TheChek News Flow

Abengoa has won approval from 75 per cent of creditors it needs to push through a restructuring plan that it hopes will help it avoid the biggest corporate bankruptcy in Spanish history.

The heavily indebted renewable energy group had required the support of 60 per cent of lenders by Monday morning to secure a standstill agreement, designed to give it more time to convince the market that its restructuring plan is viable.

Ahead of a hearing in its home city of Seville, the company announced that 75 per cent of lenders had backed the agreement.

The news suggests that the company, which has a debt pile of €9.4bn, is likely to secure the level of backing it needs to press ahead with the full restructuring — also three-quarters.

“This key step in the restructuring process of Abengoa . . . will permit the company to complete the Financial Viability Plan that has already been accepted by lenders in order to stabilise business and protect its leadership in the energy and environmental sectors,” the company said.

A person close to Abengoa said it expected to have the deal implemented by May or June, when new management will be in place. Delays in the Spanish legal system and the complexity of the agreement present the only risks to the deal falling behind schedule, the person said.

“This is good news for Abengoa,” said Maxime Kogge, an analyst at Spread Research. “It appears to have gone quite smoothly. Now the company has to work hard to rebuild confidence among its suppliers and trade partners in the sector.”

Under the restructuring proposals, Abengoa would receive €1.5bn-€1.8bn in fresh funding. The company raised €137m in emergency loans last week to pay suppliers and staff wages. Those lenders that extended the funding, which included Elliott Management, KKR and Oak Hill Advisors, would receive 55 per cent of the equity in the company. Investors, would be among the new backers.

Existing creditors, who face a 70 per cent haircut as part of the restructuring deal, would get 35 per cent of the shares in compensation. The shareholding of existing equity holders, including the founding Benjumea family, would fall to 5 per cent.

“There have certainly been some mistakes along the way with Abengoa,” said Pedro Nueno, emeritus professor of entrepreneurship at the IESE business school. “But it looks like the business plan it now has in place is the correct one. It has been able to raise some short-term cash, which shows that investors want it to keep breathing. The cost to everyone involved of Abengoa going bankrupt is high — the creditors also have a lot to lose.”

Expectations are sky-high for Tesla Motors’ new Model 3 mass-market car to be unveiled Thursday. That presents the stock with its toughest test yet.

The premium valuation Tesla shares fetch versus more established rivals is largely due to investors’ vision of affordable electric cars generating outsize revenue growth and, in turn, major profits. To get there, Tesla needs to achieve economies of scale that lead to profits and the Model 3 is central to that. But the target market for this model is far more price sensitive than for earlier, luxury Tesla products. Given that, tax incentives will play an important role.

The problem: the more popular Tesla’s car becomes, the quicker the company might hit a point where certain incentives diminish or disappear. That, in turn, could crimp sales.

Details on most key features of the Model 3 are scant, but Tesla has said the base model will start at $35,000 before tax incentives. Those incentives are a big deal for buyers. The standard federal electric-vehicle tax credit amounts to a $7,500 rebate. Some states offer more perks on top of that.

These incentives could make the Model 3 cost comparable to more popular vehicles powered by internal combustion.

But actually receiving the Model 3 at this advantageous price isn’t straightforward. One reason: that federal credit won’t be available to new car buyers forever. According to the Internal Revenue Service, the credit starts to shrink once a manufacturer sells 200,000 cars for use in the U.S. After that, future cars sold are eligible for half the tax credit for two quarters, and 25% for two quarters after that before vanishing altogether. That will push car prices higher.

Hitting that milestone is inevitable should Tesla grow at the rate Chief Executive Elon Musk expects. If past geographic sales patterns hold up, Tesla could be more than halfway toward the threshold by the end of this year. And the Model 3 won’t be a regular sight on the roads soon, regardless of how much excitement Tesla generates on Thursday.

Tesla says it expects production and deliveries of the Model 3 to begin late in 2017. Meanwhile, existing product sales would push Tesla closer to the threshold, leaving fewer Model 3 buyers eligible for the full subsidy. Past product launches, such as the Model X sport-utility vehicle, faced yearslong delays.

