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French Argue That The Deutsche Boerse/LSE Merger Could Create Clearing House Too Big To Fail

This is not, it has to be said, one of the strongest arguments against a financial sector merger that I’ve ever heard. The contention is that we wish to have reduced risk in the financial system: well, yes, we do. That’s why we’d all rather prefer that many of the banks will be a bit smaller than they are. Then one getting into trouble isn’t going to tank the entire economy. However, this same concern over scale doesn’t really apply to clearing houses. Quite the contrary in fact, we quite like them being large. We might even actually prefer just the one, monopoly, clearing house. Because any one getting into trouble means that it is going to be rescued. And if that’s so why not have that just the one which reduces the possibility of it getting into trouble?

This is, I think at least, rather more about how the French don’t want their own stock exchange operating company, Euronext, to be overshadowed by that merger of the Deutsche Boerse and the London Stock exchange. Indeed, the clearing house concentration appears to be just added on to give another reason why it shouldn’t go ahead:

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S’exprimant aux côtés de Michel Sapin, François Villeroy de Galhau a mis en garde contre la création d’une vaste chambre de compensation. “Il y a le risque en rapprochant les chambres de compensation au sein de Deutsche Börse-LSE de créer un opérateur de très grande taille qui pourrait être ‘too big to fail’”, a-t-il jugé.

No, my French isn’t all that good either so from the original report:

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French finance minister Michel Sapin and the head of the country’s central bank François Villeroy de Galhau Monday raised concerns about the merger of London Stock Exchange Group PLC and Germany’s Deutsche Börse AG.

Well, yes, although I’ve made my views on that French antipathy to the deal clear before:

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The French finance minister, Michel Sapin, is complaining about the planned merger between Deutsche Boerse and the London Stock Exchange Group. This is entirely unsurprising: France has a tendency to rather like market dominance when it is French companies doing the dominating and not to like it at all when it is foreign companies dominating French. This isn’t actually all that unusual among politicians in any country of course, but it does seem to become more apparent, more public, in the French attitude towards these things. The real complaint here seems to be that the not-French are just doing rather better at this dominance.

But that point about the clearing house:

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Speaking alongside Mr. Sapin, Mr. Villeroy de Galhau warned against the creation of a large clearing house.

“It could create an operator that is too big to fail,” Mr. Villeroy de Galhau said.

Clearing houses are, almost by definition, too big to be allowed to fail. Simply because of the disaster that follows if clearing does fail: we get back to something very like 2008 when no one actually knew how much they themselves owned because they just didn’t know who was going to be next to go bust. But here’s the thing about a clearing house: the larger it is the less likely it is to fail.

The credit risk in a clearing house is not the risk of the clearing house itself. Of course, someone can get the computer programming wrong (and you can devise other such scenarios yourself) and blow it up but the actual, real world, risk is that one of the users of the clearing house defaults. Fails to deliver, fails to pay for what has been delivered. And at that stage the usual system is that all other members of the clearing house chip in to cover the shortfall. If it’s a for profit clearing house then maybe its own equity and so on. OK: but look what happens the larger a clearing house becomes. The exposure to any one client becomes smaller. Thus the risk of the clearing house defaulting as a result of a customer defaulting recedes.

That is, oddly enough, we’re quite happy to have larger clearing houses. Positively desire them in fact: because the larger they are the safer they are. Thus I’m not sure I think much of this latest French complaint about the merger. But then I never really did think much of their complaining about it, as above.

Equity funds that promise to shield investors from market volatility attracted inflows for the 11th straight month in May, making them a marketing success story for the asset management industry but triggering warnings that they may not behave as expected in a future market downturn.

More than $10bn has now flowed into US-listed “low vol” funds this year so far, more than the total for the whole of 2015, with two BlackRock exchange traded funds accounting for more than half of the total raised.

These and similar funds say they have picked stocks that will fall less steeply than the market in a downturn — and go up less than the market during a bull run — but some investors expressed concern that their newfound size could change the behaviour of the underlying stocks.

