TheChek News Flow

The French government is planning to sell shares in some of the country’s largest companies to pay for a €3bn aid package that will help utility EDF build the controversial Hinkley Point nuclear project in the UK.

People close to the discussions say that shares in Renault and Safran are likely to be sold this year, along with the airports in Nice and Lyon, in order to ensure that there will be no extra cost to taxpayers for the investments by the majority-state owned utility group.

This comes as the government last week promised to provide three-quarters of the money for a €4bn capital raise by EDF this year. The group, which has a stretched balance sheet with €37bn in net debt, needs money to pay for a range of costly investments.

This includes the £18bn Hinkley Point nuclear project in the UK as well as an estimated €55bn bill in the coming decade just to increase the lifespan of the country’s 58 nuclear power stations from 40 years to 50 years.

Raising this money presents a challenge to the government, which has already promised to participate in a €5bn capital raising of Areva, another state-controlled nuclear group which has fallen on tough times.

The sales of the airports in Nice and Lyon have already been announced, but two people close to the talks say that the government hopes to raise between €1.5bn and €1.8bn from the two, with Lyon alone hoping to raise as much as €1bn.

Much of the rest could come from Renault, where the state has nearly 20 per cent of the company, say people involved. The state has not yet sold a 5 per cent extra stake it bought last year for €1.2bn to push through a motion on double voting rights.

This 5 per cent stake is currently worth less than what the government paid in April last year, however, meaning it will probably have to wait until the share price recovers before any disposal. At the time of the deal in April, the Renault shares were trading at €88 a share. On Friday, they closed at €85 a share.

The government is also considering selling other parts of its portfolio of 77 companies, such as selling shares in Safran, the aerospace and defence group, where it has a 15.4 per cent stake worth around €3bn, people close to the talks said.

The state, through its holding company APE, owns more than €60bn worth of assets and has investments in 14 listed French groups, including Engie, Orange, Peugeot, Thales and Airbus Group. APE is headed by Martin Vial, who took over the job in August last year.

Earlier this month, the French economy minister Emmanuel Macron said there will be “other operations” by the state on top of selling to airports to raise the €3bn for EDF and the money for Areva as well.

He added that the state’s 14 per cent stake in carmaker Peugeot was worth “several hundred million euros” more than what they paid for in February 2014. This was another deal to bail out a French industrial champion.

One person close to the situation said that the government was not envisioning selling shares in Orange, the telecoms group in which it has a 23 per cent stake.

Italy’s government-orchestrated €4.25bn bank bailout fund Atlante has undertaken its first rescue mission after the flop of a closely watched €1.75bn capital call at its 10th largest bank, regional lender Popolare di Vicenza.

Privately backed fund Atlante, named after the Titan who held up the sky, was rushed into existence 10 days ago as a backstop facility to quell contagion to Italy’s banks should the capital call demanded by European Central Bank supervisors at Popolare Vicenza fail.

While small in relative value, the cash call at Popolare Vicenza had come to be seen as barometer of investor sentiment towards Italian banks. The sector has lost about 40 per cent of its value so far this year amid concerns about its backlog of €360bn of bad loans, of which €200bn are to borrowers deemed insolvent.

The close of the Vicenza capital call came as the government of Matteo Renzi on Friday took its latest step to shore up the banking sector, passing a decree aimed at speeding up repossessions. Bankers said it should help create a market for Italy’s €83bn of non-performing loans that are not already written down by its banks.

At the close of the capital call, Atlante ended up holding more than 90 per cent of the new shares at a price of 10 cents a share, Popolare Vicenza said in a statement on Sunday.

The rest of the capital call was bought by financial institutions active in Italy amid almost zero interest from foreign investors. Mediobanca, the Milanese investment bank, is the second-largest shareholder with a 5 per cent stake.

UniCredit did not subscribe, the statement said. Italy’s largest bank by assets had fermented fears of contagion by underwriting the Popolare Vicenza cash call, despite its own laggard capital position.

“Thank God for Atlante,” said one senior banker on the deal whose institution had backed the rescue, reflecting the widespread view in Italy that a failure of the capital raising without the fund as a backstop could have resulted in “bail in” of Popolare Vicenza or a capital call by UniCredit. That could have set off panic among investors and depositors.