Meanwhile, a rash of electric car competition from established manufacturers is set to come online in the next few years; those cars will generally be eligible for the subsidy.

The subsidy, which has been a selling advantage for Tesla, then would become a relative disadvantage. Tesla says customers will have up-to-date information about tax incentives when it comes time to actually buy the car. Then, too, the law could be changed to Tesla’s benefit.

And Mr. Musk has successfully defied skeptics before.

Nevertheless, the stock’s lofty valuation—it trades at 28 times expected 2019 earnings—leaves little margin for error. The prospect of diminishing federal incentives leaves it even less.

MergerMarket

Eldorado Gold (TSX:ELD) (NYSE:EGO), the Vancouver, British Columbia-based gold mining company, has seen a number of Chinese mining companies show an interest in its assets in the country, CEO Paul Wright said late last week.

During his prepared remarks on the 4Q15 earnings call, the CEO noted that in 2014, the company announced it was evaluating the merits of possibly listing its Chinese assets on the Hong Kong Stock Exchange.

“Since then we’ve had numerous approaches by Chinese mining companies looking to acquire these high quality assets,” Wright said. “I am of the opinion that we will have a resolution to this value-up maximization exercised within the near term and you should expect updates during the second quarter.”

In the Q&A session, Raymond James analyst Phil Russo asked Wright about the prices it was being offered for the Chinese business units. The CEO said any potential sale of these assets would reflect Eldorado’s desire for improvement and the alternatives for the Chinese assets. He noted that it was aware of the market valuation of the units.

“We’re not considering our divestment option to disappoint ourselves in the marketplace, I guess that’s the best way I’d describe it,” Wright said.

Eldorado announced in late October 2014 it had retained BofAML as its sponsor for a proposed Hong Kong Stock Exchange listing of its Chinese business units. Eldorado is the largest foreign producer of gold in China, the company said in its 30 October earnings release, with three operating gold mines (Jinfeng, Tanjianshan and White Mountain) and the Eastern Dragon project. The company's Chinese operations produced more than 325,000 ounces of gold in 2015, its website states.

A published report in January said Eldorado may pursue an accretive spinout or divestiture of its Chinese holdings in the first half of this year. The article noted that the potential sale of its entire Chinese portfolio, which has a net asset value of USD 710m, would give Eldorado the financial wherewithal to pursue accretive M&A.

Earlier on the call, JPMorgan analyst John Bridges asked if Eldorado was being approached with potential targets while it awaited permits for its Skouries mine in Greece.

"People do appear on our doorstep and occasionally have interesting ideas, not a lot. We are clearly in the mode of being open for interesting ideas going forward in the event that we did," the CEO replied. "I'd like to divest ourselves [of] the Chinese assets, we would be looking at some point on how we replace that production both internally and externally."

He added that while Eldorado was a little more open to external opportunities than it had been in previous years, there were very few "gems just waiting on the kerb to be picked up."

A report by this news service in September 2015, citing Wright, said the company’s IPO process for the Chinese units had "advanced to a degree.” The company was running a dual-track process and had seen enough serious expressions of interest that Eldorado wanted to see “where they may lead” in order to properly weigh the value of a potential IPO, the article said.

The CEO declined to identify bidders at that time. Zhaojin Mining [HKG:1818], Zijin Mining [HKG:2899], China National Gold and Jiangxi Copper [HKG:0358] were identified as potential bidders, according to a previous newswire report.

Eldorado’s M&A efforts have been largely focused on acquisitions in the past decade. However, it disposed of a Brazil-based gold company in 2008 and a Peru-based uranium mining company in 2009.

The company has used Canadian advisors for the majority of its buys in recent times, including GMP Securities on the financial side, along with Borden Ladner Gervais and Fasken Martineau Dumoulin for legal. The latter was used for the Peru-based sale.

In-country advisors have also been used, including Macquarie Group and Freehills for Australia-based acquisitions. Dorsey & Whitney has additionally been used on both the buy and sell side, according to the Mergermarket M&A database.

