Europe’s Periphery Debt Market Welcomes New Member: France
Some investors are selling French government debt over concerns the country could leave the eurozone
Investors are once again selling the bonds of Europe’s peripheral economies amid political concerns. This time around, France has joined the club.
Some investors are selling French government debt, worried that the country will elect Marine Le Pen as its president, a candidate that has promised to take the country out of the eurozone. That has left French bonds behaving increasingly like their peers in the parts of Europe hit hardest by the 2011-12 sovereign-debt crisis.
It is quite a flip for Europe’s second-largest economy. After that crisis, French bonds traded with Germany’s. On Monday, a poll showing Ms. Le Pen comfortably in the lead for April’s first round of the presidential election drove yields on French 10-year bonds to jump to 1.064%. Yields rise as bond prices fall.
The spread with German bond yields hit 0.84 percentage point during the day on Monday, the highest in more than four years, before settling at 0.75 percentage point as European markets closed. Six months ago, this gap was only 0.22.
Also rising are Italian and Portuguese 10-year yields which are up by around 0.7 percentage point against Germany’s in the last six months. Greek yields have jumped.
The premium that investors demand for holding the debt of these nations over richer northern European economies like Germany and the Netherlands will continue to rise as a range of risks grow and the European Central Bank’s massive bond buying program buys less debt, investors say.
It could be French yields leading the charge higher this time. Analysts at Japanese bank Mizuho Financial Group, Inc. told their clients Monday that they should stop treating French government bonds on par with German or Dutch debt.
“France is in the driving seat” in eurozone bond markets, Francesco Garzarelli, co-head of European macro research at Goldman Sachs said in a recent research note.
To be sure, Southern European spreads were widening before concerns spiked over France. In Italy and Portugal, economic growth remains weak as bad debts burden banks. In Greece, concerns have resurfaced that officials will fail to secure new loans from European creditors.
But, in the eurozone, there is a history of selling in one country’s bonds that ripples out across weaker members of the currency bloc. France appears to now be acting in that role.
“If France was to leave, the viability of the remaining euro would be very difficult to justify,” said Neville Hill, co-head of global economic research at Credit Suisse.
The French presidential election takes place over two rounds this spring. Most experts and polling suggest Ms. Le Pen will fail in the election’s second round, as voters choose an “anyone but Le Pen” candidate. But international investors, in particular, are fretting about the possibility that the National Front’s candidate will pull off a Brexit-style surprise and shock markets.
A poll released Monday suggests Ms. Le Pen will win the first round of the vote, but lose in the second round, garnering 42% or 44% respectively against Emmanuel Macron and François Fillon, the two next most popular candidates. But Ms. Le Pen’s second-round polling support has been rising in recent months, causing volatility in European bond markets.
Within the 19-nation eurozone, investors always dump the bloc’s weaker economies and rush into stronger members like Germany whenever risks of a breakup of the currency emerge.
In 2012, the European Central Bank stemmed the fall in peripheral bonds by buying up billions of euros in this debt.
But ECB bond-buying has passed its peak.
Starting in April, officials will cut the amount of bond-buying they do every month from €80 billion ($84.89 billion) to €60 billion, as part of a broader trend of developed world central banks reducing their involvement in markets.
The program’s strict rules also mean that the ECB has to buy a smaller share of the debt of some of the neediest nations, chiefly Portugal. While ECB officials suggested last week that they may be increasingly favoring flexibility in these rules, investors remain worried that they hamper the bank’s ability to prop up peripheral debt.
“Without ECB support it’s hard to see how their spreads don’t widen up further,” according to Said Haidar, chief executive of the New York-based hedge fund Haidar Capital Management. Mr. Haidar is now betting against Southern European and French bonds.
Still, the ECB is unlikely to allow eurozone yields to reach 2012 levels again, investors say.
And not all of the periphery is looking shaky. Investors see the bonds of two peripheral nations, Spain and Ireland, as increasingly being on safer footing, just as they view French debt on shakier ground.
Spain’s 10-year bond yields are now around 0.5 of a percentage point above Italy’s, their most positive spread against Rome in five years. Ireland’s 10-year yields are now practically equal to France’s, yielding 1.047% and 1.035% respectively on Monday.
Investors are also finding bargains in the midst of Europe’s latest round of political turmoil, even in France. Since January, Adam Whiteley, portfolio manager at London-based Insight Investment, has bought French government debt while selling French corporate bonds, because he believes that the gap between the two has narrowed too much.
Also, most investors—particularly French ones—still believe it is unlikely that euroskeptic candidates like Ms. Le Pen will win power, and overcome Europe’s complicated electoral systems.
“I see the risk as limited,” said Frédéric Lamotte, chief investor at Indosuez Wealth Management. “From a portfolio point of view, generally, I don’t care.”
