NY Post : These brands are happy not selling to millennials — for now

Most luxury brands want to be cool with the kids, but Tiffany, Baccarat and Van Cleef & Arpels are chilling with the grandparents.

Steeped in tradition and history, these and other so-called heritage brands are unapologetically old school in large part because their customers are, too.

“We are very happy to have grandmothers as our customers,” said Oscar de la Renta CEO Alexander Bolen. “They have a lot of money.”

Bolen and other top executives gathered Thursday in New York for the French-American Chamber of Commerce’s first Luxury Symposium to address the headwinds facing the business.

“Opening more stores and increasing prices was the formula for this sector,” said Luca Solca, managing director, global luxury goods, at Exane BNP Paribas.

But as economic turmoil roils China, the strong dollar stifles tourism in the US, and e-commerce gnaws on brick-and-mortar stores, luxury brands are being squeezed.

The average return on invested capital — a measure of profitability — for nine top brands, including Prada, Hermes and Burberry, was negative 5 percent from 2012 to 2014, according to Exane BNP Paribas data.

Most luxury companies are in a bind: trying to court new customers while not alienating their base.

“While we need to evolve to make our brand more relevant, we also need to keep our current customers happy,” Boren said.

Many are tinkering with their marketing or social media, but sticking to their knitting in every other way.

Baccarat has been around for 225 years, and “our manufacturing has not changed in that amount of time,” said Jim Shreve, president of USA Baccarat. The crystal company is trying to change customers’ perception about its pricey wares with a new tagline “everyday Baccarat” in which a set of six tumblers — costing $450 — transitions from juice in the morning to Scotch in the evening.

“One Baccarat glass can cost $125, and people are afraid to chip our glasses, so they don’t use them,” Shreve said.

Tiffany & Co., meanwhile, is “investing in the theater of shopping in its stores” said CEO Frederic Cumenal, referring to renovations and its largest store ever, which just opened in China.

“Radical thought and innovation does not always come with a cord attached,” he said.

NY Post : Billionaire banker Safra charged in SA bribery probe

Billionaire banker Safra charged in SA bribery probe

Brazilian prosecutors have charged Joseph Safra, the world’s richest banker, in connection with an alleged scheme to pay bribes to government officials in return for waiving tax debts.

The 77-year-old owner of Grupo Safra SA had knowledge of a 2014 plan by executives at his bank to pay $4.2 million in bribes to federal tax auditors, prosecutors said in a statement on Thursday.

The accusation is based on tapped phone calls between Banco Safra executive João Inácio Puga and tax officials, the statement added.

Safra, who alongside his family owns Banco Safra and a number of private-banking institutions, including Switzerland’s J Safra Sarasin, was not directly involved in the negotiations on the bribery plan, the statement noted. Still, the conversations showed that Puga informed Safra about the bribery talks, prosecutors said.

The bank denied the allegations, calling them “unfounded.”

There “have not been any improprieties by any of the businesses of The Safra Group,” it said in a statement.

No Safra Group representative “offered any inducement to any public official and the Group did not receive any benefit in the judgment of the tribunal,” the Safra Group statement added.

The charges filed are a follow-up of a broader police inquiry, known as “Operation Zealots,” into kickbacks by companies through lobbyists. Dozens of other Brazilian firms, including steelmaker Gerdau SA, have also been under investigation for suspected kickbacks.

The case is investigating whether companies bribed members of CARF, a body within the Finance Ministry, that hears appeals on tax disputes, to get favorable rulings that reduced or waived the amounts owed.

Over 70 industrial, agricultural, civil engineering and financial companies, including banks, are being probed in Operation Zealots.

Safra, a Lebanese-Brazilian billionaire, whose fortune is estimated at $13.4 billion by Bloomberg, controls a banking and financial conglomerate that operates in 19 countries.

In addition to Operation Zealots, Brazil has been gripped by the far-reaching corruption probe around state-run oil company Petroleo Brasileiro, known as Petrobras, and major engineering conglomerates in the past couple of years.

FILED

NYT : Chinese Phrase Adds Mystery to Anbang’s About-Face on Starwood

Chinese Phrase Adds Mystery to Anbang’s About-Face on Starwood

HONG KONG — An obscure phrase on foreign investment tucked into China’s insurance regulations is being viewed as stunningly cryptic by Western standards. But the collection of words — not even a full sentence — adds to the mystery surrounding the sudden decision by the Chinese insurer Anbang Insurance Group to walk away from a $14 billion bid for the Starwood hotel chain.

The phrase allows insurance companies to make overseas investments, provided the total does not exceed 15 percent of their assets. But the rule does not specify how to calculate the value of the foreign investments.

For example, it does not indicate whether to use historical prices or market prices, nor which exchange rate to use. The rule does not even specify how to determine an insurer’s assets, except to say that they shall be calculated at the end of the previous year.

So regulators have a lot of wiggle room. If the China Insurance Regulatory Commission made an unfavorable calculation, it might have raised the uncertainty for Anbang, compelling the company and its partner to withdraw the bid.

The derailed deal reflects the changing fortunes in China.

In the last couple of years, the Chinese authorities encouraged insurers and other companies to make large overseas acquisitions as a way to diversify and expand beyond their borders. Real estate was particularly attractive, and a rush of Chinese companies as well as wealthy families snapped up properties overseas. The results of a survey a year ago indicated that buyers from China were buying one in every 14 homes sold for more than $1 million in the United States.

But such overseas investments are coming under increased scrutiny as the Chinese economy slows.

Overseas acquisitions account for a significant source of capital outflows. And those outflows, which have weighed on the currency and the markets, have become a major point of concern for the Chinese authorities.

China has been trying hard to slow a rapid flow of money to foreign markets since last summer. And Hong Kong financiers suggested this year that the government had been pressuring insurers to temper their purchases.

Anbang has been one of the most acquisitive Chinese insurers.

