Japan Pension Fund GPIF CIO: Optimistic about Japan's structural reform; Now is the "moment of truth" for Abenomics - financial press
- Need more investment from oversea to give domestic investors more confidence.
Shire Weighing Options to Sweeten All-Stock Offer for Baxalta, Sources Say
Among the possibilities, getting cash to Baxalta shareholders faster
LONDON— Shire PLC is weighing options for sweetening its multi-billion-dollar, all-stock offer for U.S. biotechnology firm Baxalta Inc. by putting cash into shareholders’ hands sooner, said people familiar with the matter.
The Dublin-based drug maker’s unsolicited proposal—disclosed last month and valued at $30.6 billion based on Shire’s stock price at the time—excluded any cash. Shire said that was to maintain the tax-free status of Baxalta’s recent spinoff from Baxter Inc., both based in Deerfield, Ill.
Shire said instead it would return cash to Baxalta investors by launching a share buyback program “promptly after” the close of the deal. Baxalta, which was spun off from Baxter in July, rejected the offer as too low.
Now, Shire has communicated to some Baxalta shareholders that it is considering how it might fashion a revised deal that would hand cash to shareholders sooner than the buyback plan allows, without jeopardizing the tax-free status of the spinoff, according to these people.
It is unclear what specific avenues Shire and its advisers are pursuing—or whether Shire is now considering boosting the overall value of its offer. One complication for Shire is that the value of its stock has fallen some 17% since making its approach public in early August. That could require it to sweeten its bid beyond simply speeding up the payment of cash to investors.
The issue is far from clear-cut, say tax lawyers, because there are few, well-known examples of a company being purchased so soon after a spinoff.
Tax experts say one option could involve Baxalta agreeing to take out a loan to pay a special dividend to its shareholders before an all-share acquisition by Shire.
U.S. law provides for tax-free spinoffs in most cases. But there are restrictions, including a provision that such spinoffs not be used as a “device” to funnel cash to shareholders.
Tax experts say a quick sale that involves cash being paid to Baxalta shareholders could run afoul of this stipulation.
Anything that disqualifies the tax-free treatment of the spinoff would put Baxter in line to pay 35% corporation tax on its gains from the spinoff.
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A dividend payment might not raise the same issue. The device test “doesn’t preclude people from paying dividends,” said Robert Willens, an independent tax expert.
Bill Dantzler, a New York-based partner at the law firm White & Case LLP, which isn't involved in the deal, said the law is gray. “There aren’t clear bright lines as to what is a device and what is not,” he said.
Shire Chief Executive Flemming Ornskov has spent the weeks since going public with his proposal trying to convince shareholders that a combination of the companies would create a global, rare-disease powerhouse. Both companies made around $6 billion in revenue in 2014.
Shire is best known for its hyperactivity drugs, but its focus has shifted toward rare diseases in recent years. Baxalta specializes in treatments for the bleeding disease hemophilia and immune deficiencies.
While Shire’s attempt to acquire Baxalta so soon after its spinoff is rare, there have been a handful of cases where companies have successfully acquired recent spinoffs for cash after a bit more time. In 2011, Google Inc. acquired cellphone maker Motorola Mobility Holdings Inc. in an all-cash deal seven months after Motorola Mobility had been spun out of parent company Motorola Inc. Google later sold the unit to Lenovo Group Ltd.
And in 2006, Apollo Global Management LLC paid cash to acquire real-estate broker group Realogy, which had been spun out of the now defunct Cendant Corp. 4½ months earlier. Apollo has since exited that investment.
Amid those high-profile examples, the passage of time can work in Shire’s favor. “Every day that passes, probably helps the tax analysis,” Mr. Dantzler said.
Weekly Performance
Dow+0.36% S&P+0.51% Nasdaq+1.88% Russell+1.10% Nikkei+2.65% Hang Seng+3.18% Shanghai+1.27% Ibovespa-2.04% EuroStoxx+0.24% FTSE+1.24% cAc+0.57%Dax+0.85% SXXP+0.74% Ibex-0.85% MIB+1.35% SMI+1.39%
The volatility seen over the last month in global markets gave way to relative calm this week. US markets were subdued thanks to the Labor Day weekend holiday and a schedule light on major data releases. There was a notable increase in corporate debt issues as companies tried to get ahead of Fed hikes later this year, although the jury remains out on the feasibility of policy tightening at next week's FOMC meeting. Other highlights included the excellent JOLTs job openings report, Apple's product refresh, and various investor conferences where management teams largely indicated that prior guidance (or the low end) remains achievable despite the recent uptick in global growth concerns. Shanghai reopened for trade after a two-day holiday to another weak Chinese trade report, which inspired equity gains on hopes for more stimulus spending. US Treasury yields backed up modestly, as prices were pressured by supply from both corporate and government sales. For the week, the S&P and DJIA each gained 2% and the Nasdaq added 3%.
