TheChek News Flow

01-OCT-2015 10:58:30

LONDON, Oct 1 (Reuters Breakingviews) - German banks are seldom the stuff of fantasy. But a union between Commerzbank CBKG.DE and HypoVereinsbank is worth considering. The German lender's returns are meagre, while Italy's UniCredit CRDI.MI, which owns Commerz's Munich-based rival, could use extra capital. A tie-up could kill two birds with one stone.

Commerz, 15 percent owned by the German government, is a serial destroyer of shareholder value. It made a 1 percent return on equity last year. Even by 2018, that will only increase to 5.5 percent, according to Eikon estimates.

HVB looks better off. Its equivalent returns were only 5 percent in 2014, but with a far bigger relative equity base. HVB made more than twice Commerz’s 264 million euros in earnings last year, despite having a balance sheet half the size on a risk-adjusted basis. A tie-up would create a 900 billion euro asset national champion, with HVB's strength in Bavaria complementing Commerz's elsewhere.

An all-share merger would make most sense. As of Sept. 30, Commerz’s market capitalisation was 12 billion euros. HVB doesn’t have a standalone market value, but assume it trades around book value, in line with the wider European banking sector, and it would have a notional value of 19 billion euros – implying UniCredit would hold 62 percent of the combined group.

If the two could squeeze out 1 billion euros of annual pre-tax synergies, equivalent to 15 percent of combined operating costs, they could create savings with a net present value of 7 billion euros to 8 billion euros. Commerz's government stake should then be worth more, facilitating a quicker sale.

UniCredit’s capital could improve, for two reasons. HVB’s current 23 percent core Tier 1 ratio makes it hugely overcapitalised: selling it with a lower capital ratio of 12 percent could allow 9 billion euros to be upstreamed to its Italian parent. Second, if UniCredit also sold its stake in the merged bank down to 35 percent, it could push its core Tier 1 ratio up from 10.5 percent currently to over 12 percent.

Back in the real world, a merger of Commerz and HVB would need careful handling. Berlin would be wary of layoffs. German regulators and Commerz would drive a hard bargain on valuation and capital repatriation. And UniCredit’s gains could be offset by Basel capital rules obliging banks to deduct surplus capital held by newly created minority interests. Still, as fantasy mergers go, this one is worth pondering.

TULLOW - 6 monthly RBL redetermination complete, remains unch at $3.7bn...+5%

ALTICE - Confirms mid term guidance, €1.8bn cap raise via JPM expected..+2/3%

BT - Ed Vaizey comments no NOT support Openreach breakup - FT.............+2%

NOVARTIS - +ve P3 data on Secukinumab confirms significant efficacy in PA.+2%

REPSOL - Disposes of part of piped gas business to Redexis for €651m....+1/2%

ASTRAS - Says Psoriasis Patients Benefited from Brodalumab..............+1/2%

SPIRE HEALTHCARE - Pushing the BUY case here again, PO £4.15..............+1%

LUNDIN/CAIRN ENERGY - read from Tullow, these 2 also use RBL financing....+1%

ACCOR/IHG - US RevPar for w/e 26/9 +7.2% (Occupancy +2.3% and ADR +4.9%)..+1%

VESTAS - 93MW in Finland & 150MW in US, announced orders now 5.9GW YTD....+1%

GLENCORE - Reuters says CHS may be interested in GLEN Canada AG assets....+1%

LONDONMETRIC - Sells 2 retail parks for £43.4m to UK insto investors......+1%

AUTOLIV - CMD in Sweden today & tomorrow,no change to guidance expected.+0.5%

UK WATERS - Moody's maintains its stable outlook for next 12-18 months....U/C

ITE - LFL Revs -14%. Still experiencing FX -ve impact.Keeps guidance......U/C

TECHNIP - Industri Energi (IE) threatens to boycott Technip vessels.......U/C

ATRIUM - legal action in Netherlands, mgmt believe fully provided for...-1/2%

ACCOR +2% Smiths Revpar data +10.5% for Europe, +7.2% for US

ALTICE -7% Launches 10% capital raise, €1.8bln via ABB at JPM.