Less than three weeks ago, Anbang agreed to pay $6.5 billion to Blackstone to acquire Strategic Hotels and Resorts, which has more than a dozen luxury United States hotels. (The Blackstone transaction is expected to close this year.) Anbang already owns the Waldorf Astoria hotel in New York, which it acquired for $1.95 billion in 2014.

If the insurance rules played a role in the abandonment of the Starwood deal, it is also telling that it was Anbang that dropped the deal. Anbang has deep political connections. And typically those ties have insulated companies until now, giving them more leeway with regulators.

“It would be good for everybody in China to see that the rules are being applied more uniformly than people would have anticipated,” said David Zweig, the director of the Center on China’s Transnational Relations at the Hong Kong University of Science and Technology.

Financing, too, may have been an issue.

Starwood was not comfortable with Anbang’s ability to finance the latest bid of $14 billion, according to people briefed on the matter. An earlier bid by Marriott, just $700 million lower, appeared to meet Starwood’s expectations.

Anbang declined to comment. Its partners — the American private equity firm J. C. Flowers & Company and another private equity firm based in Beijing and Hong Kong, Primavera Capital — did not respond to requests for comment, nor did the insurance commission.

The 15 percent rule appears in Chinese insurance regulations as early as 2012. But it really became relevant only a year and a half ago, when the Chinese government started encouraging insurance companies to invest overseas. Even now, the Chinese insurance industry remains overwhelmingly domestic; only 1.5 percent of its assets were invested overseas as of last summer.

Anbang is one of the few insurers that have made a big overseas push, so the company has been viewed as a test case of how the 15 percent rule would be enforced. But Anbang is a particularly complicated corporate group to analyze for calculating asset ratios.

For example, Anbang bought a 35 percent stake in the Chengdu Rural Commercial Bank in 2011 for nearly $1 billion. But Anbang is closely held. And the limited publicly available data on the insurer does not make clear whether it has included a portion of the bank’s assets in figures for its total domestic assets.

WSJ : The Secret Money Behind ‘The Wolf of Wall Street’

LOS ANGELES—Despite the star power of Leonardo DiCaprio and director Martin Scorsese, the 2013 hit movie “The Wolf of Wall Street” took more than six years to get made because studios weren’t willing to invest in a risky R-rated project.

Help arrived from a virtually unknown production company called Red Granite Pictures. Though it had made just one movie, Red Granite came up with the more than $100 million needed to film the sex- and drug-fueled story of a penny-stock swindler.

Global investigators now believe much of the money to make the movie about a stock scam was diverted from a state fund 9,000 miles away in Malaysia, a fund that had been established to spur local economic development.

The investigators, said people familiar with their work, believe this financing was part of a wider scandal at the Malaysian fund, which has been detailed in Wall Street Journal articles over the past year.

The fund, 1Malaysia Development Bhd., or 1MDB, was set up seven years ago by the prime minister of Malaysia, Najib Razak. His stepson, Riza Aziz, is the chairman of Red Granite Pictures.

The 1MDB fund is now the focus of numerous investigations at home and abroad, which grew out of $11 billion of debt it ran up and questions raised in Malaysia about how some of its money was used.


Investigators in two countries believe that $155 million originating with 1MDB moved into Red Granite in 2012 through a circuitous route involving offshore shell companies, said people familiar with the probes. This same money trail also is described by a person familiar with 1MDB’s dealings and supported by documents reviewed by the Journal.

The story of how “The Wolf of Wall Street” was financed brings together Hollywood celebrities with a cast of characters mostly known for their connections to the Malaysian prime minister. It detours through parties in Cannes and aboard a yacht, and spending on such embellishments as a rare, million-dollar movie poster and an original 1955 Academy Award statuette.

The U.S. Federal Bureau of Investigation has issued subpoenas to several current and former employees of Red Granite and to a bank and an accounting firm the company used, according to people familiar with the subpoenas.


“Red Granite is responding to all inquiries and cooperating fully,” said a spokesman for the company, based in West Hollywood, Calif. He said it had no reason to believe the source of its financing was irregular.

The 1MDB fund and Mr. Najib’s office didn’t respond to questions about Red Granite. In the past, both have denied any wrongdoing. Representatives of Messrs. DiCaprio and Scorsese didn’t respond to numerous requests for comment.

The film grossed about $400 million and was nominated for five Academy Awards, including best picture. There is no indication any profits from it flowed to 1MDB or Malaysia.


The movie, heavy on depictions of Wall Street debauchery, wasn’t distributed in Malaysia after authorities there demanded more than 90 cuts to comply with local morality laws, a Malaysian official said.

Red Granite Pictures was set up in 2010 by Mr. Aziz, the Malaysian prime minister’s stepson, now 39 years old, and  Christopher McFarland, a Kentucky businessman who is 43.

Mr. Aziz had worked in finance in London, left to travel and ended up in the U.S., he once told the Hollywood Reporter. Mr. McFarland, called Joey, invested in various ventures and moved to Hollywood to try to make movies, people who know him say.

The two were introduced by a mutual friend: a peripatetic Malaysian businessman named Jho Low, who became a fixture on the party circuit in Los Angeles, Las Vegas and New York starting in 2009. Mr. Low gained media attention for a lavish lifestyle that brought him into the orbit of celebrities such as Paris Hilton and Lindsay Lohan.

Mr. Low knew Mr. Aziz from the U.K., where both had studied, and forged ties to Mr. Aziz’s family, including Prime Minister Najib. In Malaysia, Mr. Low, whose full name is Low Taek Jho and who is 34, played a role in setting up the fund that became 1MDB.

Messrs. Aziz and McFarland worked for a time out of L’Ermitage Beverly Hills, a luxury hotel owned by a company Mr. Low founded. The aspiring movie moguls later set up an office on Sunset Boulevard that they filled with Hollywood memorabilia.

