AB InBev’s Carlos Brito stays focused on things he can control
When asked earlier this year about the worsening economic slowdown in Brazil, one of AB InBev’s core markets, Carlos Brito, chief executive, was characteristically unflappable.
The group would not be distracted by macroeconomic trends, he told a local newspaper, instead it would concentrate on the things it could control and understand: “beer, soft drinks and energy drinks”.
Now he has something else to concentrate on: closing a deal with rival brewer SABMiller.
With the proposed takeover, the Brazilian born Mr Brito is pursuing the growth strategy he and the three billionaires who control AB InBev know best
Mr Brito began working with Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira in 1989, when they took over Brahma, a Brazilian local brewer. As they built the empire that eventually became AB InBev, Mr Brito’s role was to deliver and execute ever more impressive takeovers.
A no-nonsense executive who works in an open-plan office, he personally propagates AB InBev’s hard-driving culture of frugal, performance-orientated management.
He told the Financial Times earlier this year that the only interest outside of “the company” that he allowed himself was his family — and half an hour on a treadmill a day.
His management philosophy includes “zero-based marketing” in which budgets are reset to zero each year and every cost has to be justified afresh.
The group regularly sheds the “bottom 10 per cent” of underperformers in its workforce — he says they “always unhappy anyway and complaining”.
Before joining the beer group, Mr Brito worked for Shell Oil and Daimler Benz. He then persuaded Mr Lemann, a former Brazilian tennis champion who has also made his name in recent years for his takeovers of Burger King, Heinz and Kraft, to pay for an MBA at Stanford University.
Mr Brito worked his way up, becoming chief executive officer at InBev in 2005 and then leading the company through the dramatic $52bn takeover of US brewer Anheuser-Busch three years later.
The constant churn of dealmaking has left Mr Brito open to questions about whether the company can grow sales organically, particularly in the US. But the challenge of integrating SABMiller would put such concerns on the backburner.
As for what the integration process might bring, a summary of employee reviews on the employer rating site Glassdoor, could be revealing.
It shows that while 64 per cent of AB InBev employees approve of Mr Brito, only 48 per cent would recommend the company to a friend.
By contrast, at SABMiller, 88 per cent of employees approve of chief executive officer Alan Clark and 85 per cent would recommend the company to friends.
With millions of dollars in “synergies” looming from the proposed tie-up between the rival brewing groups, many of those employees recommending SABMiller to their friends today could be the ones looking for a new job tomorrow.
Fed’s Daniel Tarullo questions 2015 rate rise
A second member of the US Federal Reserve Board has come out against a near-term increase in interest rates, adding to signs of a split at senior levels in the central bank and casting new doubts over the policy outlook.
Daniel Tarullo said in a CNBC interview that his current expectation was that it was not appropriate to raise rates this year, joining fellow governor Lael Brainard in favouring a wait-and-see approach.
That contrasts with Janet Yellen’s most recent public position, in which she said she was among those Fed policymakers who think an increase in 2015 will be appropriate. Over the weekend Stanley Fischer, the vice-chair of the Fed board, told a conference in Lima, Peru, that he also favoured an increase in 2015.
“The fact that [two] governors are publicly doing this is highly unusual,” said Michael Feroli, US economist at JPMorgan. He added: “We still believe the Yellen-Fischer leadership can pull the Committee together for a December lift-off, but in the interim the communications may continue to sound inharmonious.”
The Fed held rates unchanged in its September meeting following weeks of speculation that an increase was on the cards. Since then policymakers, including John Williams of the San Francisco Fed have suggested the decision was a close call, as they continue to hold open the prospect of a move by the end of the year.
That impression was confirmed by minutes that revealed on Tuesday that eight of 12 regional Federal Reserve banks called for an increase in the interest rate on discount window loans at the September meeting.
However Mr Tarullo suggested the Fed should wait for “tangible evidence” of a pickup in inflation before moving. Ms Yellen has said she does not have to see a significant acceleration in inflation before moving rates.
Based on a “risk-management approach” of being concerned that a premature rise might be harder to deal with than waiting a little bit longer, Mr Tarullo said: “I wouldn’t expect it would be appropriate to raise rates” this year.
In a speech on Monday Ms Brainard also questioned the wisdom of moving rates soon because there was a risk that the Fed would have to execute a costly U-turn. She questioned assumptions favoured by Ms Yellen, under which full employment is assumed to lead to higher wages and prices down the road, arguing instead that the so-called Phillips Curve has largely broken down.