Macro :
- Nine Weekly Reversals Show S&P 500 Traders Have No Clue on Fed
- Brazil’s Junk Relapse Makes Its Bonds Even Riskier Than Russia
- EU Weighs Transaction Tax as France Pushes for Wider Base
- China’s Aug. Crude Steel Output Falls 3.5% to 66.94 Mln Tons
- China Alumina Output Rises 6.1% to 4.88 Mln Mt in August
- China Fixed-Asset Investment Tumbles to Lowest Since 2000 (1)
Keep an eye on :
- ABBN VX : ABB CEO Says Eyeing Acquisitions in Mid-Size Range: FuW
- ABBN VX : ABB May Relocate Some Swiss Workers to Dubai, U.S., NZZ Reports
- ABBN VX : ABB Won’t Separate Power, Automation Businesses, Voser Tells SZ
- AGA LN : Whirlpool Says It Doesn’t Plan to Make an Offer to Buy AGA
- AIR FP : Eurofighter Confirms 28-Fighter Jet Order With Kuwait Government
- AIR FP : Airbus Says Assembly of A320 Cheaper in U.S. Than Germany: Welt
- CSGN VX : Credit Suisse Plans October Strategy Announcement: SamS,
- GOOGL US : Schaeuble Poised to Close Tax Loopholes Used by Google: Bild
- RNO FP : Renault Seeks to Overtake Ford in Europe, Ghosn Tells JDD
- SIE GY : Siemens Sells Wind-Power JV Stakes to Partner Shanghai Electric
- UL FP : Unibail Preparing to Offer Paris Office Buildings for Sale
- PAH3 GY : Porsche Chief Mueller Mulls Electric Version of All Models: AMS
- UHR VX : Swatch CEO Hayek Says SNB Board Should Resign: SamS
- VOD LN : Vodafone to Continue Offering Netflix Free to Some Customers
- VWS DC : Vestas Receives 200MW Order for Wind Turbines From Xcel Energy
GE emerges as key player in Halliburton buyout deal
General Electric could be key to Halliburton winning regulatory approval for its $35 billion buyout of rival oil-service company Baker Hughes.
The Post reported Thursday that the Department of Justice had determined that Halliburton needs to find a single buyer of assets generating about $7.5 billion of revenue to pass muster.
The most logical buyer — it might turn out to be the only candidate — is GE, which has tens of billions in cash from selling much of its financial services business, and is building its presence in oil services.
GE will bid at the right price, sources close to the company said. GE declined to comment.
On Friday, Halliburton said the DOJ had not told the company it would require the businesses to be sold to one buyer and was continuing to market the assets
Not content to merely watch the US Open finals, Wall Street’s tennis nuts are holding their own tourney.
The Finance Cup will take place across the East River from Arthur Ashe Stadium, at the New York Athletic Club’s tennis courts in Pelham this weekend.
The doubles tennis-fest pits some of Wall Street’s best players — including captain Jeffrey Appel, a senior director at Broadband Capital, and co-captain Bill Ackman, founder of Pershing Square Capital Management — against some of Europe’s fearsome financial servers, including captain David Anvig of Global Asset Capital in London and co-captain Christer Gardell, founder of Cevian Capital.
Next year’s matches will be held across the pond, in London.
Shell CEO says BG deal risk is overstated
Investors’s fears that Royal Dutch Shell will fail to complete its planned £43bn acquisition of BG Group have been exaggerated, Shell’s chief executive has said.
BG shares are trading at a substantial discount to the value of Shell’s offer, suggesting some in the market are concerned the deal will not go through.
But Ben van Beurden told the Financial Times that the two companies’ share prices had been “knocked about” by recent turbulence in stock markets, and their valuations were driven by “risk aversion and volatility at the moment, rather than careful considered pricing”.
He reiterated Shell’s commitment to maintaining its dividend, even though the shares had an “outrageous” yield of about 7.8 per cent, reflecting investors fear that the payout could be cut.