These included a poster for the 1927 Fritz Lang science-fiction film “Metropolis,” a rare original that cost $1 million, said people familiar with it.

Red Granite burst on the scene in 2011 by throwing a million-dollar beach extravaganza at the Cannes film festival with fireworks and performances by Kanye West, dressed all in white, and Pharrell Williams. A few months later its first movie was released, “Friends With Kids,” starring Adam Scott and Kristen Wiig.

“They definitely came off as high rollers when they started,” said Howard Cohen, co-president of Roadside Attractions, the distributor of Red Granite’s first film.

In the insular movie business, many were surprised to find the high-energy but inexperienced Mr. McFarland overseeing dealings with filmmakers. “Joey is their mouthpiece, and Riza—he said maybe 20 words to me,” said Charles Wessler, a producer of a later Red Granite-backed film.

Messrs. Aziz and McFarland next turned their attention to “The Wolf of Wall Street.” Mr. Low, the Malaysian financier, made a key connection: He knew Mr. DiCaprio and introduced him to Red Granite, according to people familiar with the introduction.

Mr. DiCaprio had long been interested in a movie based on the memoirs of a penny-stock operator who went to prison for fraud, Jordan Belfort. But the actor and other boosters couldn’t find a studio that believed a film so expensive and potentially offensive would find a big enough audience.

Red Granite was willing to take the risk.

Shooting began in August 2012. Three months later, when Mr. DiCaprio had a birthday, the Red Granite principals forged a closer tie to him with an unusual gift: the Oscar statuette presented to Marlon Brando in 1955 for best actor in “On the Waterfront.” People who described the gift said the statuette had been acquired for around $600,000 through a New Jersey memorabilia dealer.


Mr. Aziz, asked about Red Granite’s financing in a 2014 New York Times interview, identified the main investor as a businessman in Abu Dhabi named Mohamed Ahmed Badawy Al-Husseiny. “There was no Malaysian money,” he said.

Mr. Al-Husseiny is an American who then headed Aabar Investments PJS, which is an arm of an Abu Dhabi sovereign-wealth fund known as IPIC. The state-owned firms did business with 1MDB. For instance, IPIC guaranteed some of the Malaysian fund’s bonds.

In connection with the IPIC guarantees, 1MDB reported in corporate filings that in 2012, it sent $1.4 billion to Aabar as collateral.

Investigators believe this money never got to Aabar in Abu Dhabi but went instead to a separate, almost identically named company that Mr. Al-Husseiny had helped set up in the British Virgin Islands, called Aabar Investments PJS Ltd., said people familiar with the probes.

The investigators believe about $155 million of this money then flowed to Red Granite Capital, a firm Mr. Aziz had formed to fund the film company.

Documents reviewed by the Journal show three transfers to Red Granite Capital: of $60 million, $45 million and $50 million in 2012.

The $60 million and $45 million transfers were booked by Red Granite Capital as a loan from the British Virgin Islands company that had a name almost identical to Aabar Investments.

Most of the $50 million moved to Red Granite from that same British Virgin Islands company, via intermediaries, the investigators believe.

Among the intermediaries, according to people familiar with investigations and the person familiar with 1MDB: Telina Holdings Inc., a company that had been set up in the British Virgin Islands by Mr. Al-Husseiny and his boss, Khadem Al Qubaisi.

Representatives of the two men, who have been removed from their posts in Abu Dhabi, declined to comment.

Financing ‘The Wolf of Wall Street’

The 2013 Leonardo DiCaprio film came from little-known Red Granite Pictures. Investigators of a Malaysian state fund called 1MDB believe much of the film’s financing originated there and moved circuitously to Red Granite.

Red Granite Capital

British Virgin Islands firm set up to fund Red Granite Pictures

$105M

$155M

$50M

About $50M

Aabar Investments PJS Ltd.

via intermediaries

1MDB

Red Granite Pictures

British Virgin Islands firm named nearly the same as a firm 1MDB did business with

Telina Holdings

Another British Virgin Islands firm

Note: Red Granite has said these were loans that are being repaid and that the $50 million is already repaid.

Sources: Malaysia’s Attorney General; people familiar with investigations

A November 2012 loan agreement from Telina Holdings, reviewed by the Journal, shows the $50 million was to fund “The Wolf of Wall Street.” This loan has been repaid, said people familiar with it.

The spokesman for Red Granite said it “has been repaying and will continue to repay all of its loans in accordance with their terms.”

It isn’t clear to whom Red Granite could repay the $105 million loan. The British Virgin Islands firm that extended it was liquidated last June.

“Red Granite had no reason to believe at the time that the source of Aabar’s funds was in any way irregular and still believes the loan to be legitimate,” said the film company’s spokesman.

Once “The Wolf of Wall Street” was in production, Messrs. Aziz and McFarland were sometimes on the set and involved.

On Dec. 31, 2012, around the end of filming, many of those involved celebrated New Year’s festivities in Australia and then flew to Las Vegas on a rented jetliner in time to celebrate it again, according to people familiar with the trip, who said the celebrants included Messrs. Aziz and Low, “Wolf of Wall Street” stars Mr. DiCaprio and Jonah Hill, along with singer and actor Jamie Foxx, an acquaintance of Mr. Aziz. A representative of Mr. Foxx declined to comment. A spokeswoman for Mr. Hill didn’t respond to a request for comment.

Six months after the movie’s debut, Messrs. DiCaprio, Aziz and Low attended the Brazilian World Cup and spent time on the Topaz, a 482-foot yacht owned by Sheikh Mansour Bin Zayed Al Nahyan, chairman of the Abu Dhabi sovereign-wealth fund IPIC, according to people familiar with the excursion. Sheikh Mansour, who is also deputy prime minister of the United Arab Emirates, didn’t attend, they said.

