TheChek News Flow

Ray-Ban Maker Luxottica to Merge With Lens Company Essilor, Creating $49 Billion Eyewear Giant

French lens maker and Italian maker of Ray-Ban and Oakley brands had been seen on collision course

In Snap IPO, New Investors to Get Zero Votes While Founders Keep Control

Snapchat messaging app creators Evan Spiegel and Bobby Murphy are expected to retain more than 70% of voting power; pre-IPO investors get less-powerful voting shares

Like many technology entrepreneurs, the founders of Snap Inc. want to retain management control of the virtual-messaging company, even as they sell shares to the public.

In one respect, the men are going further than tech firms typically do: Investors won’t get any voting power with shares purchased in Snap’s initial public offering, according to people familiar with the matter.

That leaves key decisions, such as the makeup of the board, primarily to Evan Spiegel and Bobby Murphy, co-founders of Snap, the owner of the disappearing-message app Snapchat. The two are expected to hold more than 70% of the voting power despite owning roughly 45% of the stock, the people said.

Companies with multiple classes of stock typically give IPO investors fewer votes per share than they give to founders, executives and early private investors.

The power of the “supervoting” shares is typically diluted over time as new shares are issued. But Snap’s decision to sell nonvoting shares is extreme. Messrs. Spiegel and Murphy’s proportional voting control wouldn’t materially change when new shares are sold because the common stock doesn’t have voting rights.

The setup evolved from a similar arrangement Snap had with its private investors, who received nonvoting shares in Snap’s recent private funding rounds, according to the people familiar with the matter. The pre-IPO investors will receive voting shares with less power than those held by the two founders, the people said.

Mr. Spiegel has considerable leverage as Snap plots its IPO, which could come as soon as March and value the business at between $20 billion and $25 billion, people familiar with the matter have said.

The company’s bankers and executives see the 26-year-old as a selling point to investors and plan to portray him as a visionary who knows how to create products for his coveted millennial peer group, The Wall Street Journal has reported.

The recent scarcity of tech IPOs could work in Mr. Spiegel’s favor. In 2016, 26 technology companies went public on U.S. exchanges, raising $4.3 billion, the lowest number and dollar volume since 2009, according to Dealogic.

“If you’re the only supply in the market, you’re well positioned to dictate the terms,” said Triton Research LLC Chief Executive Rett Wallace, whose firm collects and analyzes data on private companies.

Family-run companies in media and other industries have long used different classes of stock to keep control. At News Corp, which owns Dow Jones & Co., publisher of The Wall Street Journal, Rupert Murdoch and his family maintain greater influence through a dual-class setup. Class A shares that make up about two-thirds of the equity base have no voting power, while Mr. Murdoch and his family trust hold about 39% of the Class B voting shares.

Many tech companies prefer the setup because it allows them to innovate without risking a shareholder revolt. And such structures can thwart activist investors, who sometimes try to rally other investors to vote out a company’s board.

Between 2012 and 2016, roughly 19% of U.S. tech firms that went public did so with dual-class structures—more than double the share over the prior five-year period, according to data assembled by University of Florida Professor Jay Ritter. In 2016, 21% of tech firms went public with dual-class structures, down from 37% in 2015. Around 11% of all non-tech U.S.-listed IPOs used dual-class structures in 2015 and 2016.

Some big investors contend that dual-class structures unfairly remove public shareholders from the decision-making process. The California Public Employees’ Retirement System, the largest U.S. public pension fund by assets, recommends companies adopt a “one share, one vote” structure. Last month, Calpers sued to block Barry Diller’s IAC/InterActiveCorp from issuing nonvoting stock. Gregg Winiarski, IAC’s general counsel and executive vice president, said in a statement the lawsuit is without merit.

Snap decided to create this nonvoting share class at the outset to be transparent with investors that the founders wanted to stay in control for the long term, rather than seek to make such a change later, according to people familiar with the process.

