TheChek News Flow

Sweeping changes to the trade barriers governing the sugar industry are redrawing the map for one of the commodity world’s most protected markets.

Many sugar producers protect their domestic industries through some combination of guaranteed payments to farmers, production restrictions or import limits. But the industry is gradually liberalizing in a series of moves that could push the price of sugar lower. That has refiners and exporters scrambling to work out what newly opened markets will mean for them.

In the biggest change, the European Union will remove production quotas and minimum payments for sugar-beet farmers from October 2017. Farmers are expected to push much of the additional supply to export markets, which would turn the EU into a bigger competitor abroad.

Separately, the World Trade Organization is considering whether Thailand, the world’s second-largest sugar exporter, is breaking trade rules by subsidizing its production in a case brought by Brazil, the world’s largest producer and a loud voice for liberalization. Market barriers in Africa also are under pressure from regional trade agreements.

“The entire sugar world is going to be shaken up,” said Hartwig Fuchs, chief executive of Nordzucker AG, Europe’s second-largest sugar producer.

Mr. Fuchs estimates that Europe has the potential to add an extra 3.5 million tons of new sugar a year onto the global market, equal to just over 6% of this year’s expected global trade volumes.

The coming changes add uncertainty at a volatile time for the sugar market. Sugar consumption is set to exceed supply in 2016 after five years of surpluses and stagnant prices, and the market has gained in recent months after droughts hit harvests in many parts of the world. Yet analysts think prices could be pressured in the longer term by extra production.

Liberalization of the sugar industry has lagged behind reform of other agricultural commodities. In developing countries, that reflects pressure on governments to protect a labor-intensive industry.

The U.S. government, which has levied taxes on imported sugar since 1789, currently guarantees a minimum price for domestic producers, places production quotas on growers and taxes imports.

While there are few signs of imminent change in the U.S., the world’s sixth biggest producer, the sugar industry in Europe and Africa is set for an overhaul.

Europe will shift to more liberal markets in October 2017, when production quotas and minimum payments will be removed in the EU. The move is the culmination of a process that already has seen the EU cut its sugar subsidies following a 2005 WTO ruling that the EU was dumping sugar on world markets in a case brought by Brazil, Thailand and Australia.

Producers in Europe’s industry, currently the world’s third largest, say they plan to produce and export more sugar as a result.

“The EU will certainly become a net exporter,” said Olivier Lippens, managing director of Finasucre SA, a Belgium-based sugar producer. Mr. Lippens estimates that net exports eventually could reach around three million tons a year.

Meanwhile, restrictions on cane-sugar imports into the EU will remain. The combination could squeeze importers like Tate & Lyle Sugars, whose London refinery has been turning cane sugar into sweetener for 138 years.

“The clock’s ticking for us,” said Gerald Mason, a vice president of Tate & Lyle as he watched a crane unload a 35,000-ton shipment of sugar. “We are not going to be competitive after 2017 unless the regulation is changed.”

Many sugar producers in the Caribbean and Africa rely on sales to European refiners.

“The people who have been supplying Europe for a century and more are the casualties, unfortunately,” said Karl James, manager of Jamaica Cane Products Sales Ltd., a Jamaican sugar exporter.

The change also could hit the relatively high-cost producers of the Caribbean, which may now struggle to compete in Europe when prices fall with the removal of quotas.

In Europe, beet producers already have cut prices to grab market-share ahead of the 2017 reform. The impact is being felt across the sugar-cane industry. Tate & Lyle’s Thames-side refinery is now running at reduced capacity. In October, Jamaica Cane Products Sales agreed to a one-year extension on a contract to supply Tate & Lyle sugar cane at around $370 a ton. That is down from $770 a ton in the previous three-year deal.

African producers also likely will suffer as their traditional European markets become more self-sufficient.

South Africa-based Illovo, that continent’s largest sugar company, is gearing up to sell more of its sugar into Africa, where trade barriers also are tottering.

Bilateral trade agreements between some African countries and pressure from regional trade bloc Comesa to reduce restrictions make the market look more attractive, said John Bason, finance director of Illovo’s parent, Associated British Foods PLC.