The creation of Atlante raised questions about UniCredit’s governance procedures and how top management could have approved the risky underwriting of Popolare Vicenza when it ultimately proved unable to backstop it, said bankers.

Analysts and rating agencies said Atlante had averted contagion in the short term but argued it extended the risky interconnectedness of the Italian system as stronger banks support weaker ones.

Having raised fewer funds than the €6bn initially hoped for, Atlante also had a limited scope to cope with its second aim to help buy securitised tranches of bad loans.

Under the rules of Atlante’s creation, it will now restructure Vicenza and seek to sell it, potentially as a takeover target to a larger Italian lender. A mooted stock market listing was in doubt because of the weak market take up, said bankers.

Atlante was expected to intervene again at a €1bn capital call at another regional lender Veneto Banca in June.

One question deals with a difficult topic for Mr. Buffett: It addresses the Sequoia Fund, a mutual fund founded four decades ago to take on investors in what was then Mr. Buffett’s investment partnership, which was being wound down.

Since its inception, the Sequoia Fund has outperformed various stock market indexes. But it was severely wounded last year as shares in one of its biggest holdings, the drug maker Valeant Pharmaceuticals, plunged amid concerns about its business practices. Its high drug prices, its appetite for ever-bigger acquisitions and its ties to a dubious pharmacy affiliate all drew criticism.

Shares in Valeant have tumbled 67 percent so far this year, and its former chief executive was called to testify before Congress this week about the company’s drug-pricing policies.

Such was the turmoil at the mutual fund that two of its five independent directors abruptly resigned, apparently over its huge stake in Valeant, which at its peak represented 32 percent of the fund’s portfolio.

Turning quiet, Mr. Buffett spoke highly of Sequoia’s history. The mutual fund was founded by a close friend, the late William Ruane, and was the only one he recommended to his clients when he closed down his investment partnership.

But he also noted that the money manager responsible for Sequoia’s investment in Valeant, then-chief executive Robert Goldfarb, has left the fund. Such a concentrated bet was a huge mistake.

Mr. Buffett then openly derided Valeant, something that he had previously left to others. Mr. Munger famously and negatively compared the drug maker to the former conglomerate ITT last fall, drawing complaints from Valeant’s most outspoken backer, the hedge fund executive William A. Ackman.

In his remarks on Saturday, Mr. Buffett called Valeant “enormously flawed” and said that Berkshire had previously been asked to take a look at the company. It declined.

The billionaire went further, implying that the company was similar in some respects to “chain letter” companies designed to fool investors.

But leave it to Mr. Munger to toss off the most prickly description of the company: “Valeant was a sewer, and those who created it deserved the opprobrium they got.”

Activist investors, hedge funds who buy stakes in companies and then demand changes to strategy, have gained enormous power in recent years, giving moguls like William A. Ackman, Carl C. Icahn and Paul E. Singer outsized stature on Wall Street.

Yet Mr. Buffett doesn’t worry about one of those investors ever coming in and trying to break up the company he has built. Could such a hedge fund come in if Berkshire’s stock ever trades at a significant discount to where it is now?

In responding to a question on the topic, the billionaire concedes that he once fretted over the issue. “I used to worry about that more than I do now,” he admits.

Why less concern these days? Mr. Buffett turns to a familiar defense of how Berkshire’s sprawling conglomerate model — one that, employed by other companies, has made them targets of activism campaigns — underpins the strength of its myriad businesses. Berkshire Hathaway Energy, he argues, would not be able to pivot away from coal and toward renewable energy sources if it didn’t have the backing of its corporate parent.

Moreover, Mr. Buffett notes that he still has an enormous stake in the company that would dissuade such an activist. Even after he dies, and his holdings are eventually doled out to charity, his estate will remain Berkshire’s biggest shareholder for some time while that stock is distributed out.

When prompted, Mr. Munger adds drolly, “I think we have almost no worries at all on this subject. Other people have a fairly justifiable worry.”

A curious Mr. Buffett prods his lieutenant to explain. Activists, according to Mr. Munger, could prompt companies under attack to seek an ally. And what more powerful partner could those targets seek than Berkshire?

“I’m Warren Buffett, and I approve this message,” Mr. Buffett declares.

