TheChek News Flow

"Just as the assertions, heard a few years ago that the oil price would reach $200 a barrel were proved wrong, so the recent assertion that the oil price has shifted to a new low structural equilibrium will also turn out to have been wrong," said Prince Abdulaziz bin Salman, the kingdom's deputy oil minister.

In a speech at an energy conference in Doha, Prince Abdulaziz warned spending cuts across the industry - as prices collapsed from a June 2014 high of $115 a barrel to below $50 - will have a "substantial and long-lasting" impact on future oil supplies and could lead to a price spike.

"Non-OPEC supply is expected to fall in 2016, only one year after the deep cuts in investment. Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation and postponement of projects will start feeding into future supplies, and the impact of previous record investments on oil output starts to fade away," Prince Abdulaziz said in the speech, quoted by Reuters.

He added:

The scars from a sustained period of low oil prices can't be easily 'erased'.

Prince Abdulaziz said Saudi Arabia, the world's largest crude exporter, will continue investing in its oil and gas sector and believed long-term industry fundamentals "remain robust."

His comments suggest the Kingdom is satisfied with its strategy of not cutting production to prop up oil prices for the benefit of rivals, echoing other senior officals in the kingdom

Amgen, one of the four largest US biotech groups, is on the hunt for potential acquisitions, according to people familiar with the situation, as it prepares to end its self-imposed exile from the boom in pharmaceuticals mergers and acquisitions.

More than $850bn of healthcare deals have been announced since the start of 2014, according to Thomson Reuters, but Amgen has so far stayed on the sidelines, eschewing large or medium-sized transactions.

Instead, it has focused its efforts on buying or licensing a handful of unproven drugs that are in early-stage testing and typically command much smaller price tags.

However, a person familiar with the company’s thinking said it had recently “opened the aperture” and was now evaluating companies worth in the region of $10bn, with drugs that have been proven in clinical testing and are almost ready to bring to market.

Companies that have recently completed similar acquisitions include Celgene, another biotech group, which paid $7.2bn for cancer specialist Receptos, and Alexion, which spent $8.4 on Synageva, a rare diseases specialist.

Amgen, which ended last week with an equity value of $121bn, has also been seen as a potential target and has been linked to Allergan, the drugmaker that is in talks about combining with Pfizer.

$121bn

Amgen’s market value on Friday

One investor who recently held meetings with Amgen’s management team said the company had contacted shareholders in the past few weeks to get “everybody prepared” for an acquisition.

Amgen declined to comment.

Amgen’s last major acquisition was Onyx, which it bought in 2013 for roughly $10bn, primarily to secure the rights to its cancer drug Kyprolis.

Investors initially turned sour on the Onyx deal amid lacklustre sales of the medicine, but many shareholders revised their opinion this year, after the US drugs watchdog approved Kyprolis for use in a cocktail of medicines to treat patients with cancer of the plasma cells.

The decision by the Food and Drug Administration paves the way for a big jump in sales, according to analysts.

“They’re taking a lot of comfort from the Onyx acquisition,” the investor said.

Amgen would probably finance an acquisition by raising debt, according to the person familiar with the company’s thinking.

Although the company’s balance sheet has $30bn of debt it also has roughly the same amount in cash, with the vast majority trapped offshore. Repatriating cash to the US to fund a deal would incur a hefty tax bill.

Amgen, founded in 1980, is one of the four cornerstone groups of the US biotech sector, along with Celgene, Gilead and Biogen, and is credited with developing some of the first successful “biologic” drugs.

It is now facing competition to some of its top-selling products from a new generation of “biosimilar” copycat medicines. Earlier this year, the FDA approved the first ever biosimilar version of Neupogen, an Amgen medicine that had sales of $1.16bn last year.

Last year, Dan Loeb, the activist investor, acquired a stake in Amgen through his Third Point vehicle and pushed for cost-cutting and a potential break-up of the company, prompting the group to implement roughly $1.5bn of cuts.

However, Amgen has fiercely resisted any attempt to split in two, and Mr Loeb has, for now, dropped the idea.

Zodiac is due to report FY14/15 results on 24 November at 7am CET. The

actual FY14/15 results numbers are likely to be a side show, with all attention

on: 1) the potential for recovery in the seating business following production

problems; and 2) the earnings growth potential for the group once these

execution problems are resolved. We maintain our nearer term caution on

Zodiac shares and our TP of E23.