The success of “The Wolf of Wall Street” established Red Granite as a player in Hollywood. It went on to produce “Dumb and Dumber To,” a sequel to the 1994 Jim Carrey and Jeff Daniels comedy, and another comedy, “Daddy’s Home,” with Will Ferrell and Mark Wahlberg. It is planning to bring out a film about George Washington.

Investigations of 1MDB “will not affect our ability to move forward with the exciting projects Red Granite is developing,” the firm’s spokesman said.

FT : Airbus in talks with SFO over export credit

Airbus in talks with SFO over export credit

Airbus is in discussions with the UK Serious Fraud Office after admitting that it had failed to notify authorities about the use of third-party agents in deals it was asking the UK government to cover with financing guarantees.
The European aircraft maker revealed its errors late on Friday night in a brief statement.

A spokesman said that the errors had been discovered in an internal review of compliance, and that some export credit had “temporarily” been suspended. However it was confident that the customers affected would soon have the financing needed to realise their orders. The group’s guidance on orders and deliveries remained unchanged.
“The group believes that although some export credit financing will be temporarily unavailable, the affected customers will be able to resume obtaining such financing or refinancing in the near future,” the company said in the official statement. “The group is co-operating with the relevant export credit agencies to resolve this issue as soon as possible.”
Third-party intermediaries on deals have been the target of anti-bribery regulation.
The major components of Airbus commercial aircraft are manufactured and assembled in France, Germany and the UK, giving the company access to finance support from all three governments.
The FT was told that the French and German export credit agencies do not require the same level of disclosure, hence the omission on agents by the company in the forms submitted to the UK. Roughly 6 per cent of Airbus deliveries was covered by export credit last year, of which the UK is not the largest share.
The UK export credit agency on Friday said it was now up to the SFO to decide whether to pursue the matter further.

FT : IMF weighing exit from Greek bailout

IMF weighing exit from Greek bailout

The International Monetary Fund is considering forcing Germany’s leadership to quickly grant wide-ranging debt relief for Greece or allow the Fund to exit Athens’ bailout programme after six years, according to a transcript of an internal IMF teleconference published by WikiLeaks.
The teleconference, between the head of the IMF’s European operations and its top Greek bailout monitor, is the clearest sign to date that the Fund wants to leave Greece’s €86bn rescue to the EU alone and wash its hands of a programme that has led to a torrent of criticism.

During the call, which occurred just two weeks ago, Poul Thomsen, head of the IMF’s European bureau, notes that Berlin is under intense political pressure because of the refugee crisis and suggests confronting Angela Merkel, the German chancellor, to either agree to debt relief or allow the IMF to exit.
German officials have repeatedly said they could not participate in Greece’s bailout without the IMF on board, and senior members of the Bundestag have warned Ms Merkel they would reject new eurozone loans to Greece if only EU authorities were monitoring the programme.
“Look, you Ms Merkel, you face a question, you have to think about what is more costly: to go ahead without the IMF? Would the Bundestag say, ‘The IMF is not on board’?” the transcript quotes Mr Thomsen as saying to his staff. “Or [does Ms Merkel] pick the debt relief that we think that Greece needs in order to keep us on board? Right? That is really the issue.”
The IMF said it would not comment on “supposed reports of internal discussions.” But it noted that it has long pushed for “a credible set of reforms matched by debt relief from [Greece’s] European partners.”
One official involved in the talks said the transcript accurately reflected Mr Thomsen’s private and publicly-stated views, albeit in “more direct and colourful language.” Many of the points raised by Mr Thomsen in the call have been made publicly on his IMF blog.
Greek officials, however, reacted angrily to the revelation, arguing it was evidence the IMF was “blackmailing” Germany on the debt relief issue.
“We will not allow anyone to play with fire and blackmail Greece or Germany or Europe,” said a senior Greek official. Alexis Tsipras, the Greek prime minister, was meeting with his cabinet on Saturday to decide how to respond and was expected to talk to Christine Lagarde, the IMF managing director, later in the day.
The IMF teleconference came just days after Wolfgang Schäuble, the powerful German finance minister, publicly said he was opposed to Greek debt relief — despite the fact eurozone leaders agreed to restructuring last July at a high-drama EU summit that agreed to a third bailout programme.

The transcript shows IMF officials fretting that despite public claims, eurozone leaders wanted to move quickly to agree debt relief — which has long been an IMF demand, since Mr Thomsen believes Greece cannot survive economically without a large-scale restructuring — a decision will probably be delayed until July, when Greece is faced with its next big debt payment.
“What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default,” Mr Thomsen is quoted as saying. “And possibly this is what is going to happen again. In that case, it drags on until July.”
But Mr Thomsen notes that in addition to causing instability in Greece, a drawn-out deliberation on debt relief is politically dangerous for the EU because it will coincide with strife prompted by the refugee crisis and play out at the same time as Britain’s June 23 referendum on EU membership.
“Clearly the Europeans are not going to have any discussion a month before the Brexit [vote] and so, at some stage, they will want to take a break and then want to start again after the European referendum,” Mr Thomsen says.
Olga Gerovasili, a Greek government spokesman, said the statement showed Mr Thomsen was pushing for a Greek default before the British referendum in June.
"The Greek government asks the IMF for explanations whether pursuing the creation of bankruptcy conditions in Greece, just before the British referendum, is the Fund's official position,” Ms Gerovasili said.
A spokeswoman for Ms Merkel declined to comment. Berlin is likely to play down the reported remarks and avoid inflaming the political tensions surrounding the Greek rescue. The government is expected to remain very sceptical about deep debt cuts for Athens: it has repeatedly argued that these do not have to be on the immediate agenda as Greece has already been granted debt relief for the next few years.
Berlin will however be keen for the IMF to stay involved in the rescue, as the Bundestag’s support for the package depends on continued IMF financial backing.
Ms Merkel is also concerned to avoid undermining support for the EU in the UK in the run-up to the referendum. She has said that British membership is not only in UK’s interest but also Germany’s and the whole EU’s.
Although much of the transcript reiterates well-known IMF positions on Greece, it lays out in clear detail the profound differences between Mr Thomsen and the European Commission, and highlights the IMF’s belief that Brussels no longer has any credibility in judging Greece’s fiscal and economic performance. The IMF and the commission are the bailout’s two leading monitors and have clashed for months over how to proceed with the programme.
Delia Velculescu, who oversees the Greek programme for the IMF, is quoted showing frustration with the European Commission’s backsliding on reforms required by Athens and says eurozone finance ministers should be forced to decide whether to accept the IMF’s pessimistic view of the bailout’s likelihood of success or a more optimistic view from Brussels.
“They need to take a stand on whether they believe our projections or the commission’s projections,” Ms Velculescu says.
Despite Greek anger over the disclosure, the transcript also shows the IMF arguing on Greece’s behalf, saying it wants to ease off tough budget surplus targets and grant Athens significant debt relief — both policies Mr Tsipras has long asked for.
“I hope for the sake of the Greeks we are going to find a solution soon,” Mr Thomsen says.

