TheChek News Flow

The world’s most famous currency speculator has warned a vote on Thursday for Britain to leave the EU would trigger a bigger and more damaging fall for sterling than the day he forced Britain out of the Exchange Rate Mechanism almost a quarter of a century ago.

George Soros, writing in the Guardian, said that a Brexit vote would spark a “black Friday” for the UK, but the devaluation of sterling would bring none of the benefits to the economy that it enjoyed after it dropped out of the ERM on 16 September 1992 – Black Wednesday.

He said that, as in 1992, there would be big financial gains for speculators who had bet on the UK leaving the EU but that such an outcome would leave “most voters considerably poorer”.

Soros said that unlike after Black Wednesday, there was little scope for a cut in interest rates, the UK was running a much larger current account deficit, and exporters would be unable to exploit the benefits of a cheaper pound due to the uncertainty caused by a vote to leave the EU.

“Sterling is almost ­certain to fall steeply and quickly if leave wins the referendum,” Soros said. “I would expect this devaluation to be bigger and also more disruptive than the 15% ­devaluation that occurred in September 1992, when I was fortunate enough to make a ­substantial profit for my hedge fund investors at the expense of the Bank of England and the British government.”

In the months following the UK’s departure from the ERM, interest rates were cut from 10% to 5.5% – easing the financial burdens facing consumers and businesses. However, with official borrowing costs currently at 0.5%, Soros said rates were already at the lowest level consistent with the stability of British banks and meant there was little the Bank of England could do in the event that Brexit led to a recession.

A vote to leave would force the pound to slide towards parity with the euro – “a method of joining the euro that nobody in Britain would want” – and plunge more than in September 1992 when his $10bn (£6.9bn) bet against the pound broke the Bank of England.

“Too many believe that a vote to leave will have no effect on their personal financial positions. This is wishful thinking. If Britain leaves the EU it will have at least one very clear and immediate effect that will touch every household: the value of the pound would decline ­precipitously. A vote to leave the EU would also have an immediate and dramatic impact on financial markets, investment, prices and jobs,” Soros added.

“A vote to leave could see the week end with a black Friday and serious consequences for ordinary people,” Soros said.

Michael Gove, the justice secretary and leading leave campaigner, said Soros had previously predicted that Britain would be better off with the single currency, a forecast which proved the currency speculator had made mistakes.

“George Soros is an advocate of the single currency, an advocate of European integration,” he told BBC Radio 4’s Today programme. “If economic forecasters were as reliable as doctors or airline pilots then we’d all be billionaires. When we reflect on what George Soros is saying we also need to remember he has got things wrong in the past.”

Gove said the EU model was a “sinking ship” which Britain could unshackle itself from, and “send Europe in a better, more progressive direction”.

Two days before the polls close a series of high-profile figures warned about the risks of a vote to leave. Enda Kenny, the taoiseach of Ireland, appealed to Britain to vote to remain inside the EU, warning that the return of a stronger border between Ireland and Northern Ireland required by a Brexit vote would play into an old narrative – “one of division, isolation and difference”.

Writing in the Guardian, Kenny warned of a psychological effect, saying the reappearance of the old border after decades of work to promote peace and reconciliation “would be a step backwards and present an opportunity for others, with malign agendas, to exploit”.

Jeremy Corbyn repeated his careful endorsement of a remain vote. The Labour leader said he was “not a lover” of the EU but had come to a rational decision about his support for remain. He cautioned that either result was possible: “I’m hoping there is going to be a remain vote; there may well be a remain vote, there may well be a leave vote.”

Amid worries about whether Labour supporters would turn out for remain, Len McCluskey, who heads the Unite trade union, wrote that he was not surprised that they were concerned about immigration.

“In the last 10 years, there has been a gigantic experiment at the expense of ordinary workers. Countries with vast historical differences in wage rates and living standards have been brought together in a common labour market,” he said. “The result has been sustained pressure on living standards, a systematic attempt to hold down wages and to cut the costs of social provision for working people.”

Sterling rallied on Monday as polls published over the weekend showed a rise in support for the remain camp after the death of Jo Cox and propelled the pound to its biggest one-day move in almost eight years when compared with the world’s other major currencies.