“Low volatility stock funds are probably the most dangerous thing out there”, said Jeffrey Gundlach, founder of DoubleLine, the Los Angeles asset manager.

“The big problem in markets is always the same; not things that are known to be risky but things that are thought to be safe that turn out to be risky,” he said. “People that own them think that they don’t go down. It’s when you think it’s safe and it starts going down that you get mass selling.”

The research group Morningstar classifies 25 ETFs as low volatility funds, with $35bn in assets at the end of April, $9.8bn of which had been invested in the first four months of the year. The pace of inflows picked up sharply in February, after stock markets gyrated with fears of a global recession.

Money has kept being added, even though the Vix index of market volatility has fallen back close to a one-year low. The six largest low vol ETFs alone had further inflows of $1.6bn in May.

The $13.1bn iShares Edge MSCI minimum volatility USA fund from BlackRock, which has doubled in size in the past 12 months, has had inflows on all but three days so far this year. A $7.1bn sister fund that runs a minimum-volatility portfolio of non-US stocks has had inflows on every day but one this year.

Andrew Ang, head of factor investing strategies at BlackRock, said savers in low vol funds are less likely to sell in a panic if their fund is insulated from the worst of a market swoon, and he predicted demand for low vol funds would remain robust as long as the world remains uncertain.

“The times when minimum volatility strategies perform the worst is when there is no risk of Britain leaving the EU, no refugee crisis in Europe, Greece is all good, there is no Isis, no al-Qaeda, oil is back to $50 or $60, China is growing at double digits again and it is the 1970s ‘peace, man’ everywhere,” he said.

BlackRock also dismissed concern that inflows into low vol funds would change the dynamics of the underlying portfolios. Its US low vol ETF accounted for 0.03 per cent of the market capitalisation of the 198 stocks in its portfolio.

The valuation of the stocks in that portfolio, however, has risen above the average for the market this year, amid rising demand for defensive stocks more generally, potentially making them more vulnerable to a sell-off than previously, according to some investors.

Peter Tchir, managing director at Brean Capital, said the assumptions underlying the low vol label were based on “historical data and historical correlations, but so much money has flowed in that we could see a breakdown of these traditional relationships, particularly if they are held by nervous buyers who have only decided to stay in the market on the thesis that they will outperform”.

Earlier this month, Deutsche Bank identified low volatility as one of the most crowded trading strategies.

“Low volatility appears to be as crowded as it was during the financial crisis when investors simultaneously plunged into defensive, low volatility stocks,” analyst Javed Jussa and colleagues wrote in a research report.

Bacardi, Pernod Ricard Spar Over Rights to Rum Name

Big-money clash arises over who gets Havana Club brand in U.S.

SAN JOSE, CUBA—The distillery that converts Cuban molasses to Havana Club rum beneath palm trees here is about to undergo a major expansion.

A multimillion-dollar expansion of warehouses and bottling lines anticipates a reopening of the American market to the Cuban brand, said Asbel Morales, rum master at Havana Club International, a joint venture between the Cuban government and Paris-based distiller Pernod Ricard SA. “We just need to know when we can enter.”

But that very prospect has inflamed a decades-old battle between Pernod Ricard, the world’s second-largest spirits producer behind Diageo PLC, and Bacardi Ltd. over ownership of the Havana Club name.

Pernod says a 1993 deal with the Cuban government gives it rights to sell the Cuban-made rum around the world, including the U.S., where sales of the brand currently are blocked by the 1962 trade embargo.

Bacardi, started in 1862 by one of Cuba’s oldest families, says it owns rights to the brand after buying it from Havana Club’s founding family, the Arechabalas, who, like the Bacardis, fled Cuba when Fidel Castro’s government nationalized the island’s distilleries in 1960. The distiller has sold rum under the brand name and made it in Puerto Rico off and on since 1995.

As Pernod charges ahead with its distillery expansion in Cuba, Bacardi is ramping up its U.S. distribution and offerings of its Puerto-Rican-made Havana Club rum. Both have designs on the U.S. rum market, which accounts for about 40% of international sales.