Barron's : Endo Offers a Chance for 50% Upside

Endo Offers a Chance for 50% Upside

Promising products could revive the drugmaker’s battered shares. Hurt by fallout from the Valeant fiasco.

Endo International ’s shares have been halved in value in 2016, but the specialty pharmaceuticals maker can make a recovery over the next 12 to 24 months, and its stock could rebound more than 50%.

After a debilitating first quarter, there’s no doubt that Endo’s Nasdaq-listed shares (ticker: ENDP) are cheap. They traded Friday at $28.50, less than five times estimated earnings for 2016 and 2017. The company has a market value of $6.37 billion.

The stock is down 54% from $61.22 at the end of 2015. This time last year, shares of Dublin-based Endo were close to $100.

SINCE LAST SUMMER , the entire sector has been infected by the symptoms that hit Valeant Pharmaceuticals International (VRX), whose share price has plunged amid scrutiny of its strategy of pursuing growth through debt-fueled acquisitions and cranking up prices for established products, rather than investing in research and development to find new drugs. Valeant has attracted political ire and questions over its accounting practices, too.

Not surprisingly, rivals such as Endo, which develops and manufactures branded pharmaceuticals, generic products, and over-the-counter drugs, have been quick to highlight the differences in their own business models. However, they haven’t been immune from fallout.

Endo, whose chief executive, Rajiv De Silva, was formerly Valeant’s chief operating officer, has done little to help its cause.

In March, the company trimmed its forecast for the first quarter, just three weeks after offering initial guidance. And Thursday, it was slapped with a lawsuit by the Federal Trade Commission alleging that it violated antitrust laws by paying rivals to delay generic competition to branded drugs.

Endo already faces a raft of litigation stemming from injuries linked to its vaginal mesh products, which are intended to treat pelvic organ prolapse and urinary incontinence. It has allocated more than $2 billion to pay compensation to women who say they were harmed.

But Endo’s model isn’t broken, and most analysts seem to think the recent selloff has been overdone. “I certainly think so,” says Randall Stanicky, managing director of global equity research at RBC Capital Markets. “The question is: What will be the catalyst to reverse that weakness?”

The catalyst could be a new drug or additional uses for existing products. This year will see Endo launch generic versions of cholesterol medicine Zetia and bipolar treatment Seroquel XR.

Among Endo’s branded products, management is particularly excited about Xiaflex, currently used to treat Dupuytren’s contracture and Peyronie’s disease, conditions related to collagen disorders, but it could have more than a dozen additional uses.

Xiaflex, which posted 2015 sales of $158 million, could soon become Endo’s best seller. Its current No. 1 product, Voltaren Gel, a nonsteroidal anti-inflammatory for the relief of joint pain, had $207 million in sales last year. But it faces competition from a generic version launched last month. Endo’s management also is excited about Belbuca, a treatment for chronic pain that has just been launched.

In 2016, Endo is forecast to earn $1.32 billion, or $5.89 per share, on $4.37 billion in revenue. Next year, it is projected to earn $1.50 billion, or $6.73 a share, on $4.76 billion in sales. It made $975 million, or $4.66 a share, on $3.27 billion in 2015.

As a result of a string of acquisitions, Endo’s debt is relatively high. At the end of 2015, net debt was $8.3 billion, or a ratio of 4.37 times earnings before interest, taxes, depreciation, and amortization, a measure of cash flow.

Leverage has come under the microscope in the wake of Valeant’s problems, so Endo is keen to reduce its net debt/Ebitda multiple to a range of three to four times. That would reduce its financial flexibility in the near term, but could put the drugmaker on a much firmer footing over the long run.

Analysts prefer to value Endo’s shares on a ratio of enterprise value to Ebitda, instead of price/earnings, to take into account its debt. The stock currently trades at an enterprise value of 6.7 times estimated 2017 Ebitda. In contrast, rival Perrigo (PRGO) changes hands at 11.9 times and the sector average at 8.6.

Endo may suffer some pain over the next couple of quarters, but its prospects could perk up over the near to medium term. Stanicky at RBC Capital Markets calculates that it could earn $5.50 this year, more than 6% below consensus, owing to the impact of the generic version of Voltaren Gel, but he rates Endo at Buy with a $45 price target. That could take away some of investors’ pain.

Barron's : Energy Roundtable: 12 Oil Rebound Picks

Energy Roundtable: 12 Oil Rebound Picks

Four pros guide investors through the sector’s turmoil—and pick stocks and bonds for the next boom.

Energy investors have arrived at the fifth stage of grief—acceptance. It hasn’t been easy. The price of oil has dropped 62% in the past two years, as easy access to credit helped fuel a drilling binge that resulted in massive oversupply. Nor did it help that China’s economy, once a key source of demand for fossil fuels, slowed precipitously. The resulting crash in crude prices, from $107.26 a barrel in June 2014 to a low of $26.21 this past February, has wreaked havoc across the industry.