* Fun in the Exhibit Hall

Earlier in the day, Mr. Buffett participated in a newspaper tossing challenge prior to taking the stage at the shareholders conference.

Mr. Buffett has long been held up as a moral investor of sorts, refusing to invest in industries like tobacco because of their unhealthiness. So why, DealBook’s Andrew Ross Sorkin asks on behalf of several shareholders, should Berkshire investors be proud of Berkshire’s investment in Coke?

The roughly 10 percent stake has proved to be a lightning rod in recent years. The hedge fund mogul William A. Ackman, among others, has attacked Coke as a provider of sugar water that has helped spur a rise in obesity and diabetes.

Despite an admonition for Mr. Buffett to avoid referencing his own Coke consumption, a favored dodge when asked this question in the past, the billionaire jokes once again that he is probably one-quarter Coke.

What follows is probably the fullest answer he has given yet on owning a nearly 10 percent stake in the soft-drink giant. And it essentially amounts to this: People can choose what to eat and drink. Consuming unhealthy amounts of calories is a personal decision, and the 85-year-old Mr. Buffett says he’s content eating large amounts of fudge and peanut brittle — a box of the latter is displayed prominently on stage — and Cherry Coke.

To further illustrate his point, Mr. Buffett speaks of an imaginary twin brother who ate broccoli and other nutritionally superior foods. That sibling might live longer, he says, but probably would be unhappy.

“You have a choice in consuming more than you use,” Mr. Buffett says of calorie consumption. Referencing his own diet, he adds, “I’m a very, very happy guy.”

Berkshire may be known as a holding company for innumerable consumer brands and industrial businesses, but much of the financial firepower of the conglomerate comes from its insurance businesses. Yet one of the first questions asked at the meeting was about Mr. Buffett’s pessimism over his company’s financial powerhouse.

Berkshire sold down its stakes in two big reinsurers, Munich Re and Swiss Re, in part because the business looks challenged. Low interest rates have lowered the returns that firms reap by reinvesting the insurance premiums they have collected and not yet paid out, known as “float.” Mr. Buffett adds that Berkshire faces fewer constraints, because its money comes from its operating businesses as well as its insurance float.

Mr. Munger adds that the reinsurance business has gotten much more crowded, primarily from hedge funds. Mr. Buffett says that while supply in reinsurance providers has gone up, demand for insurance has not.

Mr. Buffett and Mr. Munger have finally taken the stage, and after a couple of jokes — about Mr. Munger’s advanced age and luck with the ladies and about crying from Mr. Buffett’s 7-month-old great-grandson — the two get serious.

Among the most striking things of the Berkshire meeting this year: It’s being translated into Mandarin. Interest in the event from Chinese investors has been high over the years, and increasingly bigger numbers have been coming to the event.

Mr. Buffett begins with a rundown of Berkshire’s first-quarter results. Insurance profits are down from the same time a year ago, as losses from weather catastrophes have hit the business hard. Railroad profits, from Burlington Northern, are down as well.

The Berkshire chief notes that the company’s goal has been to increase its after-tax operating earnings, which exclude investments and other financial engineering, every year. The company has largely succeeded, except after 2001 and 2008. Here’s how the company has done.

Shareholders attending the Berkshire Hathaway annual meeting often get to the CenturyLink Center arena well before doors open to grab prime seats. They also want to sit through a bunch of commercials.

This year’s pre-show footage ran ads for Berkshire companies like Duracell and Coca-Cola and this adorable ad for Heinz. The Berkshire Hathaway Energy ad touted its efforts to produce cleaner energy.

The pre-show also recapped previous celebrity skits, including those featuring Susan Lucci, Jamie Lee Curtis, the cast of “Desperate Housewives” and the stars of “Breaking Bad.”

And there is always the sobering replay of Mr. Buffett’s testimony before Congress about the scandals besetting Salomon Brothers, which the billionaire then chaired. It features the now-famous line, “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

Newer elements included an animated take on “Trading Places,” the classic finance-minded comedy, starring Mr. Buffett, Mr. Munger, the reinsurance chief Ajit Jain in the Dan Aykroyd role and the Geico gecko in the Eddie Murphy role. Instead of fixing the orange juice futures market, however, the Berkshire duo conspire to fix the market for cocoa beans to affect See’s Candy (another Berkshire company).