Apple claims Brussels breached its fundamental rights in tax case
Tech giant challenges fairness of demand to pay €13bn to Ireland
Apple is claiming that the European Commission breached its fundamental “right to good administration” when it demanded last year that the tech giant pay €13bn in back taxes to Ireland.
The legal argument was one of 14 so-called “pleas” lodged by the company in its appeal against the commission’s finding that a favourable tax regime granted by Dublin over 11 years constituted illegal state aid.
The pleas were published by the European Court of Justice on Monday, setting the stage for one of the biggest competition cases ever handled by the Luxembourg-based tribunal.
Apple’s two main arguments challenge the fairness of the commission’s investigation and maintain that Brussels made fundamental errors in its interpretation of Irish law and of the way in which the tech giant generated its profits.
Specifically, the pleas claim the commission “violated the principles of legal certainty and non-retroactivity”, failed to conduct “a diligent and impartial investigation” and breached the EU’s Charter of Fundamental Rights.
The iPhone maker says that by failing to give reasons for its decision, the commission infringed the company’s “right to good administration” under the charter, which guarantees impartial, fair and timely treatment.
One critic of Apple in Brussels said its resort to a “fundamental rights” defence was “hilarious”.
“There is no human right to receive tax subsidies,” said German Green MEP Sven Giegold, who sits on the parliament’s tax avoidance committee. “Even Apple does not stand above the law.”
Several other of Apple’s pleas relate to the commission allegedly misunderstanding Irish tax law and providing “self-contradictory” and poorly researched assessments of how the company attributes profits to its US headquarters.
Lawyers said the sheer range of Apple’s relatively experimental arguments reflected what an unusual test case this was for Brussels. “The [commission’s] tax ruling cases are novel, so the pleas are also novel,” said Philipp Werner, competition partner at Jones Day.
Margrethe Vestager, the EU’s competition commissioner, has dismissed claims that state aid rules are arbitrary or untested, pointing out that the EU has challenged corporate tax arrangements since the 1980s. In a recent speech in Ireland she said multinational companies were “pushing the boundaries of aggressive tax planning”.
Apple’s two Irish companies — Apple Sales International and Apple Operations Europe — hold the rights to make and sell the company’s products outside North and South America but pay very low tax rates as most profits are allocated to a head office not considered resident for Irish tax purposes.
Apple argues profits should be taxed in the US where its intellectual property is created although taxes are not paid until the profits are actually brought back to the US.
However the commission argued that the Irish tax rulings — letters outlining how Apple would be taxed in Ireland — in 1991 and 2007 artificially cut the company’s Irish tax bills to below 1 per cent of its European profits.
The Irish government is also appealing against the commission’s decision, using arguments which echo Apple’s logic.
The commission said it will defend its decision in court. Apple reiterated the statements that it made in January, when the commission’s decision was published, saying it paid a worldwide tax rate of 26 per cent.
The court hearing is expected after the summer.
Listed hedge funds: rescue me
The market does a poor job valuing alternative managers
Spare a thought for Mike Novogratz. Mr. Novogratz was a hotshot macro trader at Fortress Investment Group for more than a decade, before an unceremonious departure in late 2015 after heavy losses in his fund. When he left, Fortress repurchased his shares for $4.50 — well off the company’s 2007 IPO price of $18.50. But when SoftBank recently bought out all of Fortress for $8 a share, a 39 per cent premium to its undisturbed price, it was an indication that the market had failed to understand how to value Fortress.
Fortress was the first “alternative” manager to list its shares. Its performance in the subsequent decade hardly lived up to expectations. The primary reason was that its private equity funds have disappointed which, in turn, kept it from raising new funds. It infamously raised “gates” during the financial crisis to keep investors from redeeming their interests. Mr Novogratz’s macro fund collapsed.
Still, Fortress boasts $70bn under management which echoes a common complaint in the sector; considering its assets and earnings power it is wildly misunderstood. In a recent presentation, it argued that cash and investments on its balance sheet, as well as as-yet unrecognised performance fees, were worth more than $4 a share alone. This implies that before the SoftBank buyout, investors ascribed virtually no value either to its core management nor performance fees.
The day after SoftBank announced its rescue of Fortress, Och-Ziff, the other laggard among listed hedge funds, reported its fourth-quarter results. Its shares are off 90 per cent since its IPO. The fund paid a $412m settlement to US authorities over an African bribery scandal. Its flagship fund has seen its asset base shrink by 29 per cent in the last year.
