year ago FinCEN, which collates information reported by banks and others on their clients and makes it available to law enforcement agencies, moved to plug what it believed was a major conduit for dirty money.

It introduced a rule requiring identity disclosure for cash buyers using shell companies to purchase top-end property in Manhattan and Miami. The rule was later extended to the whole of New York City, more of Florida and Los Angeles, San Francisco, San Diego and San Antonio.

The information gathered “corroborates FinCEN’s concerns about the use of shell companies to buy luxury real estate in ‘all-cash’ transactions”, the unit said on Thursday.

Some 30 per cent of top-end all-cash transactions using shell companies for which FinCEN received data were found to involve either an owner or owner’s representative who had been the subject of a “suspicious activity report”. These are reports that banks must lodge with the authorities when they have concerns about the source of a client’s funds.

Some anti-corruption activists had feared the disclosure rule would be allowed to lapse when it came up for renewal on Thursday, part of wider concerns about the fate of regulation under Donald Trump’s administration. During his presidential campaign, Mr Trump described the Foreign Corrupt Practices Act as “horrible”.

However, the disclosure rule was extended for another six months on Thursday. A FinCEN spokesman said the decision had been taken with the “full support” of Steven Mnuchin, Mr Trump’s Treasury secretary.

Mr Trump’s fortune is based on US real estate. As the Financial Times revealed in October, an alleged Kazakh money-laundering network used the all-cash transactions now in the spotlight to buy and sell apartments in the Trump Soho tower in Manhattan.

FT : Safran hits back at TCI’s campaign to stop Zodiac takeover

Safran hits back at TCI’s campaign to stop Zodiac takeover
French group says fund’s attempts to stop deal would destroy long-term value

French jet engine maker Safran has accused one of Europe’s largest activist hedge funds of wanting to “destroy value” in the long term in its attempt to scupper an agreed €8.5bn takeover for rival Zodiac Aerospace.

Last week, The Children’s Investment Fund, run by Sir Chris Hohn, launched a campaign to block the aerospace deal, saying it had “no strategic rationale” and demanding cash be returned to shareholders instead.

TCI argued that Safran would be worth €100 per share if it ditched its offer for Zodiac, the maker of aircraft seats and cabin interiors, compared to €66 that it was trading at this week. It said the company was “massively overpaying” for Zodiac for “questionable synergies”.

Safran’s management struck back on Thursday, claiming TCI was making “baseless” claims, and it cast doubt on the fund manager’s understanding of both French corporate governance laws and the aerospace industry.

In a letter by the Safran board sent to Mr Hohn on Thursday, the company said TCI’s proposal for a share buyback instead of the deal “results from a partial and incomplete view likely to destroy value for shareholders in the long term”.

The claim that Zodiac was of “inferior” quality to Safran “overlooks certain fundamentals” in the cabins and seats business, said Safran in the letter, adding that while Zodiac had production problems in the past it was now on track with its latest financial targets.

Speaking to the Financial Times, Ross McInnes, chairman of Safran, added that “the management and the board of Safran did not need to take lessons from anyone on how we manage our portfolio”.

He particularly criticised TCI for pushing them in 2012 to sell their 23 per cent stake in Ingenico, the payments company, for about €470m. “By waiting, we ended up receiving €900m,” he said.

The comments will add to the bad blood between Safran and TCI, which has built a reputation as an activist investor following high-profile campaigns in Europe, Asia and the US.

One of TCI’s main criticism of the Safran deal was that shareholders will not be given a vote at the upcoming annual meeting on the initial part of the Zodiac deal, which is a tender offer of €29.47 per Zodiac share.

Safran shareholders will only get a vote on the subsequent merger, which will offer 97 Safran shares for 200 Zodiac shares, but by which point most of Zodiac will already likely be owned by Safran.

Mr McInnes said Safran had no obligation under French law to hold a vote on the initial tender and that TCI — as a “sophisticated investor” — should have known this when buying its shares in the first place.

FT : Surge in M&A raises concerns over market peak

Surge in M&A raises concerns over market peak
The absence of a huge surge in deal activity might be more worrying

Does the recent spate of large-scale M&A signal that a top in the market is being reached? That is what some prominent investors are worried about after the surprise $143bn bid by Kraft Heinz for Unilever last week, which was later abandoned.

Jeff Ubben, founder of ValueAct and leading player in the world of hedge fund activism, this week raised worries that companies are getting too active.

Mr Ubben, an investor who prodded Towers Watson and Willis to merge and Valeant to roll up lots of smaller drug companies, told a Reuters Newsmakers panel on Wednesday night: “You can see it in the risk-hungry nature of corporations. At these extremes the stock market is usually baiting you to do the wrong thing. The private equity guys made the top in ‘07. They were buying everything and they learned their lesson. The corporations didn’t play the ‘07 game and now they are going to make the top.”

But is he right? There are several counter arguments to this, not least that deals numbers are not running red hot.

The number of M&A transactions involving US companies in 2016 was the lowest of any year since 2005, bar the crisis-nadir year of 2008. Activity has been concentrated among larger companies so the value of deals is hardly depressed, but last year’s deal total of $2tn was lower than 2015’s $2.4tn even after a spike in the fourth quarter of 2016.

Absent Unilever, the first quarter of 2017 does not seem on course to break any record, either. A few megadeals would send the numbers soaring, and it is true that news of last week’s bid approach caused Kraft Heinz shares to leap by almost as much as Unilever’s, suggesting the market would welcome the deal. But whatever you think of the cultural mismatch between the two companies, there was a cost-cutting rationale.