But just as investors were getting used to the fact that a recovery would be slow to come, oil bounced 46% to $38.34. The question now is whether the worst is over for energy companies—or whether there’s more pain on the way.

Barron’s recently sat down with four energy pros to guide us through the turmoil in the oil patch. While they all agreed that there will be tough times ahead—even the optimists are somewhat pessimistic—they all saw opportunities amid continued volatility. They also offered their pick of companies that could be poised to take advantage when the energy bust eventually turns to boom.

Barry Kupferberg is the director of research at Trilogy Capital Management, a $125 million hedge fund that specializes in distressed debt. Trilogy started betting against oil companies in 2014, but has since wagered on a rebound in some of the most beaten-up bonds, despite Kupferberg’s pessimism about where oil will be in the months ahead. He has more than 30 years of experience in the energy and power industries.

Barry Kupferberg notes that the oil industry spent $800 billion on new projects in 2014—but plans to spend just $400 billion this year. Photo: Jenna Bascom for Barron's
Robert Thummel, a portfolio manager at Tortoise Capital Advisors, helps oversee $12 billion, including $1.6 billion in the Tortoise MLP & Pipeline fund (ticker: TORTX), among the top-performing master-limited partnership funds this year and in the top quartile of such funds the past three years.

Harlan Cherniak, a director with the special-situations team at private-equity firm Kohlberg Kravis Roberts, helps oversee $8 billion in debt and equity, particularly distressed situations. With so many energy companies in trouble, Cherniak provides a perspective on what happens when times get tough—real tough.

Richard Daskin is chief investment officer at RSD Advisors and also subadvises Cumberland Advisors’ MLP investments. MLPs have had a challenging time this year—the Alerian MLP ETF (AMLP) has fallen 29% in the past 12 months—but Daskin sees opportunities in some of these beaten-down pipeline companies.

Barron’s: Oil has taken investors on a wild ride this year. In February, West Texas Intermediate crude, the U.S. benchmark, plunged to $26.21 a barrel, its lowest level since 2003. Since then, it has gained 46%. What’s going on?

Robert Thummel: A global glut. Supply is exceeding demand, plus we have high inventory levels. That has resulted in one of the biggest declines in oil prices we’ve seen in a long while.

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Robert Thummel of Tortoise Capital looks for companies with low debt that can gain market share even with oil at $30. Photo: Jenna Bascom for Barron's
So what’s caused the recent rebound?

Harlan Cherniak: The demand side of the equation has actually been pretty robust. Despite a very warm winter, we actually saw an increase in demand, perhaps because gasoline was cheaper.

Barry Kupferberg: There have been several fundamental changes around the world. Capital spending has slowed significantly—the industry has gone from spending nearly $800 billion in 2014 to $400 billion this year. The mood in China is more upbeat today than it was, and China counts for a significant amount of demand around the world. And we’ve seen OPEC [the Organization of Petroleum Exporting Countries] at least receptive to a meeting—that’s important. There are clearly countries that can’t survive with the current oil prices, and they are pressuring OPEC to do something. All of those things account for some bottoming, even if we’re not quite at a bottom.

How realistic is it to expect production cuts from OPEC?

Richard Daskin: Not very. Even just getting all the OPEC nations to agree to a production freeze will be very complicated. Right now they’re talking about it, and that’s raised the price of oil. That rally is because sentiment has changed. Investors think the producers are cooperating—but there is no deal yet.

Cherniak: OPEC is highly political. Look at the kingdom of Saudi Arabia: It has 28 million civilians that rely heavily on subsidies from the government, which are reliant on income from oil exporting. At some point production will have to be curtailed [to drive prices higher].

Is the bounce in oil then simply a sentiment shift? How much higher can it go?

Thummel: Our estimate: $50 oil by the end of 2016. For that to happen, demand for crude oil worldwide has to continue. We think it will, and then some: The growth in long-term demand has been about a million barrels a day for the last couple of decades. Last year it was substantially higher than that. This year it will be substantially higher again. U.S. production has started to fall. As production continues to fall and demand continues to rise, we will get to $50 oil by the end of the year.

Cherniak: My 2016 year-end guesstimate would be $40 per barrel. By 2018, $60 or $65. The catalyst will be both inventories peaking at the end of ’16 and a tidal wave of financial restructuring across the oil and gas industry.

Kupferberg: I also think we end 2016 at $40, and then longer term we settle somewhere around $50 oil out in ’17 or ’18. Although production has been curtailed, there’s the ability to bring a lot of it back on line quickly if oil prices rise. That will keep more of a lid on prices than in the past. A falloff in demand from China would concern me, and that’s a real risk given the way that country has grown through issuance of debt. There is so little transparency into what’s going on in that country; there has been tremendous pressure on the renminbi and capital flows. All of that can translate into a very ugly picture, precipitate a downside to everything we’re talking about.

Daskin: I guess I’m the bull. Dec. 31, 2016: $65. Dec. 31, 2018: $80. There could be a surprise source of demand, such as a geopolitical incident, OPEC cooperation, or a bounce in emerging markets. The emerging markets have a growing middle class, which buys cars and washing machines. So $20 or $30 a barrel is not a long-run or even an intermediate-run equilibrium price. Likewise, $100 to $120 a barrel probably isn’t a sustainable long-run price either.

What happens if oil stays in the $30s?

Kupferberg: This industry was not designed to sell its product at $30 a barrel. These companies have to earn a return on their capital. The generally accepted price needed to make a fair return is probably closer to $50. Oil can fall to $30 or even $20 for some short period of time, but at some point there’s not enough profit to be made, and it will force a rebalancing of supply and demand.

Can anyone make a profit down there?