Mr van Beurden suggested that over time there was likely to be a floor under oil prices at $70 per barrel, but said he did not know when the market would get back to that level.
“It doesn’t help me making decisions today. Today’s decisions are driven by today’s oil price,” he said, adding that decisions were based on “what is it that I can afford to spend today.”
At Shell’s closing price of £16.15 on Friday, down 34 per cent in 12 months, its offer for BG is worth about £11.02 per share, a substantial premium to the target’s latest price of £9.90.
Speaking after a presentation to investors in New York last week, Mr van Beurden argued that those prices did not accurately reflect investors’ views on whether the deal would go ahead.
He was “categoric” that the company had “no intention to walk away from this deal,” he said.
To complete the acquisition, Shell needs to secure regulators’ approval in the EU, Brazil, China and Australia, and then win the backing of both companies’ shareholders.
When the takeover was announced in April, oil prices appeared to be recovering, but they have since slipped back, stoking expectations that they will remain lower for longer than expected earlier in the year.
The price of Brent crude for delivery at the end of 2018, for example, has dropped from about $70 in April to about $63 today.
That decline has made the economics of the BG deal look less attractive for Shell. However, Mr van Beurden said the takeover still offered a “strategic transformation” for Shell that would give it a leading position in the two most exciting parts of the industry: deep water developments and liquefied natural gas.
He said he was confident that investors would back the deal, allowing it to close as planned early next year.
“At the moment I do not hear any shareholders not supporting the deal,” he said.
There was a “modest” risk that Shell could fail to secure key regulatory approvals, he added, but it had already been cleared by the EU, South Korea and other countries and was making “a lot of good progress” elsewhere, including in China.
Buying BG would strengthen Shell’s ability to maintain its dividend, he said even if there might be concerns over its impact in the first year or two.
A dividend that was maintained and rose over time in line with inflation was “a core value proposition for our shareholders,” and was therefore something that “the board as well as our executive team really stand by as a commitment”.
He could imagine that investors would worry about Shell’s ability to continue paying the dividend, he said, in part because of the extra debt that the company will take out to pay for the cash component of the offer, which represents about a third of its total value.
To answer that “legitimate question”, he said, Shell was promising to maintain the dividend at $1.88 per share for this year and at least that amount again for 2016.
“That is an assurance that we really know as a company and as a board we can stand by, because the dividend is such an iconic item within Shell,” he said.
Beyond that, he added, the company had no formal commitment, but he suggested the financial constraints on the group would ease.
The key risk period seen by investors was in the near term, he said.
After that, both BG and Shell would have new projects coming into production to boost cash flow over the coming years. Oil prices were also likely to rebound, he suggested.
“A large segment of our investors also realises that in the end, oil price fundamentals will reassert themselves,” he said.
Barrons Summary: Cautious cover story on BABA; Positive on AAPL, SVU, IFX.DE
Cover story: Cautious on BABA: Wall Street's optimism about the Chinese e-commerce giant is stronger than it should be, and though 45 of 52 analysts covering it maintain Buy recommendations, a decline of 50% looks likely amid a number of challenges, including slowing growth rates and profit margins; additional pressure could arise when the IPO lockup expires.
Features:
1) Positive on Infineon (IFX.DE): Germany's largest chipmaker is defying the slump in the sector, creating a buying opportunity for company that is investing in advanced chip-wafer technology and the vehicle market, and which is "a hot rod priced like a hatchback";
2) Positive on AAPL: Company's recently announced new products were overshadowed by its iPhone leasing plan, which could "be a game-changer for the stock because it addresses slowing iPhone growth, the primary bear case for shares;
3) Positive on SVU: Company could unlock substantial value if it spins off its deep-discount Save-A-Lot chain, which has been growing at a faster clip than its other operations.
Tech Trader: More pain is likely to hit the semiconductor sector, and "the urge to buy chips smells like wishful thinking" given a slowdown in the PC industry and China's slump, which has yet to show up in reported results (cautious on INTC, KLIC, MRVL, TXN, MCHP).
Trader: If the Fed raises its interest-rate target, says Lori Heinel of State Street Global Advisors, the market is likely to have a "knee-jerk negative reaction"; Cautious on UAL: Under new chief Oscar Munoz, the carrier has a chance to improve customer service, product reliability, and cost position, and it plans to hold capacity growth to below GDP growth; Positive on Atlantia, Intesa Sanpaolo, Enel, Telecom Italia: Amid an improving Italian economy and lower unemployment, shares of some companies look inexpensive.