The highlight, of course, is the annual celebrity skit. This year’s edition features Arnold Schwarzenegger, the new host of “Celebrity Apprentice,” who’s trying to fill the final spot on the show. Rejected candidates include: Kenneth I. Chenault of American Express (“Credit card chief, denied.”), Virginia M. Rometty of IBM (Mr. Schwarzenegger says he types on an iPad) and Muhtar Kent of Coca-Cola. The first three lead companies in which Berkshire has invested, of course. He also rejected Danny DeVito (“Twin”).

Mr. Buffett calls, begging for a spot. His bona fides include appearing in “Wall Street: Money Never Sleeps,” to which Mr. Schwarzenegger responds, “Sequels are for girly men.”

Nearly despondent, Mr. Schwarzenegger takes a call from “The Terminator” — who happens to be Mr. Munger. The host celebrates, calling the nonagenarian “someone with balls.”

The camera then cuts to Mr. Buffett, sitting in his office, amusing himself by playing with Snapchat filters. Admittedly, he’s better at it than this reporter.

The audience was highly amused.

Berkshire Hathaway released preliminary first-quarter earnings as the firm’s annual shareholders meeting got under way Saturday in Omaha, Neb.

The firm, run by investor Warren Buffett, reported net income of $5.59 billion, up from $5.16 billion a year earlier.

Insurance underwriting profits declined to $1.132 billion in the quarter, compared with $1.355 billion in the prior-year quarter, because of a rise in natural disasters.

Berkshire’s massive railroad, utility and energy segment saw profits fall as well—to $1.225 billion, compared with $1.466 billion in the year prior.

First-quarter earnings at Berkshire’s BNSF Railway were down “significantly,” Mr. Buffett said at the annual meeting, adding that it is “almost certainly going to be down” for the remainder of the year. Lower shipments of coal and material used in shale-gas extraction had cut into the railroad’s results last year, and it has been expected to report lower earnings and revenue in 2016.

As a result, operating profit at Berkshire dropped in the quarter. The rise in net income was due to investment and derivative gains and losses.

Iran’s moderates scored a success at parliamentary runoff elections, which could help Hassan Rouhani’s centrist government implement its pro-reform policies.

Iranians voted on Friday to elect the remaining 68 members of the legislative body, about half of whom are moderates. The other elected MPs of this round are either hardliners or independent.

In February, allies of the centrist president seized crucial wins in the elections of the parliament and the assembly of experts — the body that will determine the next supreme leader in the event of Ayatollah Ali Khamenei’s death.

Despite putting an end to the hardliners’ 12-year dominance of parliament, president Rouhani’s allies still fall short of having a majority in the 290-seat body. However, the win is an endorsement of the country’s curbing of nuclear activities in return for sanctions relief — a bid to encourage foreign investment — and a welcome boost for Mr Rouhani’s policy of engagement with the west.

Domestic media, close to the centrist president, reported that moderates occupy more than 120 of the 290 seats in parliament, while the rest of the seats are almost equally divided between hardliners -- who oppose the nuclear agreement -- and independent members. Pro-president forces hope independent members of parliament will join them to form an absolute majority.

Although the hardliners lost their dominance in the parliament, they still have a strong hold in key bodies such as the judiciary and the Revolutionary Guards, which retains a grip on many businesses.

A major question for the new parliament, which will convene on May 27, remains that of who will preside over the next legislature. Supporters of the moderate and reformist forces will probably appeal to Mohammad-Reza Aref — the top figure of the camp who gained the highest vote in the country — to run for the parliamentary speaker, especially considering the high probability that he could gain sufficient votes.

However, some analysts say the re-election to the post of Ali Larijani, a conservative who was supported by the moderate camps too, could give the government more power to lobby the hardliners. Experts say Mr Larijani could assist the government to implement policies that may otherwise be blocked by hardliners.

Mr Aref declined to comment on Saturday on whether he would run for the position of speaker. In an interview with the semi-official ISNA news agency, he also said that his allies in parliament would soon be launching a new faction called ‘Hope’, aimed at improving the country’s economy and its people’s daily lives.

Analysts believe increased co-operation between parliament and the government may help revitalise an economy suffering from prolonged stagnation and youth unemployment of 26.1 per cent.