Thummel: Technology is changing the rules of the game. Just a few years ago, it cost $10 million to drill a well that would produce 500,000 barrels of oil in, let’s say, the Permian Basin in West Texas. That required $80, $90 oil for that producer to make an economic return on its capital. Now, that same well in the Permian Basin would cost $5 million to $6.5 million, and you’d get a million barrels. That takes the break-even price needed to earn an economic return down to $35 to $40, maybe even $30 a barrel.

Harlan Cherniak of KKR expects to see a “massive wave of bankruptcy filings.” Photo: Jenna Bascom for Barron's
Which companies have the lowest costs?

Thummel: Pioneer Natural Resources [PXD], one of the largest producers in West Texas, is a fantastic company. Its management team has been through these commodity price swings before. It has low debt. While all these other guys on the high-yield side struggle to figure out how they are going to cure the balance sheets when oil prices recover just a little, Pioneer is going to gain more and more market share and grow its production even in this $30 to $40 low oil-price environment.

This year is the first that U.S. companies will be able to export oil and natural gas. Why is that a big deal?

Thummel: This is really a milestone year for the energy sector. The U.S. is going to become a significant supplier of low-cost energy to the rest of the world. Cheniere Energy [LNG], which operates liquefied natural gas terminals, has a first-mover advantage in the U.S. liquid natural gas export business. It is going to become a lot larger scale, and will just continue to extend for years and years to come.

What role does the debt energy companies have issued play in a recovery of oil prices?

Cherniak: Credit was the gateway drug for a lot of oil and gas producers. In the last 10 years, the exploration and production component of the high-yield index has increased from $20 billion to more than $120 billion. No other sector has increased its high-yield issuance like that since telecom in 2001.

Kupferberg: What’s happening with oil is very similar to what happens in other markets—real estate, shipping, or mortgages. I was talking to someone last week who described the situation in energy as akin to The Big Short.

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Richard Daskin of RSD Advisors notes that sometimes federal regulation provides a clearer view to an MLP’s revenue. Photo: Jenna Bascom for Barron's
That sounds dire—The Big Short chronicled how just a few investors saw the growing problem in mortgage-backed bonds, which eventually touched off the financial crisis.

Kupferberg: Since 2012, energy companies have issued more than $200 billion in high-yield bonds at very low interest rates. Because yields were even lower elsewhere, people were willing to buy the riskier, high-yield bonds from energy companies. But now, those risks have manifested: With oil at these prices, those companies are not economic. That’s akin to subprime borrowing.

Cherniak: Look at the number of companies that have been downgraded by the credit-rating agencies. Since the beginning of 2015, Petrobras [PBR] debt has moved into the junk world. So has Gazprom [GAZP.Russia], Freeport-McMoRan [FCX], Anadarko Petroleum [APC], Vale [VALE], and Transocean [RIG]. That shows the sheer magnitude of this potential tidal wave of debt downgrades.

And now the credit markets have closed to many oil companies who need to issue new bonds to finance their ongoing costs. What are they to do? Can they access their bank credit lines?

Cherniak: Every year, banks do an analysis of their reserve-based lending—they come up with a value as to how much all that stuff in the ground is worth. If it’s worth $1.5 billion, a company can usually draw up to $1 billion in credit.

Daskin: They call that a redetermination. Typically banks do it in April and October.

Cherniak: Now, as you might imagine, as oil has gone from $120 to $30, the value of what’s in the ground has come down dramatically. Banks are the piggy banks for a lot of the E&P companies. Without that cash, default rates are going to tick up meaningfully. You are going to see a massive wave of bankruptcy filings.

Are any bonds safe?

Kupferberg: We took the view in January and February that the proverbial baby had been thrown out with the bathwater, and we could invest in very high-quality companies that were trading at attractive yields—8% to 12%. Any risk had been fully factored into prices, even if there wasn’t a recovery.

We invested in bonds from two exploration and production companies, Anadarko Petroleum and Hess [HES]. Hess has one of the lowest leverage levels in the business, and it is a junior partner to one of the majors, either ExxonMobil [XOM] or Chevron [CVX], in several wells, each of which was considered among the most significant discoveries of 2015. Anadarko has a mix of high-quality U.S. assets, plus it operates in the Gulf of Mexico and West Africa. It’s a mix that could be attractive to a “major.” The bond is not only a yield play, but could also ultimately see a big benefit if the company gets acquired. The bonds that we were buying in the low $80s could appreciate to $135 if they were bought.

Speaking of Exxon and Chevron: Their debt appears safe, but what about their dividends?

Thummel: Exxon has increased its dividend 33 years in a row. Chevron just had its investor day, and the first bullet point was about maintaining and growing its dividend. I don’t think the dividends are going anywhere.

Oil-services companies have been under a lot of pressure—they’ve dropped 19% in the past year. But it’s also an area where we’ve seen consolidation, with Halliburton ’s [HAL] offer for Baker Hughes [BHI], and Schlumberger ’s [SLB] bid for Cameron International [CAM]. Will there be more?

Cherniak: We’ve been focused on the companies that make the sand that goes into the hydraulic-fractioning process. Sand is like the doorstop that keeps the door opened; it keeps the fissures in the shale open to allow oil and gas to flow in and out. The demand for sand is strong, but the market was oversupplied into this downturn. You need to see consolidation to rationalize that supply-demand imbalance. The No. 1 player is a company called U.S. Silica Holdings [SLCA]. They sell to Halliburton and Schlumberger as well as directly to some of the E&P competitors. It recently issued new stock for that purpose, so now they have a war chest to pursue other companies. U.S. Silica will be the consolidator.

But even among companies that could be facing bankruptcy, you’re seeing opportunities. Why is that?

Kupferberg: We like the 13% secured Permian Resources notes due in 2020. It’s secured by attractive acreage in the Permian Basin, which is thought to be one of the lowest-cost oil basins in the U.S. This tranche represents the first $530 million of a $3 billion capital structure, and even though the company is likely to face a restructuring, we believe the notes are fully protected by the value of the collateral. So you get a very attractive yield—10.9%—in a situation where your principal is protected, unlike an unsecured high-yield bond where typical recovery can be in the single digits.

