August 1, 2016
MAKOR - SABMILLER / AB INBEV - Our thoughts following the SAB board recommendation of the cash consideration
We note the statement from the SABMiller board that they are unanimously recommending the cash consideration and that SAB shareholders vote in favour of the UK Scheme at the UK Scheme Court Meeting and in favour of the SABMiller Resolutions at the SABMiller General Meeting.
As per the Co-operation Agreement (dated 11 November 2015), the voting requirements are as follows, but we note, that the SAB board have also today announced their intention to propose to the UK Court that Altria and Bevco be treated as a separate class of shareholders and allow other SABMiller shareholders to vote on the revised £45 offer separately:
(i) UK Scheme Court Meeting – 75% of SAB shares present and voting either in person or by proxy provided that there is a quorum of at least 50% of outstanding SAB shares attending and voting at the meeting.
(ii) SABMiller General Meeting – 75% of SAB shares present and voting (the SABMiller General Meeting will be held immediately after the UK Scheme Court Meeting.
It remains undecided if the UK court will determine that the vote should be split into two classes, and, if a decision is made to split the vote, whether the voting threshold will then be 75% of disinterested shareholders (provided that a majority of disinterested SAB shareholders - excluding Altria and Bevco - are present and voting at the meeting).
We spoke to the Takeover Panel who said that the decision to split the vote is a decision for the Court. He believes that the shareholder voting requirement is likely to be the same for both classes of shares, if a decision is made by the Court to split the vote (i.e. 75% of SAB shares present and voting either in person or by proxy provided that there is a quorum of at least 50% of outstanding SAB shares attending and voting at the meeting).
Now that the SAB board recommendation has been obtained, our source close to ABI confirmed that ABI expect the integration planning to recommence as soon as this weekend. We remind investors that ABI are highly committed to the transaction and are said to be providing “incentives” to their employees to complete the transasction in an October/November timeframe.
We currently expect the Belgian Offer Document to be published shortly now that all the pre-conditions have been satisfied and for the UK Scheme Document to be published shortly after a decision is made by the UK High Court. We understand that the Court only meets on Mondays and that submissions have to be made by the previous Wednesday in order to get on the agenda for the following Monday. Thus, at the very earliest, SAB have until Wednesday, 3 August to lodge their request with the UK court in order to get on the Court agenda for Monday, 8 August.
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Uber abandons car-hailing battle with China rival Didi Chuxing
Uber has agreed to merge its Chinese operations with those of rival Didi Chuxing, throwing in the towel on its costly battle for the Chinese ride-hailing market.
Under the terms of the deal, set to be announced in coming days, Didi will acquire all of Uber China’s operations and investors in Uber China will get a 20 per cent stake in Didi, according to two people close to the transaction.
Didi, which is China’s largest ride-hailing company, will also invest $1bn in an equity stake in Uber’s global business, in a deal that brokers a truce between the two of the most fiercely competitive car-hailing companies in the world.
The two rivals have poured billions of dollars into subsidies for passengers and drivers as each has sought to gain market share in China.
Uber’s decision follows reports of mounting pressure from investors who were concerned the San Francisco-based company was wasting money in a market it could not win.
The idea of a tie-up was first aired by Travis Kalanick, Uber’s chief executive, more than two years ago when he met Cheng Wei, Didi’s founder, in Beijing.
As the fight for market share has heated up, both Uber and Didi have been on a fundraising spree. Didi raised more than $7bn in debt and equity in June, a month after a $1bn investment from Apple, while Uber raised $3.5bn from Saudi Arabia’s sovereign wealth fund around the same time.
The unprecedented scale of the fundraising has also made clear how costly it would be for both sides to continue the battle.
Discussions about a deal only got serious during the past few weeks, after the fundraisings were complete, according to a person close to the transaction.
Didi’s new alliance with Uber could prove awkward for Lyft, Uber’s main rival in the US. Didi is an investor in Lyft, and the two companies have linked their apps so that Didi’s Chinese passengers can summon a Lyft car while travelling in the US.
Mr Kalanick is also chief executive of Uber China and has personally overseen its growth, spending nearly one in five days in the country last year.
Uber’s strategy in China has relied on heavily subsidising its rides, and the company was losing more than $1bn a year there as it gave bonuses to drivers and discounts to passenger.
As Uber’s market share grew, China became Uber’s biggest market in terms of daily rides, surpassing the US.
While Uber has often stated that it has roughly 30-35 per cent share of the China ride-sharing market, the terms of the merger appear to reflect Didi’s own calculations that its market share is roughly 80 per cent.