In a twist on the 2005 WTO ruling that went on to fell European barriers, Brazil is now taking aim at its one-time ally, Thailand. Brazil has accused Thailand of increasing its share of the global sugar market by subsidizing exports. In a complex maneuver, the Thai government fixes domestic sugar prices, taxes the sales and uses that revenue to subsidize sugar-cane growers. Brazil says that this is a breach of WTO rules that costs its exporters around $1 billion a year.

“They want a result similar to what they got when they sued the European Union,” said João Botelho, an analyst at brokerage firm INTL FCStone Inc.

Last week, during which the S&P 500 fell 0.5%, BofAML clients were net sellers of US stocks for the 16th consecutive week—continuing the longest uninterrupted selling streak in our data history (since ’08). But the magnitude of outflows has been lessening for the past three weeks, with last week’s $1.2bn in net sales the smallest in ten weeks (Chart of the Week, below). Net sales were led by hedge funds, a reversal from institutional client-led selling in the prior nine weeks. Institutional and private clients were still sellers as well, but sales by these groups were both their smallest since Feb. Net sales were entirely in large caps last week, as both small and mid-caps saw net buying. Buybacks by our corporate clients decelerated last week, and month-to-date are tracking below typical May levels. Year-todate, buybacks are tracking slightly above 2015 levels but below 2014 levels.

  

Sorrento Therapeutics (NASDAQ: SRNE) activist Wildcat Capital Management has filed a verified derivative complaint asserting derivative claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against Dr. Ji and directors William S. Marth, Kim D. Janda, Douglas Ebersole, Jaisim Shah and David H. Deming.

In a Monday amended 13D filing Wildcat disclosed a share holding of 7%, stating that:

“On May 13, 2016, WLA, on behalf of the Issuer, filed a verified derivative complaint (the “May 13 Complaint”) asserting derivative claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against Dr. Ji and directors William S. Marth, Kim D. Janda, Douglas Ebersole, Jaisim Shah and David H. Deming (collectively, the “Defendants”). Pursuant to the May 13 Complaint, WLA, on behalf of the Issuer, seeks to, among other things:

(i) enjoin the three private placements that are part of the Transactions that have not already closed but are expected to close imminently;

(ii) rescind the options and warrants issued by the Issuer’s subsidiaries to Dr. Ji and the Board; and

(iii) be awarded damages resulting from the Defendants’ alleged breaches of fiduciary duties and other alleged misconduct.

A copy of the May 13 Complaint (Exhibit 6) can be read in full here.

Also on May 13, 2016, WLA filed a motion for a temporary restraining order (the “May 13 Motion for TRO”) against the Defendants seeking that the court enter a temporary restraining order pending a preliminary injunction hearing

(i) enjoining the Defendants and the Issuer from taking any further steps to consummate the Transactions or any associated voting agreements; and

(ii) enjoining Defendants and the Issuer from instructing Yuhan Corporation (“Yuhan”), to vote its shares in connection with the voting agreement associated with Yuhan’s investment as part of the Transactions.

Copies of each of the May 13 Motion for TRO and brief in support of the May 13 Motion for TRO are attached as Exhibit 7 and Exhibit 8, respectively.”

Wildcat on 6 May called on the San Diego-based biopharmaceutical company to engage an investment banker and initiate a sale process. Sorrento on 9 May announced it had engaged Guggenheim Securities and PJT Partners to review a number of strategic alternatives.

"As part of the ongoing evaluation of our portfolio of assets we decided to engage industry leading firms to advise us on potential alternatives and strategies," stated Dr. Henry Ji, President and CEO. "Although there are no assurances that the process we commenced will result in a transaction, we believe the expertise of both Guggenheim Securities and PJT Partners will provide us with the best ability to fully evaluate options to enhance shareholder value," added Dr. Ji.

Wildcat was founded in 2011 by Len Potter to manage capital for David Bonderman, the founding partner of TPG Capital.

Sorrento has a market cap of USD 246m.

  

Sorrento Therapeutics (NASDAQ: SRNE) activist Wildcat Capital Management has filed a verified derivative complaint asserting derivative claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against Dr. Ji and directors William S. Marth, Kim D. Janda, Douglas Ebersole, Jaisim Shah and David H. Deming.