On the call, Eldorado reported total liquidity of just less than USD 670m, including USD 290m in cash and cash equivalents and USD 375m in undrawn lines of credit. The company has a market capitalization of CAD 2.9bn (USD 2.2bn).

Lufthansa isn’t alone in thinking Europe’s budget airline industry needs consolidating, but with cheap oil buoying profits, sellers may be in short supply.

Consolidation has been credited with transforming the profitability of the U.S. airline industry. Some hope the trick can be repeated in Europe’s scrappy low-cost sector, but don’t hold your breath.

Europe’s budget operators can be split into two camps. Ryanair and EasyJet, large, profitable operations with impressive track records of organic growth, sit in one of them. Neither carrier has much to gain from risky takeover activity.

In the other camp is a long tail of diminutive rivals with disparate strategies. This is where consolidation could be useful. The prize is an established third place after the two giants—“going for bronze”, as HSBC analyst Andrew Lobbenberg puts it.

Lufthansa Chief Executive Carsten Spohr has been particularly vocal about his ambitions for Eurowings, the German flag carrier’s low-cost arm. He told analysts last week he thought Ryanair and EasyJet had “reached critical size,” while Eurowings and its peers lacked the scale needed to compete properly. With its strong balance sheet, Lufthansa is therefore ready for the expected “wave of consolidation”.

But if the smaller operators are subscale, none is obviously distressed. That makes it a potentially expensive time to go deal-hunting.

True, earnings multiples in the sector are low, averaging about 8.5 times. But this is mainly because cheap fuel has turbocharged profits. The valuations merely show that investors think the companies will have to hand some of these profits back in the form of lower fares or, if the oil price continues to recover, higher fuel bills.

It is also hard to identify clear targets. Wizz Air, an ultralow-cost Hungarian airline, has carved out a successful niche in Eastern Europe. Both Lufthansa and Air France-KLM were rumored to be in talks to buy the company in 2014, but then the company floated in London. With passenger numbers booming and the shares up 42% since last year’s debut, the takeover opportunity has passed.

The other midsize operator is Norwegian Air Shuttle, which is pioneering low-cost long-haul flying. But the Oslo-listed company has ordered so many planes, with so much debt, that analysts view a deal as unlikely.

There are also blockages on the bidding side. The flag carriers have most to gain from bulking up their budget businesses. But both Lufthansa and Air France-KLM have unresolved labor disputes. Splashing cash on a low-cost operator could make agreement with unions tougher.

A more credible low-cost consolidator is International Airlines Group, which was set up as a vehicle for British Airways’ purchase of Iberia in 2011. The group also now includes Vueling, a budget operator based in Barcelona. Chief executive Willie Walsh bought Irish flag carrier Aer Lingus last year and has said he sees further scope for acquisitions, if and when the time is right.

In reality, bankruptcy prompted many of the U.S. airline mergers. Cheap fuel has revived European executives’ animal spirits, but it has also raised the cost of consolidation. Eager deal makers may have to wait for the next crisis.

An all-cash offer from a company that doesn’t compete against its target seems about as risk-free as deals come. But the latest bid for Starwood Hotels & Resorts Worldwide from Anbang Insurance Group may have some hidden pitfalls for investors.

Starwood’s board said Monday that a nonbinding proposal of $82.75 a share from a consortium led by the Chinese insurer is likely to be “superior” to a recently sweetened offer it received from Marriott International. Under the latter, Starwood shareholders would receive $21 in cash and 0.8 shares of Marriott per Starwood share. That offer was worth $75.91 a share as of last Thursday’s close.

For Starwood shareholders, the choice would typically be clear-cut. Anbang’s offer is higher and all cash, meaning the value of the deal won’t fluctuate before it closes. It also wouldn’t face antitrust review in the U.S. given that Anbang’s only other U.S. hotel property is Manhattan’s Waldorf Astoria.

But a March 22 report in Chinese media suggests that country’s insurance regulator may be poised to reject two plans by Anbang, including the Starwood offer, because the deals would break rules banning insurers from investing more than 15% of assets abroad. Indeed, the Chinese deal-review process is notably opaque, making it unclear exactly what Anbang would have to do to win approval if regulators are skeptical.