BAYER -2% COVESTRO cut capital increase proceeds target, lower IPO range

COLRUYT +1% FY net income ahead of previous expectations but outlook cautious

FIAT +2% US line +8% on the back of positive FERRARI IPO comments, 10x over

ING +2% Sold 40m shares of NN GROUP

K&S +10% FAZ reports K&S board members offered role in management committee

NN GROUP -2% ING sells 40m shares @ €25/shr.

SCOUT24 - First day of trading (G24 GY), priced at €30/share

*K&S-Potash offers K&S board jobs,more money in t/o talks..........+8%

*COLRUYT-Sees FY Net at least €362m(358),Rev Grth €8.92b(9.22).....+1%

*ING-Reduces atake in NN Group sells 40m shs at €25, raises €1b....+1%

*AIR FRANCE-Plans to cut 200 pilot jobs,savings plan from Monday...+0.5%

*BASF-Completes sale of custom synthesis biss to Siegfried.........+1%

*REPSOL-To sell part of piped gas bizz to Gas Nat/Redexis-651.5m...+0.5%

*NESTLE-To sell premium Callier Chocolates globally via Amazon.....+0.75%

*BPOST-To raise domestic mail prices by average 1.5% in 2016.......+1%

*BAYER-Cuts Covestro price range to €21.5-€24.5 vs €26.5-€35.5.....-0.5%

* AIR FRANCE-talks with pilots fail, plans job and route cuts...............-1%

* BAYER-lowers Covestro ipo price range to €21.50-€24.50 (€26.50-€35.50)..-1.5%

* COLRUYT-agm, rev guidance in line, net guidance €362m vs est €358m........+1%

* BPOST-raises stamp prices by 1.5%, same as last yr, no big surprise.......+1%

* K&S-Potash offers board members jobs & more pay(FAZ)......................+2%

* NESTLE-to expand sales of premium brand Callier via Amazon................+1%

* POSTNL-cmmnts on regulator decisions, cld cost €30-€50m pa from 2016......-1%

* REPSOL-sells part of piped gas unit for €651m, past €1bn disposals mark...+2%

* AVON RUBBER-Rob Rennie(Schneider) new CEO(1st Dec)........................unch

* BRITVIC-Completes EBBA acquisition........................................unch

* BT Ed Vaizey is sceptical about splitting BT from Openreach - FT...........+2%

* CHIME COMMS offer update - gets all antitrust clearances..................unch

* CRANSWICK +ve H1 - trading slightly ahead of fcsts.........................+2%

* CVS GRP-Earnings enhancing aqc's of Alnorthumbria (£7.7m)..................+1%

* GLENCORE CHS may be interested in Glencore assets, sector better...........+2%

* ITE-PreClose.FY on track. No chg to FY15, d/g FY16&17 (FX & OIL)...........-2%

* JOHNSON MATTHEY completes sale of Chems business for £256m cash............+1%

* NETSCIENTIFIC-H1. In line.Proposed placing(@ 120p) to raise £18m...........-3%

* TULLOW RBL redetermination, gets continued support from banks..............+2%

* We have trimmed EPS 0.6-1.5% — We have marked-to-market for FX and we

have slightly revised down our organic growth forecasts, due to the deteriorating EM

macro environment. We now assume 0.9% organic lager volume growth in FY16,

revenue +4.3% and EBITA +5.2%. We expect profit growth to remain quite subdued

in FY17 (org EBITA +5.7%), as transactional FX pressures are likely to offset the

benefit of cost savings, in our view. We are about 2% below consensus on EPS for

FY16 and 4% below on FY17.