Sterling jumped more than 2% to touch $1.47 against the dollar and headed towards €1.30 against the euro. The FTSE 100 index of leading shares jumped 3% to 6,204 – pulled higher by the banking and property companies that had dragged it lower in recent weeks.

Nigel Farage, the Ukip leader, accused remain supporters of trying to take advantage of the death of Cox. “What we are seeing here is the prime minister and the remain campaign trying to conflate the actions of one crazed individual with the motives of half of Britain who think we should get back control of our borders and do it sensibly.”

Soros said that speculators – hailed the Gnomes of Zurich in the 1960s by Harold Wilson – had made large profits at Britain’s expense at the time of the 1967 devaluation. “Today there are speculative forces in the markets much bigger and more powerful. And they will be eager to exploit any miscalculations by the British government or British voters. A vote for Brexit will make some people very rich – but most voters considerably poorer,” Soros said.

Not all economists agree with Soros’s assertion that a rate cut will not be possible: economists at JP Morgan are among those forecasting a cut to zero in August from the historic low of 0.5%.

But economists at Pantheon Macroeconomics expect sterling to plunge if there is a vote for Brexit. “If Britain opts for Brexit – as it well could, given the latest neck-and-neck opinion polls – sterling likely will plunge,” Samuel Tombs at Pantheon said, warning the market was underestimating how far sterling could fall. Tombs warned that capital outflows could be “gargantuan”.

We see no further upside for European equities for the rest of this year. While the weak May US payrolls report has lead to a dovish re-pricing of Fed expectations and reduced the risk in the near-term of re-entering the “doom loop” from a more hawkish Fed to a stronger dollar, lower oil prices, high HY credit spreads and lower equity markets, we

remain concerned about the growth picture. Chinese credit stimulus continues to fade and weak US corporate profits translate into reduced hiring and investment, meanwhile, fragilities in the US high-yield credit market continue to intensify with the 12m trailing default rate up to 5%, a new cyclical-high that is not being reflected in the current level of US HY spreads. We believe that these issues continue to significantly undermine the upside case for European equities from current levels.

--> Tom Tom is still a no brainer for me, Buy on Weakness...