Marriott, which reaffirmed its commitment to its deal Monday, also urged Starwood shareholders to weigh whether the Anbang-led consortium would be able to line up the financing and regulatory approvals to close the transaction.

Granted, Starwood’s board appears to have weighed that possibility itself before coming to its preliminary “superior” ruling on the Anbang offer. That suggests it isn’t overly concerned with Chinese regulatory risk.

Still, given the $450 million breakup fee, plus up to $18 million of costs Starwood must pay Marriott to end their deal, it is a risk shareholders can’t ignore. For investors, the relative safety of Marriott’s bid may guarantee a better night’s sleep.

Marriott International, Inc. (NASDAQ: MAR) today reaffirmed its commitment to acquire Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT), confident that the previously announced amended merger agreement is the best course for both companies. The combined company will offer stockholders significant equity upside and greater long-term value driven by a larger global footprint, wider choice of brands for consumers, substantial revenue synergies, and improved economics to owners and franchisees leading to accelerated global growth and continued strong returns.

On 26, March 2016, Starwood notified Marriott that it had received an updated unsolicited proposal from a consortium of potential investors, led by Anbang Insurance Group, which its Board is considering. Marriott will monitor this development as it and Starwood continue to work toward the closing of its transaction and the successful integration of the two companies in anticipation of votes by each company's stockholders on 8 April 2016. Starwood stated today that its Board of Directors has not changed its recommendation in support of Starwood's merger with Marriott. Starwood stockholders should give serious consideration to the question of whether the Anbang-led consortium will be able to close the proposed transaction, with a particular focus on the certainty of the consortium's financing and the timing of any required regulatory approvals.

The new unsolicited proposal by the Anbang consortium follows a 21 March 2016 announcement by Marriott International and Starwood that the companies had signed an amendment to their definitive merger agreement. Under the terms of that amended merger agreement, Starwood shareholders will receive USD 21.00 in cash and 0.80 shares of Marriott International, Inc. Class A common stock for each share of Starwood Hotels & Resorts Worldwide, Inc. common stock. Starwood shareholders will own approximately 34 percent of the combined company's common stock after completion of the merger, based on current shares outstanding.

On 25 March 2016, Starwood and Marriott filed 8-Ks with the Securities and Exchange Commission (SEC) noting that Starwood's financial advisors have provided analysis that recognizes that in addition to the USD 21.00 per share cash portion of the amended Marriott – Starwood agreement, the stock consideration offers a superior long-term value for Starwood stockholders. The advisors' provided the company with opinions, available to all Starwood stockholders and attached to the 8-Ks, that noted the value range for Marriott on a standalone basis, before giving effect to the merger, is between USD 92.35 to USD 103.46 per share utilizing a discounted cash flow analysis for Marriott stock based upon the newly updated adjusted forecasts. Stockholders should review the 8-Ks in their entirety. The foregoing excerpt from the opinion of Starwood's financial advisors is only part of such advisors' analysis and is subject to a number of assumptions, qualifications and limitations which are described in detail in the 8-Ks.

Marriott International will have no additional comment until further developments occur.

Adjournment of Stockholders Meeting to 8 April

Marriott International also announced that it will adjourn to 8 April 2016 at 10:00 am local time the Special Meeting of Stockholders scheduled for 10:00 am today to vote on the company's proposed acquisition of Starwood Hotels & Resorts Worldwide in a merger transaction. The reconvened meeting will take place at Marriott's headquarters, 10400 Fernwood Road, Bethesda, Maryland 20817.

Stockholders who have already voted do not need to recast their votes. Proxies previously submitted will be voted at the reconvened meeting unless properly revoked. Marriott International encourages stockholders who have not already voted or wish to change their vote to do so using the instructions provided in their voting instruction form or proxy card.

Marriott International reminds stockholders, including employee stockholders, that their vote is important and encourages them to complete, sign, date and mail the proxy card at their earliest convenience. If stockholders have any questions or need assistance with voting, please contact Marriott International's proxy solicitor, Mackenzie Partners, toll-free at (800) 322-2885.