Didi says it provides 14m rides a day and has 300m users, mainly in China. Uber has not released comparative figures.
The merger is reminiscent of a similar consolidation that created Didi in February 2015, when Didi Dache and Kuaidi Dache — having spent hundreds of millions of dollars in subsidies to woo users — abruptly announced a $6bn merger, forming Didi Kuaidi, later renamed Didi Chuxing.
One analyst with knowledge of the situation said that both Uber and Didi were under pressure from their financial backers to do something about the subsidies they were paying.
The deal comes on the heels of new regulations last week that legalised the online ride-hailing industry across China.
Both companies may have been awaiting that development to push ahead with the merger, with the new framework giving the industry a more solid legal footing in China.
Uber is the biggest shareholder in Uber China, whose other investors include Baidu, the Chinese search company, and HNA, the Chinese travel conglomerate.
News of the deal was first reported by Bloomberg News. Rumours of a transaction were widespread on Chinese social media over the weekend, as an alleged draft blog post by Mr Kalanick about the deal circulated online.
Uber declined to comment. Didi did not respond to multiple requests for comment.
QE-forever cycle will have an unhappy ending
A combination of QE and the prospect of fresh fiscal stimulus won’t generate a recovery
Policy makers have chosen to ignore the central issue of debt as they try to resuscitate activity.
Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product (“GDP”), an increase of more than 20 percentage points.
Over the last eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth. Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households.
If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest.
Financial markets are now haunted by high debt levels which constrain demand, as heavily indebted borrowers and nations are limited in their ability to increase spending. Debt service payments transfer income to investors with a lower marginal propensity to consume. Low interest rates are required to prevent defaults, lowering income of savers, forcing additional savings to meet future needs and affecting the solvency of pension funds and insurance companies.
Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.
Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted.
Sluggish demand, slowing global trade and capital flows, demographics, lower productivity gains and political uncertainty are all affecting activity. Low commodity, especially energy, prices, overcapacity in many industries, lack of pricing power and currency devaluations have kept inflation low.
In the absence of growth and inflation, the only real alternative is debt forgiveness or default. Savings designed to finance future needs, such as retirement, are lost.
Additional claims on the state to cover the shortfall or reduced future expenditure affect economic activity. Losses to savers trigger a sharp contraction of economic activity. Significant writedowns create crises for banks and pension funds. Governments need to step in to inject capital into banks to maintain the payment and financial system’s integrity.
Unable to grow, inflate, default or restructure their way out of debt, policy makers are trying to reduce borrowings by stealth. Official rates are below the true inflation rate to allow over-indebted borrowers to maintain unsustainably high levels of debt. In Europe and Japan, disinflation requires implementation of negative interest rate policy, entailing an explicit reduction in the nominal face value of debt.
Debt monetisation and artificially supressed or negative interest rates are a de facto tax on holders of money and sovereign debt. It redistributes wealth over time from savers to borrowers and to the issuer of the currency, feeding social and political discontent as the Great Depression highlights.
The global economy may now be trapped in a QE-forever cycle. A weak economy forces policymakers to implement expansionary fiscal measures and QE.
If the economy responds, then increased economic activity and the side-effects of QE encourage a withdrawal of the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.
If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable as the Japanese experience illustrates.
Economist Ludwig von Mises was pessimistic on the denouement. “There is no means of avoiding the final collapse of a boom brought about by credit expansion,” he wrote. “The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Satyajit Das is the author of A Banquet of Consequences, published in North America as The Age of Stagnation
Satellite operator Inmarsat confirmed on Monday it has no plans to buy smaller rival Avanti Communications.
There had been reports over the weekend speculating the two satellite operators were in talks for a potential takeover, following Avanti’s announcement in July that it was entering a formal sale process of its shares.
Inmarsat said that it had been approached by Avanti but has withdrawn from the process:
Inmarsat confirms that it was contacted by Avanti’s advisers following the announcement by that company of a strategic review and formal sale process on 11 July 2016, and responded to that contact. Inmarsat confirms it has withdrawn from Avanti’s announced process and it is not considering an offer for the shares of Avanti.
Avanti announced that it needs to raise at least $50m of equity as growth slowed down in emerging markets and will explore opportunities including a corporate transaction such as a merger or takeover.
New optionality on BMPS emerging; positioned with BPER/UCG
Additional private options?…
News flow on BMPS continues to intensify and new reports (Reuters, July 28) suggest that a capital raise for BMPS is being arranged by various banks considering a €5 bn underwriting. This is, we believe, contingent on a disposal of the entirety of BMPS NPL stock.