PETRA DIAMONDS - Recovery of a 121.26 ct White Diamond at Cullinan........+3%

TDC - Sales of Swedish biz to Tele2. Proceeds likely used to deleverage.+2-3%

ALTICE - Revamps managementt, Drahi stays in control; Le Figaro.........+1-2%

AXA - New 5yr strategic plan looks broadly inline. At top end of BAML ests+1%

DIALOG - Senti +ve. Largan's pipeline remains steady for next 2 months....+1%

WHITBREAD - Relied. Premier Inn RevPAR weak but not as bad as feared......+1%

ICAP - We UPGRADE to Buy, PO 500p. Trading under 15x Mar18 ests post split+1%

CS - CEO said to tell staff its wrong to expect additional capital raise+0.5%

SAGA - Makes statement ahead of AGM. On track to achieve its '17 targets..u/c

KUKA - Investor Loh (currently holds 8.5%) rules out counterbid for Kuka..u/c

SPORTS DIRECT - In talks with Modells for joint Sports Authority store bidu/c

SIG PLC - Nothing done. SIG SHI refinancing of £130m placement notes......u/c

RICHEMONT - Value of wristwatches -21.3% in May aft adjusting for FX......-1%

TELE2 - Buys TDC Swedish biz for SEK 2.9bn. To undertake 3bn rights issue.-1%

SWATCH - Negative. Value of wristwatches -21.3% in May aft adj for FX.....-1%

UK MINERS - Copper -0.7%, Iron Ore -0.4% with BHP OZ -1%, RIO OZ -1.5%..-1-2%

JUST EAT - CFO stepping down end of Sep, to be replaced by Paul Harrison-1-2%

BHP - Nothing done. FY16 Met Coal target raised, thermal guidance trimmed.-2%

PETROFAC - Inline. Backlog down to US$19b and net debt increase the focus.-2%

GLENCORE - Said to have pulled out of Anglo American sale of coal assets..-2%

NORDEA - Press report capital shortfall. Denied by co. FSA reviewing....-1-2%

IMI - Negative read across from Senior warning on weakness in US market.-1-2%

KION - Agrees to buy Dematic for $2.1bn. Plans to fund with bridge loan.-2-3%

CHEMRING - Warning. FY16 anticipated to be slightly below market exp......-5%

SENIOR - Warning on weakness in US. H1 margins to be lower than exp....-8-10%

AXA -1-2% Seeks cumulated EU28-EU32b OCF, cons more like 34bn

Anima unch Pop Milan overhang story, but U/G'd away

Berkeley Grp M/P (bbg) home sales in London's best districts at 10 yr lows

Kuka M/P Investor Loh (holding 8.5%) rules out counterbid for Kuka

Miners -1% Aussie names opened on highs and gave back 1-1.5% since

Oils -0.5-1% Oil ADRs sold off into the US close c.75bps

Richemont -1% Swiss exports fell further 10% in May, inline with April

Saga M/P Trading update reads inline, on-track to achieve FY target

Sanatnder -1% Oi bankruptcy filing to weigh heavily on banks’ provisions

Santhera +0.5% EMA has validated Marketing for Raxone

Senior -3-5% Flexonics division reads poor, Q2 remains challenging

Stada M/P Hired banks to assist in maintaining independence

Stock Spir +1% Debt high than cons, but co announced a special divi of 10p

Swatch -1% Swiss exports fell further 10% in May, inline with April

Tele2 -2% Tele2 acquires TDC Sweden. Enterprise Value of SEK2.9b.

TDC +2% Tele2 acquires TDC Sweden. Enterprise Value of SEK2.9b.

VW -1% Evidence of addn class actions and co defends exec pay

Whitbread +1% Premier Inn & Costa lfl's better, confident of progress

Like-for-like sales across the group rose 1.8 per cent in the 13 weeks to June 2, its first quarter, up from 1.7 per cent during the final quarter of its last financial year.

This was despite a slight weakening in sales growth at Premier Inn. Like-for-like sales rose 2.1 per cent in the latest period, down from 2.2 per cent growth during the previous quarter. But sales growth at Costa recovered significantly. First quarter like-for-like sales at Costa rose by a more robust 2.6 per cent compared to just 0.5 per cent growth during the final quarter of last year.

Whitbread said Premier Inn continues to win market share but warned that the hotels market in Britain has been “weaker than expected”, particularly in London. Even so, the group said it remains confident of “making good progress” this year as it also pushes through a programme to keep a lid on costs.

Chief executive Alison Brittain said:

Whitbread delivered total sales growth of 8.0% in the first quarter as we continue with a relentless focus on our customers, innovation and investing in our strong brands. Costa has started the year well and Premier Inn continues to win share, albeit in a weaker than expected hotel market.

Ms Brittain, who took the helm at the end of last year, had a tough start to the job, having to unveil two sets of disappointing quarterly results. However, analysts were reassured after the company’s full year results in April, as Ms Brittain reaffirmed growth targets, set by former boss Andy Harrison at a time when the outlook was looking healthier.

Ms Brittain ran the rule over the targets to gauge whether they were still achievable in a climate where Costa faces increased competition from independent coffee shops that try to win customers over with artisan brews, while hoteliers have come under pressure from Airbnb.

Prior to today’s update, analysts had been expecting like-for-like sales growth at Premier Inn of 1.6 per cent and 1.9 per cent growth at Costa Coffee, according to a Bloomberg poll. Last year like-for-like sales across the group rose 3 per cent, which was down from much stronger growth of 6.5 per cent the previous year.