Flagging hedge funds often just wind down. However, Och-Ziff announced a new incentive scheme to keep its star trader, James Levin, by granting him 39m shares that vest over five years. Dan Ochs, the firm’s founder, offered up to 30m of his own shares to limit dilution. The trick for listed funds: hang on long enough for a saviour who can take advantage of a cheap price.
https://www.wsj.com/articles/trump-backing-for-bayers-monsanto-deal-buoys-investors-1487592635 DJ Trump Backing for Bayer's Monsanto Deal Buoys Investors
By Christopher Alessi
FRANKFURT--Investors in Bayer AG have taken heart from President Donald Trump's apparent support for the German pharmaceuticals and chemicals firm's planned $57 billion takeover of U.S. seed giant Monsanto Co. and are cautiously optimistic the deal will pass regulatory muster.
Bayer, which reports full-year results on Wednesday, seems to have put the deal on firmer ground by reassuring President Trump last month that it is committed to investing in the U.S. and maintaining American jobs, investors and analysts said. Questions about Monsanto are expected to dominate Bayer's results, with analysts and investors seeking guidance on the takeover's status.
"They are getting closer and closer to completion," said Jim Nelson, a portfolio manager at Bayer shareholder Euro Pacific Capital. "The meeting with Trump was an incremental positive."
Mr. Nelson said that there is "still a lot of uncertainty and we have to see what happens with other mergers" under review by regulators world-wide.
Bayer shares are up roughly 20% since Mr. Trump won election in November. The company declined to comment for this article.
The Bayer-Monsanto deal is expected to face strict regulatory scrutiny in the U.S. and Europe. It comes amid consolidation in the industry, including planned tie-ups between Dow Chemical Co. and DuPont Co. and China National Chemical Corp.'s takeover of Swiss pesticide maker Syngenta Co.
Those deals are farther in the regulatory process and decisions on them could influence regulators' view of Bayer's bid for Monsanto, experts say.
Bayer Chief Executive Werner Baumann and Monsanto Chief Executive Hugh Grant met with Mr. Trump in New York on Jan. 11 to make their case for the acquisition amid uncertainty over whether foreign corporations in the U.S.--- and megamergers in general--could face greater scrutiny under the new administration.
The Trump team appeared encouraged by the discussion. Less than a week later a spokesman for the then-president elect lauded the deal and what he said was Mr. Baumann's commitment to retain Monsanto's full workforce of 9,000 and create 3,000 new high-tech jobs in the U.S.
Soon after, Bayer said that it had committed to add "several thousand" new high-tech positions and planned to invest around $8 billion in new research and development in the U.S. over the next six years.
"They've been managing it in a smart manner," said Fabrice Theveneau of Lyxor Asset Management, a Bayer shareholder, of the German firm's early efforts to sell the deal to Mr. Trump. "If you can get access to the 'Big Man' directly, it obviously helps," Mr. Thevenau said.
Markus Manns, a portfolio manager at Union Investment which is another Bayer investor, said Mr. Baumann's meeting with Mr. Trump indicates the president is "slightly in favor" of the deal. "There were no negative tweets, so that's a good sign," Mr. Manns said of Mr. Trump.
National regulators will ultimately decide the deal's fate. That could prove more complicated in Europe where there is more skepticism over the tie-up, said Ioannis Lianos, a professor and head of global competition law and public policy at University College London.
"This deal should be seen in the context of the megadeals in this sector, " Mr, Lianos said. "When the competition authorities see so much concentration they [become] concerned," he said. Being the last deal to face review, the Bayer-Monsanto merger will likely undergo greater scrutiny, he said.
The transaction would create the world's No. 1 supplier by sales of both seeds and pesticides, creating what Mr. Lianos called a "one-stop solution for farmers" that regulators could see as undermining competition.
Other analysts have concluded that Bayer, a world leader in crop chemicals, is largely complementary with Monsanto, which dominates the seed market.
"The deal has a fair chance to succeed on the regulatory issue," said Lyxor's Mr. Theveneau.
Bayer filed its regulatory application with the U.S. Department of Justice late last year and is expected to file with the European Commission this quarter.
If successful, the acquisition of Monsanto would reshape Bayer's portfolio around agriculture. Bayer's crop-science division would account for roughly half of group sales, up from about 30% in 2015, while health care would make up the other half, down from 70%.
That was initially a concern for many investors, a number of whom openly opposed the deal when Mr. Baumann first bid for Monsanto in May.
"We would have preferred for them to refocus on the pharma business," said Euro Pacific Capital's Mr. Nelson. "We are somewhat resigned to [the deal] at this point. The more time goes by, it seems more likely it will get done."
3G Capital has up to $15bn to deploy in next megadeal
Private equity group keen to do a takeover after Kraft Heinz’s failed bid for Unilever
3G Capital, the private equity group that spearheaded Kraft Heinz’s failed $143bn bid for Unilever, has up to $15bn to deploy on its next megadeal, according to several people close to the group.