In a Monday amended 13D filing Wildcat disclosed a share holding of 7%, stating that:

“On May 13, 2016, WLA, on behalf of the Issuer, filed a verified derivative complaint (the “May 13 Complaint”) asserting derivative claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against Dr. Ji and directors William S. Marth, Kim D. Janda, Douglas Ebersole, Jaisim Shah and David H. Deming (collectively, the “Defendants”). Pursuant to the May 13 Complaint, WLA, on behalf of the Issuer, seeks to, among other things:

(i) enjoin the three private placements that are part of the Transactions that have not already closed but are expected to close imminently;

(ii) rescind the options and warrants issued by the Issuer’s subsidiaries to Dr. Ji and the Board; and

(iii) be awarded damages resulting from the Defendants’ alleged breaches of fiduciary duties and other alleged misconduct.

A copy of the May 13 Complaint (Exhibit 6) can be read in full here.

Also on May 13, 2016, WLA filed a motion for a temporary restraining order (the “May 13 Motion for TRO”) against the Defendants seeking that the court enter a temporary restraining order pending a preliminary injunction hearing

(i) enjoining the Defendants and the Issuer from taking any further steps to consummate the Transactions or any associated voting agreements; and

(ii) enjoining Defendants and the Issuer from instructing Yuhan Corporation (“Yuhan”), to vote its shares in connection with the voting agreement associated with Yuhan’s investment as part of the Transactions.

Copies of each of the May 13 Motion for TRO and brief in support of the May 13 Motion for TRO are attached as Exhibit 7 and Exhibit 8, respectively.”

Wildcat on 6 May called on the San Diego-based biopharmaceutical company to engage an investment banker and initiate a sale process. Sorrento on 9 May announced it had engaged Guggenheim Securities and PJT Partners to review a number of strategic alternatives.

"As part of the ongoing evaluation of our portfolio of assets we decided to engage industry leading firms to advise us on potential alternatives and strategies," stated Dr. Henry Ji, President and CEO. "Although there are no assurances that the process we commenced will result in a transaction, we believe the expertise of both Guggenheim Securities and PJT Partners will provide us with the best ability to fully evaluate options to enhance shareholder value," added Dr. Ji.

Wildcat was founded in 2011 by Len Potter to manage capital for David Bonderman, the founding partner of TPG Capital.

Sorrento has a market cap of USD 246m.

- We continue to believe M&A is the best way to accelerate balance sheet clean up and cut costs;

- Banco Popolare's NII is down 12% since Q2 last year as a result of lower rates.

- Combined coverage of 37% pre-writeoffs is below the 50% of best in class.

- We reach a €6.2bn valuation, 0.5x TBV 2016E, which implies 23% combined upside.

- We remain cautious on the mid cap space, ISP is our top pick.

…it will be full of bears. Investors positioned for “summer of shocks”: FMS cash levels up from 5.4% to a high 5.5%; only 12% taking “higher-than-normal” risk; most crowdedtrade “long quality”. Based on FMS positions, contrarians should be moderately long risk via UK, Japan, tech & industrials, and take profits in EM, energy, discretionary

BREXIT now seen as biggest “tail risk”; UK equity allocation plunges to lowest level since Nov’08; sterling 2nd most undervalued reading on record…good opportunity for traders looking to sell UK volatility and/or buy upside optionality.

…3-year high in relative weighting of EM equities to DM, 1st OW of EM since Sep’14, lowest energy UW in 20 months, value>growth at 3rd highest level past 10 years. But May plunge in China growth expectations = commodities & materials still big UW.

Contrarians note biggest Japan UW since Dec’12, smallest Tech OW in almost 2 years and Gold still seen as “undervalued” despite 20% rally in 2016.

FMS risk-aversion best explained by anaemic macro, negative profit expectations, forecast of 2 Fed hikes & majority (57%) do not anticipate “helicopter money” shock. 73% of investors, a record high, saying companies “underinvesting”.

The policy would put it at odds with Germany which is in the middle of a transition to renewable energy sources.

The strategy paper stated that the E.U. aimed to defend its technological strength in this area and wants member states to cooperate more closely on research, development, financing and building innovative reactors, Der Spiegel reported. The E.U. aims to build smaller reactors and aims to have at least one operational by 2030.

The paper also contained proposals to enable more investment in nuclear power.

The strategy paper is reportedly the basis for the E.U.’s future nuclear policy and will be considered first by politicians responsible for energy union this Wednesday, and then in the European Parliament.