Dow +0.73% S&P +0.58% Nasdaq +0.77% Russell +1.14%

Macro :

- World Stocks May Rally 14%, ‘Global Wave’ Signals Suggest: BofA

- A Vote for Brexit Unlikely to Hurt U.K. Stocks: Fidelity’s Rossi

- Roubini: Brexit Would Cause ’Significant Damage’ to U.K. Economy

Keep an eye on :

- ANIM IM : Anima Raised at UBS; Loss of Both Main Distributors Unlikely

- CS FP : Axa Targets EU1B M&A Annual Spending Through 2020

- CS FP : Axa Seeks EU2.1b Pre-Tax Cost Savings by 2020, Earnings Growth

- BRK/A US : California Probes Berkshire for Duping Client on Insurance Cost

- BWO NO : BW Offshore Says All Lending Banks Support L-T Financial Plan

- CF US : Yara could eye CF Industries or OCI NA in attempt to revisit US expansion

- CSGN VX : Credit Suisse CEO Said to Tell Staff Shorts Wrong on Capital

- EDF FP : EDF U.K. CEO: Nation Must Remain in EU, Will Still Need Hinkley

- FB US : Facebook Says All Directors Re-Elected at Annual Meeting

- GLEN LN : Glencore-Led Group Said to Be Out of Anglo American Sale: AFR

- INVCORP BI : *INVESTCORP BUYS LUXURY ITALIAN MENSWEAR MAKER CORNELIANI

- KGX GY : Kion to Buy Dematic for $2.1b; Initial Funding Via Bridge Loan

- LSE LN : Six Sees Clearing Concentration Risk in Deutsche Boerse-LSE: BZ

- MCK US : McKesson Said to Mull Merger of IT Unit, Change Healthcare: Rtrs

- COX FP : Nicox Says U.S. FDA Grants Priority Review for AC-170 NDA

- OCI NA : Yara could eye CF Industries or OCI NA in attempt to revisit US expansion

- SAND SS : Sandvik, Weir Top Picks to Play Resource Industry Rebound: Exane

- SAZ GY : Stada Commissions Investment Bank to Strengthen Position: FAZ

- SCYR SM : Sacyr to Use EU317M to Amortize Debt Associated W/ Repsol Stake

- TDC DC : TDC Divests Swedish Unit to Tele2 for SEK2.9b

- VIV FP : Vivendi Owns More Than 95% of Gameloft, May Seek Squeeze-Out

- VIV FP : Bollore Owns More Than 15% of Vivendi, Says Doesn’t Plan Bid

- VOW3 GY : VW Brand Chief Diess Probed by German Prosecutors, DPA Says

- VOW3 GY : VW’s Poetsch Rejects Shareholder Vote on Probe, RND Reports

- WBMD US : WebMD Puts Active After Google Announcement

- WBMD US : Google Introduces Medical Symptom Search; WedMD Shares Fall

- WEIR LN : Sandvik, Weir Top Picks to Play Resource Industry Rebound: Exane

- YARA NO : Yara could eye CF Industries or OCI NA in attempt to revisit US expansion

* CF and OCI exposed after failed merger

* US market key due to size

* Yara takeover of CF may be tough sell to shareholders

Yara International [STO:YARO], the Norway-based fertilizer company, could re-examine its US ambitions on the back of the failed merger between Netherlands-based OCI [Euronext: OCI] and US-based CF Industries [NYSE:CF], bankers and analysts said.

On May 23, following the clampdown on tax inversion deals from the US Treasury, CF Industries and OCI announced the termination of the proposed combination of CF Industries and the European, North American and Global Distribution businesses of OCI.

The failed deal could act as a catalyst for Yara to break into the strategic US region, bankers and analysts said. A tie-up or take over by Yara of either of these companies would create strong synergies and give Yara an important foothold on the attractive US market.

The US market is, mainly due to its size, strategic for Yara, a local banker said. It would be natural for Yara to consider all of its options and CF Industries and OCI must be available for conversation, a sector banker commented.

Yara’s balance sheet would allow it to seriously contemplate a take-over of OCI’s North American division or, at a push, a bid for CF Industries, the bankers and analysts said.

Yara reported net debt of NOK 8.5bn and a TTM EBITDA of NOK 22bn, giving it net debt/EBITDA of 0.4x as at 31 March. Since then, Yara has issued a USD 500m bond, closed M&A transactions and paid dividends.

At the end of 2015, Yara had NOK 3.2bn in cash and cash equivalents, and NOK 13.7bn in undrawn committed bank facilities, according to its 2015 report. The company reported a FY15 EBITDA of NOK 21bn and FY15 revenue was NOK 111bn. At the end of 2015, Yara reported net interest-bearing debt of NOK 11bn (EUR 1.2bn), which two analysts estimated will increase to about NOK 18bn by FY16.