The setup includes some features meant to protect public investors. If the founders’ ownership of the outstanding stock falls below around 30%, all shares automatically convert into common stock, according to people familiar with the deal. If either founder dies, his shares cannot be transferred, the people said.

The use of multiple voting classes doesn’t seem to have damped interest in tech offerings. The difference in post-IPO performance between dual-class companies and non-dual-class companies isn’t statistically significant, both among tech companies and all U.S. listings, according to Prof. Ritter.

The 2004 Google Inc. IPO has served as a model for other tech companies. Ahead of the offering, founders Larry Page and Sergey Brin said the structure would protect the company’s “ability to innovate and retain its most distinctive characteristics.” Messrs. Page and Brin, along with the company’s executive management team and directors, controlled more than 60% of the voting power after the IPO.

In 2014, Google, now known as Alphabet Inc., changed its structure and added a new class of nonvoting shares that would keep control of Google with Messrs. Page, Brin and Executive Chairman Eric Schmidt after the company issues more stock. As of April, the three men had 59.6% of the voting power of the company’s outstanding stock, according to a regulatory filing.

Facebook Inc. has moved in a similar direction. The company, which went public with a dual-class structure in 2012, last year said it would create a new class of nonvoting stock to allow Chief Executive Mark Zuckerberg to maintain control.

The move came several months after Mr. Zuckerberg informed the company’s board that he planned to donate 99% of his wealth to the Chan Zuckerberg Initiative LLC, an entity he created with his wife to donate to nonprofits and make private investments toward causes such as curing disease and education. Absent this change, Mr. Zuckerberg would have been likely to lose control over time as he donated his Facebook shares.

Investors have sued Facebook over the change. “Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders,” a spokeswoman said.

FT Confidential Research data predict rising sales, though tax increase will drag

Our monthly and quarterly surveys point to robust demand for vehicle purchases among Chinese consumers, with notable strength among third-tier city residents.

We nonetheless expect sales growth to slow this year. Strong 2016 sales partly reflected front-loaded purchases by consumers in expectation that tax breaks would be removed.

Volkswagen remained the most popular brand in our latest quarterly Consumer Brands Survey, though subsidiary brand Audi has eroded its lead over the past year.

Monthly and quarterly consumer survey data from FT Confidential Research point to another year of robust car sales in China. A reduction in a government tax break may slow sales growth from the double-digit increase recorded in 2016, but our data indicate continued strong demand, particularly in second- and third-tier cities.

Our measure of car buying sentiment among Chinese consumers hit an eight-month high in December, on a three-month moving average basis. In 2016, car buying sentiment was as strong as it has ever been, averaging 56 (where any reading above 50 indicates positive sentiment).

Sentiment has usually been strongest in first-tier cities (see chart), reflecting higher incomes that support demand for vehicle upgrades, bolstered by expectations that city governments will tighten restrictions on non-local vehicles to control congestion in the country’s biggest urban centres.

But demand in lower-tier cities has also strengthened. Our December survey found an improvement in third-tier cities, with the tier’s sub-index overtaking that for second-tier cities for the first time in 33 months.

Furthermore, there was a striking fall in the percentage of second- and third-tier city residents saying they did not plan to buy a car in the coming 12 months in our quarterly Consumer Brands Survey (see chart).

Building on a bumper year

Will this mean another strong year for car sales? Much hinges on government policy. Passenger vehicle unit sales rose 13.7 per cent last year to a record 24.4m, according to the China Association of Automobile Manufacturers (CAAM), including a 44.6 per cent increase in Sport utility vehicle (SUV) sales (see chart). We expect industry sales growth to slow but remain in the high single-digits in 2017.