3G, which frequently invests alongside Warren Buffett, is determined to identify and execute a major takeover soon following the collapse of the Unilever deal on Sunday, said two people briefed on the company’s situation.
New York-based 3G has raised $10bn in its latest fund and has the option to ask investors to contribute a further $5bn, added these people.
3G did not immediately respond to a request for comment.
Alongside cash from veteran investor Mr Buffett and its funds, 3G typically secures large amounts of debt to finance its deals by raising borrowings against a target company’s balance sheet.
This structure enabled 3G to contemplate Kraft Heinz’s $143bn bid for Unilever.
Kraft Heinz is jointly controlled by 3G and Mr Buffett’s Berkshire Hathaway, and the abrupt withdrawal of the US food group’s offer for Unilever was the first time the private equity company has been defeated in a takeover battle.
Kraft Heinz, noting strong opposition from the Anglo-Dutch consumer goods company to its bid, said on Sunday its “interest was made public at an extremely early stage. Our intention was to proceed on a friendly basis, but it was made clear Unilever did not wish to pursue a transaction.”
The failed tilt at Unilever revealed that 3G is ready to expand its reach beyond food, beverages and fast-food restaurants, the three consumer sector categories in which it has grown through its investments in Kraft Heinz, Anheuser-Busch InBev and Burger King, respectively.
3G-backed companies rely on acquisitions to allow them to increase their profitability since the group can impose strict cost discipline and streamline operations.
Jorge Paulo Lemann, the Brazilian billionaire and co-founder of 3G, regarded the acquisition of Unilever as an opportunity to use Kraft Heinz to generate significant cost savings with Unilever’s food business, while giving the private equity group a new foothold in household and personal care businesses, said people involved in the takeover battle.
The cash element of Kraft Heinz’s $50 a share offer for Unilever involved funds from 3G and Berkshire Hathaway, plus debt raised from capital markets.
The other 40 per cent of the consideration consisted of shares in the enlarged company.
Kraft Heinz’s bid for Unilever is likely to revive speculation the group could be interested in acquiring Mondelez International, the snack company that was split out of Kraft Foods in 2012. It has a market capitalisation of about $65bn.
Bill Ackman, the activist hedge fund investor who owns 5.6 per cent of Mondelez, has repeatedly floated the idea that the maker of Cadbury’s chocolate and Trident gum should sell itself to Kraft Heinz.
Kellogg, General Mills and Campbell Soup — which have market values of between $18bn and $35bn — are considered as potential acquisition targets for 3G by several analysts, who would expect any of these three to be rolled into Kraft Heinz.
However, given Kellogg and Campbell Soup have capital structures that would make it hard for a 3G-backed entity to buy either company unless a deal is friendly, General Mills is believed to be a more realistic takeover target.
One person who has spoken with 3G’s managing partners said recently the group has been looking at the possibility of setting up a “new platform”, which meant it could opt to acquire a company without rolling it up into Kraft Heinz.
In the personal care and household products category, potential takeover targets for 3G could include Colgate-Palmolive, Kimberly-Clark and Clorox. These three all have market valuations well below $150bn, which is what Kraft Heinz would likely have had to pay to win over Unilev
WHERE THE SECOND AVENUE SUBWAY WENT WRONG
American infrastructure projects often cost five to six times what they cost in other developed countries. Can we learn to be thriftier?
The FTSE 100 property group Hammerson saw profits drop by more than half to £317m in the year to December on a fall in the capital values of its shopping centres and retail parks.
The group said the drop, from £728m a year earlier, was partly explained by higher stamp duty in the UK and transfer taxes in Paris weighing on property prices, but also resulted from “weak trading and letting” at the Jeu de Paume shopping centre in Beauvais, France.
Hammerson, which focuses on retail property around Europe, said that adjusted profit — with valuation changes excluded — rose 9.4 per cent to £230.7m. The group plans to increase its dividend by 8.6 per cent to 13.9p a share.
David Atkins, chief executive, said:
During the year we have significantly grown and enhanced the portfolio, adding new retail space in faster-growth markets including Dublin, Leeds and Birmingham, and extending our presence in the European outlets market.
To fund these growth opportunities, we successfully refinanced over £1.2 billion of debt and executed our planned disposal programme, generating £635 million.
He also noted “UK retail headwinds and geopolitical uncertainty” but added that “I am confident that we have a resilient and adaptable business with multiple opportunities to drive similar levels of growth and therefore continue to deliver sector-leading income-focused returns.”
The group’s borrowing rose from 54 per cent to 59 per cent during the year. Net rental income was up 8.8 per cent to £347m, or up 2.2 per cent on a like-for-like basis.