Master limited partnerships have faced massive credit issues, with some—like Linn Energy [LINE]—on the verge of bankruptcy. The Alerian MLP index has fallen 47% since oil prices started dropping in June 2014. Weren’t MLPs supposed to be “toll collectors” who simply moved oil and natural gas from one place to another—and would do well no matter what the price of oil?

Daskin: Wall Street did a really poor job of selling MLPs. Some Wall Street firms touted them as equivalent to bonds. They’re not. MLPs are equity and they are affected by crude oil prices. They are not toll roads unless you define a toll road as the New Jersey Turnpike being able to charge a dollar one day and $5 the next. Some pipeline companies are investment-grade, and have customers with 10- or 20-year contracts, that’s like a toll road—but that’s a small percentage of the business.

Do MLPs have further to fall?

Kupferberg: There is another shoe to drop. Infrastructure MLPs have generally been able to increase their payouts to investors through growth, and they grew through acquisition. As the size of the infrastructure needed in this country shrinks, which it will as production declines, there will be massive overcapacity, or infrastructure in the wrong places. Ultimately, many of these MLPs are going to have to cut their dividend, and that’s going to put further pressure on their stock prices.

Should investors avoid all MLPs?

Thummel: No. Some MLPs are really critical to energy. They develop the infrastructure. It is kind of like your cardiovascular system—without these critical pipelines, oil and gas companies can’t transport their product. Spectra Energy Partners [SEP] is building new pipelines so producers in the Marcellus Shale in Pennsylvania can move natural gas north to Canada and northeast to New England for power generation, and south to the Gulf Coast where it’s being exported. There are a lot of good MLPs out there.

Daskin: Spectra Energy Partners is mainly an NGL [natural-gas liquids] pipeline that’s an affiliate of Spectra Energy [SE]. Its distribution is 5.3%. Spectra has a better risk profile because many of its end users are electric utilities, which are large companies and financially strong. Spectra also has a 1.2 times coverage ratio, a measure of how strong the distribution is. Generally you want it more than 1.

What else do you like?

Daskin: Magellan Midstream Partners [MMP], a crude-oil pipeline and storage business. A good portion of their pipelines are regulated by the Federal Energy Regulatory Commission, which sets pricing on many interstate pipelines. So pricing is consistent and generally allowed to increase by a spread over inflation.

Phillips 66 Partners [PSXP] is a subsidiary of Phillips 66 [PSX], one of the largest refiners in the country. The MLP provides infrastructure related to crude oil and refined liquid products, and benefits from its large, well-capitalized parent selling, or “dropping down,” assets into the partnership.

Rob, you’re bullish on some MLPs too.

Thummel: One of our largest holdings in our Tortoise Energy Infrastructure [TYG] fund is Enterprise Products Partners [EPD]. It’s been around a long time. And in a sub-2% 10-year Treasury market, a large-cap MLP like Enterprise with a 6.3% yield and visible dividend growth for an extended period is very attractive. Enterprise will also benefit from the exportation of oil and natural-gas liquids. Sunoco Logistics Partners [SXL] is developing a lot of great infrastructure in the Northeast that will benefit from the beginning of the exportation of ethane or this natural-gas liquid. It has a little bit higher yield—7.6%—and a little bit higher growth.

Barry, you like the bonds of one pipeline MLP, Rockies Express Pipeline. Can you explain why?

Kupferberg: It’s one of the largest pipelines in the U.S., and was originally configured to bring gas out of the Rockies to markets as far away as eastern Ohio. Now, it’s also able to bring out otherwise stranded gas from Appalachia. It’s especially attractive given possible merger-and-acquisition activity in the pipeline sector, such as follow-on deals to TransCanada ’s [TRP] purchase of Columbia Pipeline Group [CPGX].

Harlan, you also like some power companies?

Cherniak: The Environmental Protection Agency has been clamping down on the number of coal-fired power stations in certain markets. That benefits the existing coal plants with scrubbing technology and the highly efficient gas plants in the U.S. It will also drive a pretty material increase in what’s known as the “spark spread,” or the gross margin that a gas plant makes per unit of power.

There are some public bond ways to express this view on the power theme. Dynegy’s unsecured notes on a total-return basis look relatively attractive—the 7⅝s due in 2024. Calpine’s 5⅞ notes due in 2024 are a pure play on the natural-gas fleet assets that it owns in the U.S.

>>> General Mills (GIS) +6% on the Week - Nestle Rumors getting some traction

This Week rumor was that Nestle could be interested buy the company...stock is almost up 6% on the week with more than 2 times the weekly average volume with 32mil shares traded this week, and almost 20mil traded on the last 3days of trading...as NYSE volume was mainly below average.

General Mills calls traded ~13.7k contracts today, ~3.4x 4-wk avg volume as the underlying hit 52-wk high of $64.99, up as much as 2.6% on the day.
  • April $62.50 calls, May $67.50 calls, and April $65 calls most active
  • GIS 4 buys, 14 holds, 4 sells, avg PT $59: Bloomberg data

{GIS US Equity S5CONS Index RGIP 5 <GO>} {GIS US Equity S5CONS Index GRT D <GO>}

{GIS US Equity SPX Index RGIP5 <GO>} {GIS US Equity SPX Index GRT D <GO>}

{GIS US Equity NESN VX Equity RGIP5 <GO>} {GIS US Equity NESN VX Equity GRT D <GO>}

--> Other names to watch in the sector MDLZ, MJN...potential targets also for Nestle or Danone...keep in mind that last move on eur$ is also a +ve factor for NESN & BN to move in the US where Growth expectations are higher than in Europe and less risky than in the EM area.