The interventions further cloud muddy communications from the Fed about the policy outlook, following calls by some investors for a clearer steer on where policy is headed. Given the divisions in the central bank, however, there is a risk of further confusion ahead.
Ángel Ubide, a senior fellow at the Peterson Institute for International Economics, said it would be unprecedented in recent times if two governors went ahead and formally dissented against a vote for an increase.
However he added: “They [Brainard and Tarullo] are right that there is no need to raise rates soon if you look at outlook for inflation. The question is whether they are leading indicators, and whether Janet Yellen is now also questioning whether it is wise to raise rates in 2015. That is something we simply don’t know.”
Merger Market
* Share issue at current price too dilutive
* Uncertainty around total required to address issue would cloud any cap raise
* German central government may provide credit line if necessary
A capital raise would likely be low on Volkswagen’s [ETR:VOW] list of options as it attempts to address the high cost of the fallout from its emissions scandal, sector bankers, a credit analyst and an industry consultant said.
Before considering a capital raise, the company would likely look at options including cutting its dividend either partially or completely, reducing capital expenditure or selling businesses and assets, they said.
Volkswagen today, Tuesday, announced strategic decisions including a EUR 1bn cut in planned annual investments and measures to reduce fixed costs.
The company declined to comment in detail for this article, but a spokesperson said: “We have a regular plan for financing that guides us.“
In the 12 months to 30 June 2015, VW paid out EUR 2.5bn in dividends and spent EUR 13bn on capital expenditure investments in property, plant and equipment and intangible assets, according to company reports.
Last year, Volkswagen said it would invest EUR 64.3bn in the Automotive Division for the period from 2014 to 2018.
A capital raise is not seen as a priority option in part because the market for Volkswagen-issued equity and debt is depressed given the company’s struggles, the consultant said.
Ordinary shares in VW are currently trading at EUR 128.50 compared to EUR 161.55 on 18 September before news of the issue broke.
At the current share price, a capital raise is far too dilutive. Unless the company was planning such a measure prior to the scandal, it probably would not attempt one now, the first banker said.
Uncertainty surrounding the full cost generated by the crisis - in terms of legal liability, compensation for customers and loss in sales - would also weigh on investor decisions to participate in any form of capital raise, the bankers and consultant said.
While sovereign wealth funds and existing VW investors might support a cash call in principle, the fact that they do not yet know the scale of the eventual costs would discourage them from doing so at this stage, the first banker said.
The decision on which combination of measures to take would not be made until more information on the costs is certain, two bankers and the consultant said.
VW could attempt to raise a few billion euros via an offering of non-voting preference shares only, leaving major ordinary shareholders – Porsche Automobil Holding, Qatar Holdings and the State of Lower Saxony - with unchanged voting rights but a slightly more diluted proportion of dividends, the second banker said.
VW has permissions in place to issue up to 32.42m preference or ordinary shares. At today's preference share price of EUR 128.49, VW could hypothetically raise EUR 4.166bn before fees. But if a larger amount is needed, the ordinary shareholders’ consent and participation would likely be required so that their dividend proportion is not further diluted, this banker added.
One of the ordinary shareholders in particular, the State of Lower Saxony which holds 12.4% of shares and 20% of voting rights, would prove difficult to persuade to participate, the second banker said.
The State would have a hard time convincing taxpayers that their money should go towards fixing VW’s mistakes, he said.
However, the German federal government could play a role in financing VW’s recovery by providing a credit line, the first banker said.
VW’s importance to the economy and its role as a large employer in Germany means it is likely to get access to some government assistance if it is needed, but only after paying penance for the scandal.
That process has already started with the CEO being replaced, the establishment of internal and external investigations, and company cooperation with criminal proceedings, the first banker said.
The US government’s provision of financing to General Motors [NYSE:GM] had worked out relatively well, he observed, although GM was first left to file for bankruptcy protection.
JPMorgan Chase reports EPS in-line, misses on revs
Reports Q3 (Sep) earnings of $1.37 per share, excluding non-recurring items, in-line with the Capital IQ Consensus of $1.37; revenues fell 6.9% year/year to $22.78 bln vs the $23.44 bln Capital IQ Consensus.
* Net interest income was $11.2 billion, down 1% compared to the prior year, as lower investment securities balances and lower trading net interest income were predominantly offset by loan growth. Net interest income was up 2% quarter-over-quarter, driven by higher loan yields and balances.
* RoE 12% compared to 11% in Q2 and 10% in 3Q14.