Its low gearing gives Yara headroom to double, or even treble, its net debt/EBITDA ratio in an M&A scenario, the analysts said. Yara has historically kept its leverage low so it can be opportunistic over deals at the bottom of the cycle, which it is now, one of them said.

Yara tried to enter the US market in 2010 when it was outbid by CF Industries for Illinois-based nitrogen company Terra Industries. Subsequently, Yara started to look south and embarked on an aggressive M&A strategy in Latin and South America. “South America was their second choice. Yara wanted the US,” one of the analysts commented.

The failed merger with CF Industries has left OCI in the spotlight. The Netherlands-headquartered company’s North American operations would be a model match for Yara, giving it instant access to the North American market and OCI’s Iowa Fertilizer Company, a key nitrogen production facility. The plant is expected to produce up to 2m tonnes of nitrogen fertilizer per year which is a significant percentage of the US’ total import volume of 8m tonnes. The plant which, after many delays, opened this year, was the first nitrogen fertilizer plant built in the US in nearly 30 years.

There is however a risk that CF Industries, which also sees the factory as key, could bid against Yara again, despite being in the process of building its own new plants, an analyst said.

OCI has a current market capitalisation of USD 3bn. OCI’s FY15 revenue reached USD 2.2bn and adjusted EBITDA reached USD 736m, an 18.6% and 11.7% decrease respectively from the previous prior. The company does not break down revenues by geography.

An industry expert, however, questioned the logic of a Yara-OCI tie-up due to the limited tax efficiencies.

The competitive landscape in the sector will soon change, partly due to several new projects being built and the US will rely less heavily on imports, one analyst said. This new expected output, which will gradually increase between 2016 and 2018, would however not significantly weaken the appeal of the US market, this analyst said. It is on the contrary strategic for Yara to expand its presence in the US now, in one way or another, the second analyst said.

CF and Yara tie-up revisited?

In 2014, CF Industries and Yara entered into discussions regarding a merger of equals. Morgan Stanley was advising CF along with Goldman Sachs. Citigroup and ABG Sundal Collier were advising Yara.

At the time, CF Industries had a market capitalization of USD 13.51bn compared to Yara’s USD 14.26bn. Since then CF Industries’ shares have fallen and Yara’s market capitalization has at times been almost double that of CF Industries. On Friday, 17 June, CF Industries had a market capitalization of USD 6.674bn, while Yara’s ADRs traded at USD 32.44, giving it a market capitalization of USD 8.9bn.

The groups’ enterprise values, however, are more similar, with Yara’s current EV at USD 10.5bn, while CF Industries is at USD 12.4bn.

Besides levering up substantially to potentially 3x EBITDA, Yara would need to carry out a “huge” rights issue and possibly print an additional 200 million shares to its current stock of 275m, one analyst said. The deal could be a tough sell to Yara shareholders, he pointed out.

The clear synergies might however outweigh the financial hurdles, he added.

There was solid industrial logic in a potential merger between Yara and CF Industries and this logic still holds, the bankers and analysts said. CF Industries has upstream operations in North America, while Yara has a strong global downstream operation. In addition to giving Yara a foothold in the US market, a deal could give CF Industries access to Yara's global distribution network.

CF, however, might want to buy back stock rather than pursue another transaction so soon, one US based analyst predicted. CEO W. Anthony Will did this in 2014, before talks began with OCI. The strategy served as a strong support for the share price at a time when corn prices were going down. Ordinarily, fertilizer shares would go down as well but CF went up “because Tony was buying back stock,” the analyst pointed out. A strategy of buying back shares would be well received by shareholders and CF might want to sit back and focus internally for a while rather than engaging in new M&A discussions, the US based analyst said.

Meanwhile, the Norwegian government owns a 36.2% stake in Yara, thus a full take-over of Yara is deemed unlikely, the bankers and analysts said. The state has no intentions of selling down, they believed.

Yara and OCI could not be reached for immediate comment. CF Industries declined to comment.

*ANIMA RAISED TO BUY VS NEUTRAL AT UBS

*BILFINGER RAISED TO HOLD VS SELL AT BANKHAUS LAMPE