Marked by execution problems at Seat and associated cost, FY14/15 reported

numbers will have little meaning. Overall we forecast EBITA of E310m, 6%

below management guidance of c. E330m (“40% YoY decline in EBIT”). We

include E400m of exceptional charges in our FY14/15 EBIT forecast on top of the

E40-50m booked in FY13/14. What is key, we believe, is the breakdown of costs

between operational costs (some of which could be ongoing) and higher

customer penalty charges and inventory impairments, which are clearly one-offs.

The key focus of the results in our view will be on three points: 1) an update on

Seat: Zodiac had reported 1,700-pax delays in mid-September; 2) the provision

of FY15/16 guidance and specifically how much of the extra costs need to

remain in the business to ensure future on-time delivery; and 3) its adverse

commercial impact risk status following the AA announcement.

Although we see the benefit to Zodiac’s gearing against a weak Euro, we

continue to see better-value routes from Airbus (AIR.PA/AIR FP: Buy, TP: E77,

current: E66) and Dassault Aviation (AVMD.PA/AM FP: Buy, TP: E1,330,

current: E1,038). Our SoP and through-cycle earnings-derived target price of

E23 is unchanged. Downside risk: Euro strength vs. the USD. Upside risk: reemergence

of M&A conjecture (p.4).

We downgrade Telecom Italia’s senior bonds to Underweight. In 5y CDS (160) we move

to Buy Protection from Neutral. The downgrade reflects weakening operational trends

in Brazil, a slow recovery in Italy, the risk of negative ratings action, the potential for a

credit negative outcome in Brazil and the lack of clarity around Vivendi’s, and

particularly, Xavier Niel’s strategy. We see a risk that key shareholders could push for a

shareholder friendly deal in Brazil at the expense of a near-term deterioration of the

balance sheet. We view current spreads as tight in comparison to other high-BBs and

failing to compensate for the aforementioned risks.

Group EBITDA came in-line with expectations but nevertheless fell 12% y/y in reported

terms. Underlying trends in Brazil do not bode well for the coming quarters while the

recovery in Italy has slowed.

Based on our current estimates we have Telecom Italia adjusted net debt/EBITDA at

3.7x for FY15. Moody’s state that it could downgrade the rating if the company’s net

adjusted debt/EBITDA deteriorates above 3.5x with no prospect of improvement. We see

scope for adjusted debt reduction in 2016 with the €1.3bn convertible, a disposal of

Inwit and the savings share conversion. However we believe all would be required to

fully stabilise Ba1 ratings.

Xavier Niel’s acquisition of a 15% interest in Telecom Italia has further increased the

uncertainty regarding the outlook for the company. Mr. Niel has stated that he is not

working with Vivendi (which would have triggered a mandatory offer for TI) however his

intentions remain far from clear. We view Niel’s involvement as a credit negative given

the potential to push for a strategy contrary to management’s (which has generally been

credit friendly) or cause governance issues by challenging Vivendi. We do not believe

that either party wishes to mount a full take-over of Telecom Italia.

Recent press reports have suggested that Telecom Italia would only consider a merger

of Oi and Tim if it would have 51% of the new company. We view this positively given

the risks we have previously highlighted regarding a potential deconsolidation of Brazil

which would increase adjusted leverage c.0.7x (see page 5, and Brazilian consolidation

back on the table?, 26 October 2015). However we remain concerned that new

shareholders could push for a less credit friendly outcome.

TI spreads have barely underperformed since the announcement of a potential deal in

Brazil, and trade inside Ba1 rated peers (see p.2). In our view spreads fail to take account

of the increased risk of credit negative outcome in Brazil and/or a downgrade as a result

of organic operating pressure. Conversely, even in a best case scenario, TI will stabilise

at Ba1, an outcome more than factored in to current spreads. We view fair value for the

3.25% €’23s at least +35bp wider at z+235bp.

Eurotunnel, the group that operates the channel tunnel rail link between France and the UK, is planning a spate of deals in the coming months that could see it take a stake in London’s City Airport.

The company, which suffered this summer as thousands of Calais migrants repeatedly stormed the tunnel entrance, is planning to join a consortium bidding for the airport, which has been put up for sale this year.

“We are in the process of joining up with one of the consortiums,” said Jacques Gounon, chief executive, in an interview with the Financial Times, declining to say which one.

“We can help to convince [the government] that the reasonable and cautious extension of London City Airport is good for the City, good for Canary Wharf and is good for London,” he said.

One of the bids for the £2bn asset comes from Canadian investment giant, Ontario Teachers’ Pension Plan, which has partnered with the sovereign wealth fund of Kuwait and Hermes.

Another is from Allianz and Borealis Infrastructure, the Canadian pension fund, which already owns the line from the Channel tunnel to London St Pancras.

Canada Pension Plan Investment Board and PSP, another Canadian pension fund have also submitted a bid, while Australia’s Macquarie is also thought to be considering an offer.