* We are raising our 12-months target price to £40 — Our new target (raised from

£33) assumes a higher likelihood of an ABI take-over, at our base case scenario

price of £42. Even if an agreement on a deal is reached, we recognize that SAB

would likely trade at a discount to the take-out price, because of the complexities

and lengthy process to get to completion.

* Q2 trading update preview — SAB’s Q2 trading update is scheduled on 15th

October, but this could change as a result of potential newsflow on ABI-SAB. We

forecast 2.5% lager volume growth and +5% organic revenue growth for Q2. We

believe lager volume growth will have improved sequentially (from -1.4% in Q1) on

an easier comp, driven by China (Q2 last year was significantly depressed by poor

weather), Europe (Poland and Czech should be less bad than in Q1 and Italy has a

very strong YoY weather benefit). Africa could be better too (est +6% volume

growth, with the improvement coming from Tanzania and South Africa). We expect

slightly softer price/mix in Q2 (+2.2%) reflecting adverse country mix (China

recovery). Please refer to our detailed forecasts on pages 3-4.

With cash balances ballooning and valuations under pressure, we evaluate capital allocation decisions being made across mega cap tech. We focus on 11 companies across the commtech, hardware, internet, semiconductor and software sectors.

For each company, we evaluate (1) the current level of capital being invested in the business, (2) the returns being generated on those investments, and (3) the current level of capital being returned to shareholders.

With cash balances that have grown over the last 5 years for 9 of the 11 companies we examined (by 46% on average), we believe both more aggressive capital returns and or increased M&A would make sense, especially as returns (defined by CROCI) have largely been on the decline for the last 5 years.

We assess potential use of capital for each large cap tech player based on our analysis. We believe MSFT, ORCL, IBM, SAP and QCOM could benefit from M&A. We think IBM could support an acquisition of system/application software assets up to $38bn given its focus on growth in analytics, cloud, and SaaS. We also see GOOGL and AAPL as having the balance sheet strength to increase or in the case of GOOGL initiate capital returns while continuing to invest for organic growth.

We lay out historical M&A trends in software to provide context on the current environment. ORCL and SAP have been the leading consolidators since 2003, and we note a shift toward nextgeneration SaaS acquisitions starting in 2011.

- Discussion in VW supervisory board so far on selling holdings, sale of brands not on the agenda

Pernod’s shares have declined 22% since April, underperforming our

European Staples coverage by 17%, leaving the shares at an 18% P/E discount

to the sector, near six-year lows. While Pernod is far from immune from the

current challenging conditions in EM, we believe it should be able to deliver

improving growth driven by stabilization in China, solid growth in India, and

improvement in the US and Europe. If the US$ strengthens, it would also

benefit from transactional FX. Longer term, we view Pernod’s 38% exposure

to aged spirits as attractive. Our FY16-18 EPS forecasts are 2%/3%/4% ahead

of I/B/E/S consensus. We upgrade our rating to Buy from Neutral.

Pernod will report 1Q sales and give FY16 guidance on October 22. We expect

2% group organic sales growth for 1Q and guidance of 1%-3% organic

operating profit growth; our FY16 estimate is 3.5%. Given the company’s

transactional exposure to the US$, the shares should also perform well on

US$ strength. Our economists forecast the US$ to strengthen vs. the euro by

10%, 12%, and 18% over the next 3, 6, and 12 months.

We increase our target P/E to 16.5x (from 16.0x) to reflect Pernod’s recent

trading (we continue to apply this to our June 2017 forecasts). As a result,

our 12-month price target increases to €98 (from €97). Pernod trades on a

CY16E P/E of 15.3x, a 23% discount to our European Staples coverage and a

6% discount to its 5-year average. Of the 18 Staples companies we cover

with a market cap of at least $10 bn, only Imperial Tobacco is cheaper.

Risks to our view include: 1) weaker growth in key markets (e.g. US, China,

France, India); 2) Adverse FX moves (e.g. US$ depreciation or GBP, SEK

appreciation); and 3) value destructive cash deployment.