* Basel III common equity Tier 1 ratio of 11.4%
* Firmwide Legal Expense $1.347 bln pre-tax or $0.26 per share
* Adjusted expense of $14.0 billion and adjusted overhead ratio of 60%.
* Reserve Release for Consumer was +$0.10 and Wholesale was ($0.05)
* The provision for credit losses was $682 million, down 10%, due to lower net charge-offs, largely offset by lower reserve releases. In the current quarter, consumer reserve releases of $591 million, reflecting continued improvement in home prices and delinquencies, were largely offset by an increase in reserves across the wholesale businesses of $310 million driven by select downgrades, including Oil & Gas.
>>> C&I Banking
* Banking revenue was $2.8 billion, up 2%.
* Investment Banking revenue was $1.5 billion, up 5%, on higher debt underwriting fees and higher advisory fees, largely offset by lower equity underwriting fees compared to a strong quarter in the prior year, especially in EMEA.
* Fixed Income Markets revenue reflected lower revenue in Commodities and continued weakness in Credit, partially offset by strength in Currencies & Emerging Markets; and also reflected higher interest costs on higher long-term debt.
* Equity Markets revenue was $1.4 billion, up 9%, with strong performance across derivatives and cash driven by higher client volumes.
* ROE of 8%; 13% adjusted for legal expense, tax benefits and reserve build
Closing Market Summary: Industrials and Biotechnology Lead Stocks Lower
The stock market ended Tuesday on a lower note after the major averages failed to hold their slim intraday gains. The S&P 500 settled lower by 0.7% while the Nasdaq Composite (-0.9%) underperformed.
Overall, today's affair was relatively quiet with trading volume surpassing yesterday's total by a relatively slim margin. To that point, fewer than 850 million shares changed hands at the NYSE floor.
Equity indices faced some selling pressure after China's September trade balance ($60.34 billion; expected $46.79 billion) showed a 20.4% decline in imports (expected -15.0%), which was the 11th consecutive drop in that category, stirring up concerns about China's demand for goods and services from its neighbors. Accordingly, most Asian markets posted losses on Tuesday and the defensive sentiment infiltrated the European session.
However, once the opening bell rang on Wall Street, stocks spent the first two hours of the day in a steady climb off their opening lows. That rally lifted the major averages above their flat lines, but the key indices could not build on their slim gains, instead sliding back to their lows during the afternoon.
All ten sectors finished the day in negative territory with industrials (-1.0%) occupying the bottom of the leaderboard throughout the day. Transport stocks were largely responsible for the underperformance, evidenced by a 2.2% dive in the Dow Jones Transportation Average. Only one index component settled in the green while Ryder Systems (R 68.63, -7.02) and JetBlue Airways (JBLU 24.75, -2.11) paced the decline with respective losses of 9.3% and 7.9%. Shares of Ryder slumped after the company lowered its guidance while JetBlue was downgraded at JP Morgan.
Staying on the cyclical side, financials (-0.7%) and energy (-0.9%) settled near the broader market while the technology sector (-0.3%) outperformed throughout the day with Apple (AAPL 111.79, +0.19) and Alphabet (GOOGL 683.17, +6.74) climbing 0.2% and 1.0%, respectively, while SAP (SAP 72.30, +3.85) spiked 5.6% in reaction to better than expected results. Also of note, Twitter (TWTR 29.05, +0.30) rose 1.1% after increasing its revenue guidance and announcing plans to reduce its global workforce by up to 8.0%.
Over on the countercyclical side, the health care sector (-1.2%) ended among the laggards due to an afternoon retreat in biotechnology. To that point, the iShares Nasdaq Biotechnology ETF (IBB 298.76, -9.78) lost 3.2%. Elsewhere in the health care space, Johnson & Johnson (JNJ 95.45, -0.54) fell 0.6% after reporting a bottom-line beat on below-consensus revenue.
Treasuries ended the day near their overnight highs with the 10-yr yield down four basis points at 2.05%.
The Treasury Budget for September (consensus $95.00 billion) was originally on today's economic schedule, but the report did not cross the wires during the expected release time.
Tomorrow, the weekly MBA Mortgage Index will be reported at 7:00 ET while September PPI (consensus -0.3%) and Retail Sales (consensus 0.2%) will both be reported at 8:30 ET. Also of note, August Business Inventories will be reported at 10:00 ET (expected 0.1%) while the October Beige Book will cross the wires at 14:00 ET.
- Nasdaq Composite +1.3% YTD
- S&P 500 -2.7% YTD
- Dow Jones Industrial Average -4.2% YTD
- Russell 2000 -4.6% YTD