The interest from Eurotunnel is part of the company’s wider strategy to move beyond operating the concession on the Channel tunnel — which it has until 2086 — and run a greater range of cross-border infrastructure projects.

Mr Gounon said the company was also considering buying the 51 per cent stake it does not already own in Eleclink, a joint venture started in 2011 with Star Capital to develop an electricity interconnector between France and the UK.

“I have in mind to buy back Star’s shares,” he said, adding that he may bring in other partners at a later date. “I do think that it’s better to have a co-investor in order to manage the project and limit the risk.”

Mr Gounon said he also planned to refinance about €1bn of the company’s €4bn debt, locking into low interest rates before the Federal Reserve raises rates.

He said the company could get a “better rate than when the debt was taken out all those years ago because we now have the record and we have the profitability”, he said.

Eurotunnel was founded in 1986 to build the Channel tunnel, a project that was vastly over budget, saddling the company with £8bn worth of debt.

It was forced into one debt restructuring in 1997 and another in 2005. The company in 2011 reported its first ever profit and has been in the black ever since, reporting a net income of €57m in 2014.

Telecom Italia is taking the steps to clean the base, with savers share conversion, postpaid/

prepaid offers in Brazil and early retirement schemes the latest steps, and following from

earlier moves to improve fixed tariffs in Italy, boost fibre and LTE coverage and stabilise

wireless pricing. We reiterate our Outperform rating on TI ords (€1.30 PT) and TI Savers (PT

raised to €1.19 from €1.12) and TIM Brasil (US$17.00 PT from US$20).

Italy trending toward stability. Italian service revenues improved to -1.5% with underlying EBITDA

-3.1%. Management has confirmed its ambition to stabilise underlying EBITDA during 2016. TI steps to

drive stability in Italy seem rational and centred network quality and coverage are on track with >80%

LTE and 40% VDSL coverage.

Brazil macro bites, innovative portfolio announced. TIM reported Brazilian mobile service revenues

-7.1% in local FX, worse than -5.6% 2Q15. While management no longer provides an estimate of ex MTR

revenue trends we estimate that underlying performance at -1.9% 3Q15 and -1.6% 2Q15 was relatively

consistent. EBITDA trends remain relatively stable (-2.7% 3Q15, -4.4% 2Q15).

Savers conversion accretive. TI has announced the saver-ordinary conversion, expected to be

completed early in 1Q16. Saving shares can be converted into ordinary shares on a 1:1 basis with a

payment of €0.095 per saver. The upfront cash generated, c€0.6bn and an annual €0.15bn saved from

annual saver dividend premium over ordinaries.

Changes to estimates. We have cut Brazilian wireless service revenues 6% in 2016E as well as handset

revenues, with EBITDA by c6-7% over the next three years. In Italy, our revenue forecasts are unchanged.

However, we now factor an additional €400m early retirement provision in 2015E and annual €200m

one-off provisions going forward.

TIM Brasil (Outperform, PT US$17) cuts but strategic and inexpensive. Despite cutting forecasts, we

still see TIM Brasil as holding a strategic position, having a credible growth plan and trading at a wide

discount to peers on 4.5x EV/EBITDA 2016E. Our revised price target is US$17 per ADR.

Telecom Italia (Ords Outperform, PT €1.30 and Savers, PT €1.19) steps to unlock value. Telecom Italia

continues to unlock value - this quarter's moves on saving share conversion, pre- to postpaid conversion

in Brazil and planned early retirement scheme in Italy should all create value. Our Ordinary price target

(Outperform, PT €1.30 per share) remains unchanged, while we raise our Savers PT to reflect conversion

(Outperform, PT €1.19 per share).

BRUSSELS—Eurozone finance ministers won’t release a €2 billion loan slice for Greece at their meeting here Monday amid continued disagreements over new foreclosure rules, two European officials say.

Senior officials from the currency union’s finance ministries were updated on Greece’s implementation of around 50 promised overhauls, known as milestones, during a conference call Sunday afternoon. While progress has been made on some issues—including measures to substitute a tax on private education, the governance of the country’s bailed-out banks and the treatment of overdue loans—Athens and its creditors will need more time to sign off on all overhauls, the officials said. Greece needs the money to pay salaries and bills and to settle domestic arrears.

There will be “no agreement on [the] €2 billion,” one official said.

Instead, officials say they now want Greece and its creditor institutions, which represent the other 18 eurozone governments and the International Monetary Fund, to reach a deal on the overhauls by Wednesday.

Senior officials from national finance ministries will reconvene Friday to assess the latest efforts, the two officials said.