Small Caps: Positive on DRII: Shares are down amid overall concern about the leisure industry, but the acquisition of smaller time-share operators at cheap prices during the recession could push them back up by 70%.
Profile: Thyra Zerhusen, lead manager, Aston/Fairpointe Mid Cap fund, likes easy-to-understand, stable businesses at reasonable valuations that have been overlooked by most Wall Street analysts (picks: MAT, TGNA, CPA).
Interview: Joe Rosenberg, former chief investment officer at Lowes Corp, is bullish on JNJ, PFE, CVX, GM, and F.
Follow-Up: Positive on MEG: Company's bid for MDP should boost cash flow and create $80M in synergies, and Wall Street may be underestimating the potential benefits of Media General's boost in broadcast exposure because of the deal.
European Trader: Positive on Wirecard: Munich-based company, Europe's largest online-payment service provider, could offer 25% upside, though some investors see a potential return of as much as 60%.
Asian Trader: Long-term investors in India will need patience, because prime minister Narendra Modi's ambitious reform and modernization plans have been stalled.
Emerging Markets: Brazil and Nigeria won't be able to hide behind "bad fiscal and monetary policies when commodity demand dries up."
Commodities: Though silver prices are near the end of a long decline, it may still be too early for investors to dive in.
Streetwise: Positive on PWR: Shares of company that serves the electric-power and oil-and-gas industries have fallen but they look inexpensive, and much-needed upgrades in the electricity and pipeline sectors could send them up 31%.
Carmakers braced for end to record global growth run
Frankfurt motor show to open amid concerns about Chinese and US markets
When the world’s car industry last assembled in Frankfurt for the biennial motor show, automobile sales in Europe were hurtling towards a two-decade low. But there was an upbeat tone from the assembled executives and a certain sprezzatura in the stylish concept cars.
Those flashy products and confident messages will be in evidence once again at this year’s Frankfurt show, which opens to the world’s media on Tuesday. Carmakers and parts suppliers will unveil more product premieres than ever: 210 in all.
But the optimistic mood will probably be forced. Despite near record car purchases in the US, a surprising recovery in Europe and healthy profitability at some of the biggest manufacturers, analysts are increasingly concerned that the car industry’s strongest run of unit sales growth is coming to an end.
The global sales trajectory is still upward — just. LMC Automotive, a consulting firm, expects global passenger vehicle sales of about 88m this year, up 0.6 per cent compared with 2014. LMC has been cutting its 2015 forecasts for several countries.
There are fears the booming US car market could soon come to a shuddering halt, particularly if interest rates rise. Carmakers are already grappling with big falls in vehicle purchases in Russia and parts of Latin America; and China, the world’s largest market, generating 30 per cent of global sales, is going into reverse because of the country’s economic slowdown.
“If you’re struggling in the market that generates a significant part of your profits, you try to compensate elsewhere,” says Andy Palmer, chief executive of Aston Martin and a former senior manager at Nissan. “In order to hit your volume targets, you start to put incentives on to the cars. [Then] you’ll see pricing starting to give way.” These issues have been putting pressure on some carmakers’ share prices.
Analysts at Exane BNP Paribas forecast that car industry unit sales will start to decline from 2017. If they are right, the additional manufacturing capacity that carmakers are bringing online — the ability to make 16m more vehicles by 2020 compared with levels this year — will look profligate and put further pressure on the money the industry makes for each car.
In recent times, the biggest single source of satisfaction for many of the world’s carmakers has been North America.
In particular, the US market — number two globally in terms of sales — is experiencing high demand amid encouraging economic indicators, such as low unemployment.
It has also been highly profitable for the US carmakers — General Motors, Ford and Fiat Chrysler Automobiles — that underwent major restructurings during the financial crisis.
Low oil prices have prompted a shift in consumer tastes towards “light trucks” — the broad term for pickups and sport utility vehicles, which generally command higher profit margins compared with smaller cars. In August, Ford, GM and Fiat Chrysler generated 74 per cent of their US sales from trucks — a record.
But with US sales back above pre-crisis levels, analysts say two factors could halt the bonanza.
First, a rise in US interest rates could curtail credit and therefore reduce vehicle purchases. Second, carmakers could seek to compensate for falling demand in China by increasingly pushing for sales in the US, resulting in price wars.