“It is going to be an interesting battle,” said Fabio Di Giammarco, vice president of rum at closely held and family-controlled Bacardi.

Pernod spokesman Olivier Cavil said, “At the end of the day, if the embargo is lifted, the final judge will be the American consumer. What does he prefer: a Havana Club brand produced in Cuban tradition with pure Cuban sugar cane or a me-too rum produced in Puerto Rico?”

The trademark row, now in U.S. District Court in Washington, D.C., is just one of the challenges Cuba faces in the U.S. There are some 6,000 U.S. property claims worth more than $2 billion filed against the Cuban government, according to the U.S. State Department.

The Havana Club clash is the one of the most highly charged Cuban trademark disputes, and pits two big-name and well-financed distillers with broad U.S. distribution. Bacardi’s namesake rum dominates the U.S. market with a 30% market share, according to industry tracker Impact Databank. Outside the U.S., Bacardi faces tough competition from Pernod. Its Havana Club brand last year accounted for four million nine-liter case sales, up from 400,000 cases in 1994.

The conflict is commercial and personal: Bacardi family members lost their homes, and the company lost its distillery, to Castro’s government after the revolution. Its rum once was synonymous with Havana nights and Ernest Hemingway’s daiquiris.

Now, “very few Cubans even know about Bacardi,” said Guillermo Maestre Busto, a Havana resident surveying the company’s old Havana office building last month. “They just disappeared.”

The Pernod-Bacardi feud began in 1994. Before that, the family-led companies were partners. Pernod says it distributed Bacardi rum in several markets, including France. The relationship ended after Bacardi gained its own distribution system to compete against Pernod in 1992.

A year later, Pernod and the Cuban government struck their Havana Club partnership. Patrick Ricard, then the French company’s chairman, was transforming the company and needed a big-name rum like Havana Club.

Before completing the deal, Pernod determined Cuba held Havana Club trademarks in key markets, including the U.S., where the Arechabala family had let its trademark lapse in 1973, said Pernod’s Mr. Cavil.

The Pernod-Cuba partnership rattled the Arechabalas which, unlike the Bacardi family, had lost their rum business and livelihood. The Bacardis survived, having built distilleries in Puerto Rico and Mexico before Cuba’s revolution.

When Ramón Arechabala learned that Pernod had joined with Cuba, he protested in a letter, telling Mr. Ricard the trademark was “owned, as it has been for 60 years, by [him] and members of [his] family,” according to a copy of the 1993 letter. Mr. Ricard replied, saying the partnership was legal and his position prevented him “from adopting management decisions purely based on political considerations.”

Unable to afford a fight, the Arechabalas sold the brand to Bacardi. It soon manufactured a version of Havana Club for the U.S. using the Arechabala recipe. Pernod and Cuba’s Havana Club International sued Bacardi in the U.S. for trademark infringement in 1996, losing the suit. Later, in a separate matter, Havana Club International’s affiliate, Cubaexport, lost its U.S. trademark for the rum.

In January, the U.S. Patent and Trademark Office reinstated the Cuban government’s trademark for Havana Club. The U.S. District Court in Washington, D.C., is now weighing a case brought by Bacardi that seeks to have Cuba’s trademark canceled.

Rick Wilson, a Bacardi executive who married into the Bacardi family, says the Arechabalas and Bacardis have common-law rights to the Havana Club trademark. Earlier this year, Bacardi filed a Freedom of Information request for all U.S. records related to the mark’s registration to the Cuban government. But Pernod’s Mr. Cavil says the Arechabala family let the trademark lapse and Cuba now is its rightful owner.

As the court deliberates, Bacardi expects new styles of Puerto-Rican-made Havana Club to score with U.S. consumers while the embargo blocks Cuban-made Havana Club from entering the U.S. The embargo can only be lifted by an act of Congress. If that happens, Bacardi plans to deliver the message that “rum is made in other interesting places that can play to origin as well,” said Bacardi’s Mr. Di Giammarco.