Sales of vehicles with engines of 1.6 litre and under rose 21.4 per cent last year, accounting for 72.2 per cent of total passenger vehicle sales, up from 66.5 per cent in 2013. Sales of vehicles with smaller engines were boosted by a cut in purchase tax from 10 per cent to 5 per cent in October 2015 — we believe our Auto Purchase Sentiment index rose in the final months of 2016 on expectations that this cut would be reversed entirely. This was particularly true in third-tier cities and below, where smaller vehicles are more popular. 

In fact, the government only raised the tax rate to 7.5 per cent. This increase, plus the likelihood that some purchases that might have been planned for this year were brought forward into 2016, will weigh on auto sales growth this year.

Yet, by following the same logic, the slowdown may not be as sharp as some expect. The Ministry of Finance has signalled plans to restore the purchase tax to 10 per cent in 2018, which should mean further front-loaded purchases this year.

Volkswagen leads brand pack

Shrugging off the emissions scandal, Volkswagen remained the most popular brand among Chinese consumers in 2016, although its lead was eroded by its own Audi marque (see chart).

We believe this reflects increased demand to upgrade to luxury vehicles. Other German brands also gained in our survey. Mercedes-Benz may have delivered more cars globally in 2016 than rival BMW, but the latter was the more popular brand in our survey, up 1.7 percentage points year on year.

Indeed, German brands performed very well in our survey, rising 2.8 percentage points year on year as a group, while the popularity of Chinese brands slid 1.7 points over the same period.

Republican warns carmaker on Mexico plant and complains Germans do not buy Chevrolets

Donald Trump has threatened German carmaker BMW with a 35 per cent tariff on imports to the US from a new facility in Mexico as he escalated tensions with Europe ahead of his inauguration as US president on Friday.

Mr Trump’s warning, made in an interview with German newspaper Bild, is the latest in a string of attacks on carmakers that manufacture in Mexico, including General Motors and Toyota.

The US president-elect also complained in Bild that Germans do not buy Chevrolets in similar numbers as German brands, such as BMW and Mercedes-Benz.

However, Chevrolet, owned by GM, ceased selling all but a few of its models in Europe in 2015. GM’s European brands Opel and Vauxhall also outsell Germany’s BMW and Mercedes-Benz in Europe.

BMW said on Monday that its new plant will cater “for the world market”, adding that the company “feels right at home in the US”, where it supports more than 70,000 jobs.

Only a few days earlier, BMW board member Ian Robertson said its facility in San Luis Potosi was for global production, and would not need to sell to the US.

“It’s a full-blown operation to produce cars for anywhere in the world,” he said at the annual motor show in Detroit, in anticipation of criticism from Mr Trump.

“The plant is capable of making right-hand drive, left-hand drive, various models, various derivatives, so when we know what we need to know, then we can decide where it goes. We need the capacity anyway.”

When asked if the plant could survive without selling any models to the US, he said “absolutely”.

Separately, when asked what Mr Trump could do to make sure German customers bought more American cars, Germany’s economy minister Sigmar Gabriel said on Monday: “Build better cars.”

He added that the US car market would be worse, weaker and more expensive if tariffs were imposed.

Matthias Wissmann, president of German car industry body VDA, said the US would “shoot itself in the foot” by imposing tariffs on imported cars.

“For the German manufacturers, the United States is not only the second-largest export market, but also an important production base, used to supply the world market,” he said.

BMW’s insistence that it would not need to sell models in the US is highly unusual, with almost all Mexican plants heavily dependent on US sales.

Mexico’s car industry has grown on the back of the North American Free Trade Agreement, which gives it access to the US and Canadian markets.

The country produces 3.3m cars a year, with 82 per cent of its 2.7m exports going to either the US or Canada.

But Mr Trump has called for a renegotiation of Nafta, saying it harms US manufacturing jobs.

Fiat Chrysler chief executive Sergio Marchionne has said it would be too expensive to reconfigure some of the company’s plants in Mexico if they faced tariffs with the US, their main market.

As a result, some facilities may end up closing, he said last week.

But BMW believes it can be more flexible. Its plant will open in 2019 and make 3-series sedans for the global market, coming alongside existing production in Germany and China.