Furthermore, new manufacturing capacity in the southern US states and Mexico will soon come on stream following commitments from the likes of Ford, Toyota and Volvo.
Max Warburton, analyst at Bernstein, doubts that the improving European market can offset an expected decline in US profitability and problems in emerging markets. “Can European demand — and a weak euro — continue to carry the day?” he asks. “We remain dubious.”
Russia and Latin America — along with China — were once considered the main future profit drivers for the car industry.
Brazil, now engulfed in recession, is a notable weak spot for the carmakers — sales are down 20 per cent so far this year compared with 2014. Russia in August showed signs of stabilisation, but sales are still expected to fall 36 per cent this year, compounded by a sharp drop in the rouble.
But by far the dominant concern in Frankfurt will be China.
Falling sales in China are taking a toll on the jumbo pricing and outsized margins that carmakers have been enjoying in the country for several years.
General Motors and Volkswagen relied on China for 44 per cent and 41 per cent of operating profit respectively last year, according to AlixPartners, a consultancy.
Manufacturers will launch a number of vehicles at Frankfurt that were signed off at a time of buoyant optimism around the Chinese market — which had a predilection for luxury vehicles until a crackdown on ostentatious consumption two years ago.
Bentley will launch the Bentayga — “the world’s fastest, most luxurious” SUV, according to the company — alongside rival products from Jaguar and Maserati.
The decline in Chinese car sales comes at a time of ambitious plans to increase car manufacturing capacity in the country. Exane BNP Paribas estimates that 7m units of capacity will be added by 2018 — an increase of 20 per cent compared with this year.
“Manufacturers do tend to be a bit bullish in terms of installing capacity and it can catch them out when the markets turn down,” says Jonathon Poskitt, head of sales forecasting at LMC.
Leading car executives will probably put their faith in the long-term potential of the Chinese market as they take to the stands in Frankfurt. But in the short term, China is unlikely to continue its role of fuelling the carmakers’ growth run.
Analysts are slicing their earnings forecasts for Franklin Templeton, as the US asset management group wrestles with some of the worst outflows from its mutual funds in its history.
Investors pulled more money from the Templeton Global Bond fund, run by emerging markets trader Michael Hasenstab, in August than in any previous month, while Franklin’s global equities business has now suffered 16 consecutive months of outflows.
Shareholder concern centres on several major Franklin funds’ exposure to emerging markets, and on the company’s heavy reliance on retail investors, who are quicker to pull their money in volatile markets.
“This is an asset manager that is more leveraged than others to emerging markets,” said Glenn Schorr, analyst at Evercore ISI Group. “Usually that is a good thing. Now it is a bad thing. What they happen to have most of, is what has gotten beaten up the most.”
Falling assets under management quickly translates into lower fee income, and analysts have cut their earnings forecasts for Franklin’s next financial year by 10 per cent since June, according to Bloomberg data.
Mr Hasenstab’s $61bn fund has lost 6 per cent so far this year, partly because his large holdings of Mexican bonds have tumbled with the value of the peso, a performance that puts it in the bottom one-fifth of funds in its category, according to Morningstar data.
Investors responded by pulling $1.9bn in August alone. In all, outflows from the fund have totalled $6.4bn in the past nine months.
Franklin has also been shedding assets in its global equities business, where funds under management are down 18 per cent year on year, according to a company update last week.
Half of Franklin’s $806bn in assets under management are in funds that invest wholly or mainly outside the US.
Emerging markets have borne the brunt of worries about the economic slowdown in China and about what will happen when the Federal Reserve raises US interest rates.
Shares in the asset manager’s parent company, Franklin Resources, are down almost 30 per cent so far this year, making it one of the worst performers in the sector, which has fallen only half as far.
The company declined to provide an executive for interview, but senior portfolio managers have repeatedly appealed to clients in recent weeks to stick with their investments.
Mark Mobius, executive chairman of the Templeton emerging markets group, wrote in a blog post on the August stock market swoon that “it is important to put these types of market corrections in context, remain calm and look for potential opportunities”.
Mr Hasenstab, meanwhile, said in a video message posted on the company’s website that sell-offs in emerging market currencies had gone too far.
Christopher Harris, analyst at Wells Fargo Securities, cut his forecast for Franklin’s earnings next year, and his share price target, by 10 per cent apiece in response to the latest assets under management figures.
But he added: “With so much negativity seemingly baked into the valuation at this point, we keep our ‘outperform’ rating on the stock even though there appear to be few near-term catalysts.”