Full Note Attached
* Stress test was a sideshow The main event was the recapitalisation and rescue of
Monte (MPS), announced mere minutes before the publication of the EBA/ECB stress
test. One bank performed quite miserably, Monte (MPS) of course, and the other 50
banks performed fine (to varying degrees). With a Monte rescue in place, the stress test
itself is something of an afterthought. No major accidents. No major surprises.
* All about Monte On average, the adverse scenario burnt through 340bps of CT1, taking
the average bank down from 12.6% core tier 1 to 9.2% at end 2018e. There was no pass/
fail mark to this test, but still Monte managed to ‘fail’ spectacularly. The adverse scenario
burnt through >14.5% of CT1, taking the 2018e CT1 ratio down to -2.2%. A
recapitalisation plan was announced shortly before the stress test results release. MPS
will receive €5bn of underwritten capital, and will also dispose of the entire stock of
€27.3bn NPLs. No bail in. No bail out. A complex transaction, and one that carries
execution risk. We don’t think the market can accept this as a done deal. See our full
report on MPS.
* 50 shades of grey The other 50 banks in the test all performed acceptably. There are
unlikely to be any major market concerns. At the stressed end of the list, four banks drop
below 7% full CT1 in the adverse scenario: Allied Irish Bank, Bank of Ireland, Raiffeisen
Holding (restructuring plan already in place) and Popular (capital increase just completed).
Of the larger systemic banks, Barclays edges below the guideline 7.5% hurdle (ie 5.5% +
2.0% buffer), but in any case is not affected by the SREP. Other systemically important
banks clear their hurdles. Deutsche Bank’s leverage ratio drops below 3% in the adverse
scenario. As this is their relevant constraint on capital, that could cause some concern.
Interestingly, no AT1 bond would have triggered loss or conversion.
* What next? Simply, we watch and wait on Monte. There is very little anywhere in the
stress test results for the market to get excited about. There are some minor concerns for
a handful of banks (Deutsche Bank, Raiffeisen, Barclays in particular). Some banks also
perform very well (Nordics, ISP, KBC, Lloyds). However, nothing that should change
views in either direction. It should be no surprise that Deutsche Bank found the leverage
ratio a challenge, or that Nordic banks are well capitalised. Instead, the market will focus
on the execution risks around MPS and the credibility of the solution on the table. The
ongoing question of execution risk around MPS reinforces our preference for ‘safe core’
in both equity (BNPP, DNB, Erste, Lloyds, ING) and credit (Lloyds, Credit Arigole, UBS)
What did the 2016 stress test really tell us? We believe the progress made on ‘fixing’ MPS has more relevance for the Italian banks than their performance in the stress test. The lack of a system-wide solution to the NPL problem was expected, but means that the stability of Italian banks likely remains brittle. Elsewhere, Deutsche Bank’s performance in the stress test was somewhat weak, but arguably better than feared. The Benelux arguably saw the biggest negative surprises in terms of the reductions to CET1 ratios – potentially putting pressure on dividend expectations.
Focus on Italy: With Atlante buying MPS’ NPLs at 33c, this implies a CET1 erosion for Italian banks of 70-150bps, with UniCredit most notably below the SREP requirement. However, the MPS ‘fix’ may be difficult to roll-out across the sector. The system still looks vulnerable should credit quality deteriorate.
Deutsche Bank in limbo: With an equity valuation of 0.3x TBV 2016e, Deutsche Bank was clearly in focus for the stress test. But frustratingly little clarity has been added here. The 7.8% CET1 ratio in the adverse scenario is better than the last stress test – but only marginally above the ECB’s threshold (5.5% + 2% G-SIB = 7.5%). Similarly, a 3.0% leverage ratio in the adverse scenario is likely to be viewed as only just ok.
Negative surprises for Benelux: The end-point CET1 ratios all look acceptable here, but the magnitude of declines in the CET1 ratios is likely to raise some eyebrows (ABN – 5.9%, ING –3.7%, KBC – 3.6%). The knock to the safe-haven Benelux banks is surprising, even if partly explained by the EBA’s rates/GDP scenario being harsher there.