Pernod is taking a different stance. “The only Havana Club Rum I know comes from Cuba,” Mr. Cavil said.

ZURICH—Former CEO of Zurich Insurance Group AG Martin Senn, who left the company in December, has killed himself, marking the second suicide among the insurer’s top management ranks in the past few years.

“It is with great shock and sadness that we must inform you of the sudden death of Martin Senn,” Zurich Insurance said in a statement on Monday. “His family informed us that Martin took his life last Friday.”

“With the passing of Martin, we lose not only a highly valued former CEO and colleague but also a close friend. Our thoughts are with his bereaved family and friends, to whom we extend our deepest sympathies.”

Mr. Senn’s death at age 59 follows the suicide of former Zurich Insurance Chief Financial Officer Pierre Wauthier in 2013. An internal probe at the insurer, conducted under the supervision of Switzerland’s financial regulator, later cleared company leaders of placing an inappropriate amount of stress on Mr. Wauthier.

During the company’s annual meeting in early 2014, Mr. Senn said that, “The grief and shock we experienced at the suicide of our colleague Pierre Wauthier was enormous.”

Mr. Senn stepped aside in early December, capping what had been a difficult period for the company. At the time, Mr. Senn cited Zurich Insurance’s difficulties in revamping its largest business, and its failure to seal an ambitious acquisition of U.K.-based RSA Insurance Group PLC.

Last February, the company reported a larger-than-expected loss for the fourth quarter, and said about 15% of its employees would be “affected” by cost-cutting efforts.

The earnings report came shortly after Zurich Insurance had announced a successor to Mr. Senn, former Assicurazioni Generali SpA CEO Mario Greco—a one-time Zurich Insurance executive who assumed the CEO role at the Zurich-based company in March.

Mr. Senn, a former executive at Credit Suisse Group AG, joined Zurich Insurance as chief investment officer in 2006 and later assumed the CEO role in 2010.

The shocking death of Mr. Wauthier, who killed himself at age 53 in August, 2013, left Mr. Senn in an awkward position. Mr. Wauthier left behind a note blaming former Zurich Insurance Chairman Josef Ackermann for creating an unbearably stressful work environment. Mr. Ackermann, a one-time CEO of Deutsche Bank AG, abruptly resigned and issued a statement rejecting blame for Mr. Wauthier’s death.

Mr. Senn appeared on Swiss television as events unfolded, to say the company regretted Mr. Ackermann’s departure, and was unaware of the sort of friction between Messrs. Ackermann and Wauthier “which could or should have led to such a death.”

In November, 2013 Zurich Insurance announced that its internal investigation found no indication that Mr. Wauthier had been subjected to “undue pressure” by the insurer’s top management.

That finding was criticized by Mr. Wauthier’s widow at the company’s annual meeting the following April. Addressing company executives including Mr. Senn, Fabienne Wauthier said the company had unjustly sought to avoid blame for her husband’s death. “The way you handled Pierre’s suicide is a sign that unaccountability remains part of Zurich’s corporate culture,” she said.

Volkswagen also jumps into the ride-hailing game.