BMW already has a site in the US in Spartanburg, South Carolina, which makes more than 400,000 cars a year including the X5 SUV.

It is the company’s largest plant anywhere in the world, supporting 70,000 jobs, and it is the single biggest exporting plant in the US, according to the group.

“The [US] Department of Commerce is regularly using us as an example of how to export,” said Mr Robertson, adding that the group exported $10bn worth of vehicles a year from the US and is investing a further $1bn into the plant.

The 80 A320neo order is valued at $8.6 billion, flynas Chairman Ayed Al Jeaid said at press conference in Riyadh on Monday.

The order is for 60 A320neos and an upgrade of an existing order for 20 current model A320s to neos, an Airbus spokesman confirmed.

The agreement also includes purchasing options for a further 40 A320neo jets, according to flynas.

Reuters reported last week that Flynas, partly owned by Saudi billionaire Prince al-Waleed bin Talal's investment vehicle, had agreed to buy more than 60 A320neos.

Delivery of the 80 A320s will take eight years from 2018, according to an Airbus statement, likely to give flynas one of the largest Middle East budget airline fleets

The order means Airbus has beat rival Boeing (BA.N) to replace and expand flynas' fleet of 27 leased A320 jets.

Flynas, which launched as Nas Air in 2007 and first turned a profit in 2015, is facing increasing competition in Saudi Arabia, its primary market.

Start-up SaudiGulf Airlines and Saudi-owned, Egypt-based Nesma airline were granted domestic operating licenses in 2016. State-owned Saudi Arabian Airlines has announced plans for its own budget carrier, Flyadeal, to launch in mid-2017 with a target of 50 jets by 2020. Qatar Airways-owned Al Maha is waiting for a domestic Saudi operating license.

The merger makes sense if Luxottica’s founder bows out gracefully

Stepping back is tough for entrepreneurs, whose temperament inclines them to push forward. A €50bn merger with Essilor gives 81-year-old Leonardo del Vecchio, founder and executive chairman of Luxottica, a chance to retire. The logic of the deal is elegant: the first group specialises in sunglasses and spectacle frames, the second in lenses. It is up to Mr del Vecchio to make his eventual exit equally stylish.

Genuine mergers of equals are as rare in real life as Hogwartian beasts such as Bowtruckles and Occamies. The Italian and French groups nevertheless look closely matched. Luxottica’s enterprise value before the deal announcement was only €300m higher than Essilor’s at €24.7bn. Sales are heftier and margins lower, albeit partly due to tougher accounting. Neither company has agreed to pay a control premium.

Luxottica shareholders would get more of the combined equity, based on average prices over the past three months. But Essilor investors have the whip hand. Mr Del Vecchio has agreed to limit his family’s voting rights in the combined group to 31 per cent, despite a 38 per cent economic stake.

Cost synergies have a net present value of just €2bn (or €300m a year, the companies estimate), calculated conservatively. Market optics are friendlier. The capitalisation of the pair jumped €4.8bn, with three-fifths of the move in Essilor’s shares. That implies investors believe the combination can deliver top-end synergies of €600m a year. Half would be marketing synergies, whose existence sceptics doubt as much as that of the Demiguise, a JK Rowling creature prone to vanishing.

The grand vision of Hubert Sagnières, Essilor’s chairman and CEO, concerning the merged group’s potential to bring stylish eyewear to the whole of humanity may evaporate too. Potential for cross-selling — and the good old backloaded razor-and-blades pricing strategy — is glaring.

If there is a plank in the market’s eye, to wax biblical, it may have obscured antitrust and managerial issues. The EU’s antitrust authorities may truculently decide eyewear is one market rather than separately siloed frames and lenses. Mr del Vecchio may find it hard to relinquish the chairman and CEO role he will share pro tem with Mr Sagnières. Absent such problems, the future’s so bright you gotta wear shades.