Like the handbags it produces, Hermès International is expensive—in this case, on a price/earnings basis. But the luxury-goods company’s earnings and cash-flow growth could drive its shares even higher.

Hermès (ticker: RMS.France) fetched 311 euros ($356) at the close of trading Friday. The stock is flat for the year to date, but down about 8% in the past 12 months. Even so, it trades for 27 times next year’s estimated earnings, well above the Stoxx Europe 600 index 12-month forward P/E of 15.7.

Hermès’ historical multiple is even higher, at 31.5, reflecting the premium that investors are willing to pay for a company that consistently delivers high-quality profits. Assuming the stock could command that multiple again—a good bet given demand for the company’s products, and smart financial management—Hermès could be worth about €365, 17% above its recent price.

Based in Paris, Hermès has delivered total shareholder returns of about 18% annually for the past 10 years. The company also trades in the U.S. via American depositary receipts (HESAY), 10 of which are equivalent to one ordinary share. The ADRs were priced at $35.61 Friday.

Hermès manufactures ready-to-wear collections, fragrances, and accessories, including silk scarves, but 47% of revenue comes from leather goods, including storied bags such as the Kelly, named for Grace Kelly, and the Birkin, named for British singer Jane Birkin. The company added two production facilities in France last year to meet growing demand, particularly for leather accessories. Sales in that segment rose 15% in the first quarter of 2016.

Hermès sells its products worldwide through luxury department stores and 307 stand-alone boutiques, 210 of which it operates directly. More than a third of sales come from the Asia-Pacific region (excluding Japan). Europe and the Americas each contributes less than 20%.

Total revenue growth could be challenged this year, due to a stuttering global economy, terrorist attacks in France and elsewhere that have curbed tourism and store traffic, and the strength of the euro. Sales growth is likely to fall short of the company’s medium-term goal of 8%, although gains of 6% would be a creditable performance.

Management is conservative in its financial and business practices. Capital expenditures totaled just €267 million last year, relatively modest for a company with €4.84 billion in 2015 sales. Half that outlay was earmarked for the construction of 20 new branches, store refurbishment, and distribution improvements. Hermès’ balance sheet had net cash of €1.61 million at the end of last year.

The company has been careful to avoid saturating the market and diluting the strength of its brand. Exclusivity has allowed it to raise prices by mid-single digits annually. Sales have more than tripled in the past 10 years, and are forecast to reach €6 billion in 2018.

Hermès boasts best-in-class profit margins among luxury-goods makers. Last year, operating margins edged up to 31.8% from 31.5% a year earlier. The company is expected to earn €1.11 billion, or €10.55 a share, this year, on €5.17 billion of revenue. Analysts have projected earnings per share of €11.55 in 2017. Hermès could generate almost €1 billion this year in free cash flow, for a yield of 2.9%; cash return on invested capital is impressive, at 20% and growing. “That combination in a low-growth world is scarce and increasingly valuable,” says Gary Paulin, founding partner at Aviate Global, which owns the shares.

HERMÈS’ SOLID PERFORMANCE is built on a foundation of stable ownership and management. Chief Executive Axel Dumas is a member of the sixth generation of the Hermès family, which founded the company in 1837 and has run it since.

In 2014 family members pooled their stakesin a holding company that controls 52.5% of Hermès. The move came in response to a challenge from LVMH Moet Hennessy Louis Vuitton (MC.France) boss Bernard Arnault, who had accumulated a more-than-20% interest in Hermés since 2010. LVMH sold its shares in 2014, but Arnault’s family holding company retains an 8.4% stake, making it the second-largest shareholder. The Hermés shareholding pact prevents any share sales for 20 years, effectively blocking unwanted takeover offers.

At the current valuation, Hermès looks attractive, says George Evans, chief investment officer for equities at OppenheimerFunds and portfolio manager of the Oppenheimer International Growth fund, which owns the stock.

The high multiples shouldn’t faze investors, he says. “Quite often, high-quality companies can support P/Es that look eye-wateringly expensive,” Evans says. The market has a tendency to be cautious about companies that “make fat margins over three years and beyond,” but some can sustain and even improve those returns, he adds.

There seems little chance that Hermès will fall out of fashion anytime soon.