• Toyota said that it is making a strategic investment in Uber, but it's not saying how much it's putting into the ride-hailing behemoth. The deal has a lot to do with a partnership for self-driving car technology.
• Snapchat added $1.8 billion to its Series F funding round, and is telling investors it expects to make between $500 million and $1 billion in revenue in 2017. It's aiming for between $250 million and $350 million in revenue this year.
• Volkswagen Group is investing $300 million in the ride-hailing service Gett, becoming the latest major automaker to get in bed with a ride-hailing company (like GM and Lyft, for example).
• Menlo Ventures, alongside Shasta Ventures, Redpoint Ventures, First Round Capital and Playground Global, led a $50 million investment in the Wi-Fi device company Eero. The company also announced that it had struck a deal to make its home networking equipment available in Best Buy stores.
• Security startup vArmour, which primarily works on protecting data centers, raised $41 million in Series D funding from Redline Capital, Australian telco Telstra, Highland Capital Partners, Menlo Ventures, Citi Ventures and others (Fortune).
• Transferwise, a British money transfer service, raised $26 million at a $1.1 billion valuation. The funding came from Andreessen Horowitz, Peter Thiel’s Valar Ventures, Sir Richard Branson and others (TechCrunch).
• Password management startup Dashlane picked up $22.5 million in a Series C round, led by TransUnion, with participation from Rho Ventures, FirstMark Capital and Bessemer Venture Partners (TechCrunch).
• Berlin startup Contentful, which is working on a content management system optimized for devices that aren't PCs, raised $13 million in a round led by Benchmark Capital, with participation from Trinity Ventures, Balderton Capital and Point Nine Capital (VentureBeat).
• Molekule, a startup that aims to produce "the world’s first molecular air purifier," raised $3.25 million in funding from SoftTech VC, Crosslink Capital, and CSC Upshot, plus grants from the Environmental Protection Agency (VentureBeat).

RBR and Cologny are very pleased to announce the publication of the independent fairness opinion for gategroup by Freitag & Co (www.freitagco.com). The fairness opinion can be found on www.savegategroup.com. The assessment of this leading corporate finance boutique confirms that the current offer of CHF 53 per share by HNA substantially undervalues the fair value of gategroup.

RBR and Cologny conclude from the fairness opinion that CHF 100 per share would be an adequate price for this world-class franchise. This is underscored by the following:

-- RBR and Cologny continue to see no reason to sell gategroup to a Chinese company to gain access to the Chinese market. This rationale is tantamount to saying that Roche, Lindt & Sprüngli and Swatch would have to sell themselves to a Chinese company if they wanted to sell their products in China.

-- We remain convinced that gategroup is a world-class asset with huge potential to improve profitability on a stand-alone basis. The unique position and attractiveness of this hospitality and service brand benefits greatly from its strong Swiss roots, which would be lost once the company is delisted and sold to a Chinese conglomerate. We therefore firmly oppose a sale of the company.

-- After seven years of mismanagement and very poor financial performance, it is pointless to consider the public market, comparable transaction and premium analysis valuation methods. They are a look in the rear view mirror and simply verify a dismal track record. Given that N+1, the fairness opinion provider to gategroup’s board, does not highlight and specify this separately in their fairness opinion confirms the suspicion that their only purpose is to rubberstamp an already agreed and rushed offer price. A proper DCF analysis is the only method to gauge the future potential of a company in a turnaround and which has suffered from very poor performance in the past. Freitag & Co and N+1 have both performed a DCF analysis and come to very different results. Here is why: N+1uses an artificially high weighted average cost of capital (WACC), which depresses the valueof the DCF (cf. page 13 of the fairness opinion of Freitag & Co). More importantly, the EBITDA assumption of N+1 of 6.6% for the years 2016 to 2020 falls even below the mid range of the margin guidance given by gategroup. RBR and Cologny have always argued that 8-10% EBITDA margins are very achievable. These assumptions combined with consensus numbers on revenues, D&A, financial result and taxes would result in EPS of CHF 5.3 to CHF 7.3 in 2018. Applying a well-deserved P/E multiple of 15x, which is two notches below the current P/E of the SPI index, suggests a share price of CHF 80 to CHF 110 in less than two years. This is in line with the scenario analysis presented earlier this year in the corporate governance presentation (page 5) on www.savegategroup.com.

-- In summary, the rushed sale of gategroup, which is just at the beginning of a significant turnaround, does not make any sense for current shareholders. The board and current management clearly decided to prioritize their personal agenda at the expense of a great Swiss company and its shareholder base.

Rudolf Bohli of RBR Capital concludes and Jonathan Herbert of Cologny Advisors concurs: “Given the current board, which is pursuing its own agenda, and the mostly institutional investor base which is managing other people’s money rather than taking responsibility in the role of an entrepreneur and owner, it is likely that another sad chapter will be added to the calamitous history of gategroup unless shareholders decide to reject the HNA offer and turn gategroup into the great company it deserves to be.”