* The EBA has published its biennial stress test; the outcome is benign with average CET1 at 9.2% in the adverse scenario
* The results strengthen the regulator’s hand in pushing back on Basel IV. We might also see lower CET1 targets in 2016 SREP
* Banks that looked weakest have already taken, or are in the process of taking, action. Some welcome relief for the sector
CS
Air Liquide -2-3% No's light, Segment miss across gas and services
Amundi +2% AuM up 5% y/y, Net inc EU148m cons 130m, commentary upbeat
Amec M/P Wins Thai Oil’s Clean Fuel Project contract
Anglos M/P Set to ‘Unbundle’ Kumba, CEO Tells Telegraph
Banks +2-3% Following results of the EBA stress tests
Cobham +1-2% Asks headhunter Korn Ferry to find replacement for CEO
Fidessa +1-2% Numbers slightly ahead of market expectations
Fraport -2% Selling stake in Thalita, maintains 2016 outlook for EBITDA
Fuchs Petro M/P Numbers and outlook inline with market expectations
Heineken -1% H1 profit 977 vs 1.01bn, organic vols 4.7% vs cons 5.4%
Intertek UNCH Revs/Profit light, org growth inline
Keller -2% H1 revenues lower, Strong perf from North America and EMEA
Legrand +1% Sales inline, op profit 2% ahead, guidance unchanged
MorphoSys M/P H1 and guidance inline with market expectations
Miners +1% Copper UNCH, Brent +1.25%, Iron Ore +2.5%, China -1.14%
Parmalat +2-3% H1 revenues 1% ahead, EBITDA 6% ahead, confirms guidance
Senior -2% 1h revs 450.5m vs cons 429m, expect a stronger 2h
Veolia Env +1% EBITDA inline, targets for 2016 and 2018 confirmed
Ultra Elec M/P H1 revs ahead £366m vs cons £360m, confident on FY
Will Hill +1-2% Will unveil plans to reinvigorate its online business
MF
*VIVENDI-CEO says Mediaset not the only poss partner,t/o denied.....U/C
*VEOLIA-Rev 11.96b(11.95),Net 251m(291),Confirms 2016 tgts..........+0.5%
*HEINEKEN-Rev 10.1b(10.3),Pft Ex 977m(1.01),OR 4.7%(5.4),Beer wk....-2%
*AIR LIQUIDE-Rev 8.295b(8.32),Op Inc 1.38b(1.43),Cap Inc Sep/Oct....-2%
*FUCHS-Q2 585.8m(571),Ebit 97.5m(92),NI 67.9m(64),confirms o/lk.....+1.5%
*LEGRAND-Rev 2.45b(2.448),Net Inc 283.5m(284),Confirms 2016 tgts....+2% *
FRAPORT-Sells Thalita stake to Qatar,generate €30-€40m gain........-0.5%
*POSTE ITALIA-Italian Treasury to place a further 29.7%(Mid Oct)....-1%
*TUI-CEO says won't cut uk prices after Brexit - Sonntag............+1.5%
*S.E.B-CEO says double digit growth continues in China..............+1%
*MORPHOSYS-Rev 24.3m,FY guidance 47-52m(48),Ebit -58/-68m(-64)......+0.5%
JPM:
ABN Relative loser vs KBC and ING on EBA stress test -1%
ABN Relative loser vs KBC and ING on EBA stress test -1%
AIR LIQUIDE Sales miss, net income 1% better,clarity on cap raise for Airgas+1%
BURBERRY Acquired remaining 15% interest in its China Retail biz unch
DBK Some relief post EBA stress test +3%
HEINEKEN Small lfl miss vs cons but better margin implies FY upgrades +1%
INTERTEK Broadly inline. Op profit 1% ahead vs JPMe +1%
LEGRAND 2.5% EBIT beat on a 50bps margin beat vs cons, confirms FY tgts +1%
RBS Relative loser in UK on EBA stress test -2%
UK FOOD MRW announcing px cut of >1,000 products -1%
VEOLIA operationally inline, all targets reiterated unch
shore
KELLER - rev +12%,oper.pft -6%,very difficult trading in APAC,FY at low end.-2%
JAMES HALSTEAD - PBT +7.5%,trading in H2 was challenging,FY results inline.UNCH
TRINITY MIRROR - grp rev +29.9%,oper.pft +44.3%,print environment chal'ging.+1%
SENIOR - H1 pbt 32.6m.Divi 1.95p.Expects H2 to be stronger than H1..........+1%
IAG - Qataris up stake to 20.01%.No intention to increase further..........UNCH
ULTRA ELEC - H1 ptp 32.6m.Divi 14.2p.On track to meet fy expectations......UNCH
FIDESSA - H1 ptp 22.2m.Divi 14.3p.Sees Fy growth at H1 levels...............+1%
INTERTEK - revs +13.6% £1.2bn,oper.pft +13.1%,margins stable................+1%
EASYJET - Amsterdam-based pilots to strike on Monday morning...............UNCH
MORRISONS - cuts c.18% price cut to over 1,000 products....................UNCH