That is a far cry from 2007, when cheap financing, unchecked leverage and tax favours led private equity bidders to drive up stock market valuations. Ironically, it is the absence of a huge surge in M&A activity that might be more worrying. Both private equity and strategic buyers will tell you they are wary about valuations, and high valuations do not bode well for future stock market performance.

FT : Electric carmakers on battery alert after funds stockpile cobalt

Electric carmakers on battery alert after funds stockpile cobalt
Race to secure supplies of key material used in lithium-ion batteries

Suppliers to Tesla and other electric carmakers are scrambling to secure shipments of the key battery material cobalt after a group of hedge funds amassed a large stockpile of the scarce metal.

In a bold wager on higher prices, half a dozen funds, including Swiss-based Pala Investments and China’s Shanghai Chaos, have purchased and stored an estimated 6,000 tonnes of cobalt, worth as much as $280m, according to the investors, traders and analysts.

The stockpile is equivalent to 17 per cent of last year’s global production of the metal.

Increasing use of batteries containing chemical forms of the metal by Chinese electric carmakers, alongside ambitious plans by the likes of Elon Musk’s Tesla, have created a fertile backdrop for speculators hoping to profit from swelling appetite for cobalt, which boosts the power of lithium-ion batteries.

They are betting that demand for electric vehicles will exceed market expectations and push the up the price of cobalt as battery makers such as Panasonic, which makes battery cells for Tesla, rush to lock-up supplies of the material.

Global demand is already expected to outstrip supply this year by 900 tonnes, according to commodity consultancy CRU. It estimates demand for cobalt will grow 20 per cent a year for the next five years, thanks to buying from the hybrid and electric car industry whose production grew by 41 per cent last year.

The price of cobalt, which is mined almost exclusively in the Democratic Republic of Congo, has jumped more than 50 per cent since November to $21 a metric pound and could rise further. Prices rose to peak at about $50 a pound in 2007, before dropping to a low of $10 in 2015.

There’s going to be bigger demand for cobalt
Ivan Glasenberg, chief executive of Glencore
“There’s going to be bigger demand for cobalt,” Ivan Glasenberg, chief executive of Glencore, which controls almost a third of the cobalt market, said on Thursday. Each dollar rise in the price of cobalt generates about $55m in earnings for the company.

Tesla began production at its battery “gigafactory” in Nevada a month ago, sharpening its need for the metal, according to traders. Tesla did not respond to an email seeking comment. Pala Investments also declined to comment.

“End consumers worried about future price increases have been looking to fill their [stocks] and at the same time you’ve had some speculative buying from the hedge funds,” said Edward Spencer, an analyst at CRU.

With few pure cobalt companies listed outside China, hedge funds have been forced to buy physical metal to express their bullish view on the metal. Although the London Metal Exchange has a cobalt contract, it is not heavily traded.

“They quite rapidly decided that buying physical cobalt was the only way to get proper exposure to the cobalt price,” one trader said.

Still, traders warned the funds could have difficulties selling the metal for a profit, because the cobalt market is relatively small and release of new supply could quickly send prices lower.

About half of the annual consumption of cobalt comes from the electric vehicle industry. While carmakers have been trying to reduce the amount used, that has been difficult because of its ability to improve battery stability and capacity.

China is also helping to generate the bullish predictions for demand. While the country’s electric vehicle industry has in recent years relied on batteries without cobalt, carmakers have started to switch. Goldman Sachs analysts estimate China’s use of cobalt in electric batteries will almost double by 2025.

A squeeze on demand has been exacerbated by the reduction of supply from Zambia, Russia and Australia in recent years, according to analysts at Macquarie. Cobalt is mined alongside metals nickel and copper, which have fallen in price since the financial crisis.

Cobalt’s price surge has led some battery makers to buy more cobalt in the spot market, further benefiting the funds that have stockpiled the metal.

“There's a complete vacuum out there” in terms of supply, said Tony Southgate, a cobalt trader at Engelhart Commodities in London.

FT : Universal Music streams profits to parent Vivendi

Universal Music streams profits to parent Vivendi
Revenues from streaming help offset customer losses at Canal Plus for media group

Vivendi-owned Universal Music Group, the world’s largest record label, made nearly €1.5bn from streaming and subscriptions last year, the latest sign that listening on platforms such as Spotify is propelling music companies to a digital future. 

The company’s revenues from streaming grew 58 per cent in 2016, offsetting steep declines in album and download sales, which dropped by 15 and 29 per cent, respectively. UMG grew operating income by 10 per cent to €687m for the year, with the company pointing to the popularity of albums from artists such as Drake and Rihanna. 

“I remember when I took the job two and a half years ago, the first question was about music and what was going to happen,” said Arnaud de Puyfontaine, chief executive of Vivendi. “We’ve kept saying we thought this . . . could open a new growth era for the industry,” he said, adding he was “cautiously optimistic” that streaming momentum would continue in 2017. 

However, growth in its music business was not enough to offset losses for the parent company. The media group controlled by billionaire Vincent Bolloré said its core operating profit fell 23 per cent to €724m last year, weighed down by customer losses at Canal Plus, the French television channel, which had its weakest revenues in five years. 

Paris-based Vivendi has been trying to turn around its business by building out media content across France, Italy and Spain — beefing up its stakes in Telecom Italia and Italian broadcaster Mediaset. Vivendi said it expected operating profit to grow 25 per cent this year, as its ambitions to build a southern European media empire gained traction. 

Universal Music has been a bright spot for Vivendi in the past few years, with the music business heralding a renaissance through streaming. More people are paying a monthly fee to companies such as Spotify for access to more than 30m songs, earning royalty payments for the big three record labels that own licensing rights to most of the world’s popular music. 

Earlier this month, rival Warner Music said it made $1bn from streaming in 2016, powering the number three music company to its highest full-year revenues in eight years.