The French investment company dedicated to the retail sector Experienced Capital has announced today the acquisition of a 40% stake in the womenswear brand Soeur.

33.34% was acquired from EPI and the remainder through a capital increase.

The French-language item noted that the remaining 60% is held by the founders/directors Domitille and Angelique Brion.

Soeur operates six shops and a website generating revenues of EUR 5m.

Amber Heard looked like she was laughing all the way to the bank after visiting divorce lawyers this weekend — as her soon-to-be ex, Johnny Depp, took a hit at the box office.

“Alice Through the Looking Glass,” the big-budget spectacle starring Depp as the Mad Hatter, bombed over the Memorial Day weekend, earning just $28.1 million through Sunday and getting clobbered by “X-Men: Apocalypse,” which raked in $65 million.

Heard, meanwhile, may be on the brink of a financial windfall.

The 30-year-old actress stands to step away from her 15-month marriage to Depp, 52, with at least $20 million, legal experts told The Post.

So it’s no wonder Heard was gleeful when she was spotted — without her wedding or engagement rings — laughing as she left a four-hour meeting at her lawyers’ Los Angeles offices at around 7:30 p.m. Saturday with her pal Raquel Pennington.

The faintest of bruises was still visible on Heard’s right cheek, a week after she claimed Depp hurled her iPhone at her face in their LA penthouse.

Pennington is Heard’s across-the-hall neighbor there, and an important witness to the alleged incident.

Saturday’s giggle fest was in stark contrast to Heard’s somber court appearance Friday, when she broke down in tears after a California judge granted her a temporary restraining order against Depp.

She was hoping to score $50,000 a month in spousal support, $125,000 for her legal fees, their LA penthouse, his Range Rover and sole custody of their Yorkshire terriers.

For now, a judge has granted her only temporary possession of the swanky pad.

The pair did not have a prenup, so Heard benefits from California law, which guarantees her a minimum of one half of however much their combined worth increased during their 15 months together.

Forbes has listed Depp as the 12th-richest actor of 2015, with a net worth of $400 million. His “Pirates of the Caribbean” franchise alone has earned a reported $1 billion.

During his marriage to Heard, Depp got an estimated $61 million to appear in the $170 million “Alice Through the Looking Glass” and $40 million to star in “Black Mass,” in which he won raves playing Boston gangster Whitey Bulger.

But if Depp spent like a Mad Hatter, that counts against the combined income.

“If he made $30 million and he spent $30 million, you’re SOL,” Manhattan-based divorce lawyer Suzanne Bracker said.

Still, Heard stands to get at least $20 million, if not more, Bracker estimated.

That includes at least $10 million from his income alone and $10 million from the properties Depp owns, including his private Caribbean Island and a lavish home in France.

Heard, by contrast, “only” earned “only”$383,000 in 2015, clearing just $51,000 after such expenses as $18,876 in “business meals,” she says in papers.

Another prominent divorce attorney said Heard could extract more money out of her estranged hubby if his team wants to settle quickly.

“It’s highly unlikely she’ll make much, based on the brevity of the marriage,” Laurence Greenberg said.

“However, the allegations of domestic abuse might encourage a quick and possibly lucrative settlement.”

Meanwhile, Team Depp mobilized. The actor’s ex-partner of 14 years, Frenchwoman Vanessa Paradis, whom Depp dumped for Heard, released a letter Sunday about how doting he was.

“He is a sensitive, loving and loved person, and I believe with all my heart that these recent allegations being made are outrageous,” Paradis, 43, wrote in a handwritten letter obtained by TMZ.

Their teen daughter, Lily-Rose, posted a photo on Instagram of herself as an infant with her dad.

“My dad is the sweetest most loving person I know, he’s been nothing but a wonderful father to my little brother and I, and everyone who knows him would say the same,” she wrote.

Depp has not personally addressed Heard’s allegations, denying them through his lawyers.