TheChek News Flow

The Flash is an analytical summary of key corporate events concerning M&A activity that provides advisers and corporations with business development leads, investment ideas and competitive intelligence.

* Not another 2015

* Bright spot in oil patch

* Angles struggle to remain aloft

* Banks keep merging

* Same with hotels

* Activists lose the easy plays

* January AGM forecast

A few of our thoughts on how the year ahead may play out in the event driven arena:

2016 will not be another record breaking year for US M&A – Uncertainty ahead of the US Presidential election in November 2016 will cause dealmakers to err on the side of caution. While Democrat Hillary Clinton leads the pack of presidential hopefuls, her election is anything but a slam dunk. The populist ground swell has been deafening with many willing to at least tell pollsters they support the movement despite a polarizing candidate (Republican Donald Trump). Then there is the small, but non-zero chance Clinton will be indicted for mishandling classified information or the obstruction of justice related to her private email cache. Clinton, who is not known for backing down from a fight, could lead a counter offensive during the campaign that could prove detrimental to healthcare deals. Tax inversions, predatory drug pricing, and soaring healthcare premiums will continue to be front and center in the lead up to the election. We would expect healthcare companies to lay off on the mega deals into 2016, while focusing on more discreet bolt-ons and asset swaps. Overall, we see companies pushing some deals into 2017 to avoid being in the cross-hairs during a nasty political battle and the possibility for change in antitrust enforcement with a Republican administration.

Energy will lead the next wave of consolidation – The one area we don’t expect to wait it out would be energy. Many companies just won’t have the luxury given their dire straits. The Saudi’s just slashed their 2016 budget and it looks like they are serious about flushing out the weak hands. Meanwhile, on the demand side, China tries to shift to a consumer economy while it digests years of overbuilding. We don’t see either of these situations changing until at least the second half of 2016, putting the commodities risk squarely on the downside. Weak companies will enter into survival mode, which will mean asset sales to shore up capital concerns or big mergers to create scale and improve operational efficiencies.

Debt ratings will play more of a role in strategic corporate decisions – With the Fed off the zero bound and the blow out in prices of the most speculative junk due to the commodities collapse, funding is no longer (relatively) free. We expect companies to work much harder at keeping their current credit ratings. This means using more stock for M&A (why not at these inflated levels?) and the curtailment of issuing debt strictly for repurchase shares. Post announcement downgrades (especially in high yield) that lead to much higher funding costs could eat up a much larger chunk of deal synergies, pushing companies to rethink risky deals. Lenders could crack down as well, helped by regulators’ increased scrutiny, and the days of covenant-lite for all could be drawing to a close. The gap between investment grade and high yield could widen even more if banks pull or not renew revolvers and other short-term financing on a downgrade to junk, severely limiting companies’ flexibility.

More regional banks explore options – Meanwhile, a continued rise in rates can’t come fast enough for many midsized lenders. This year First Niagara Financial (NASDAQ:FNFG) decided to pursue a sale in part because the Fed didn’t raise rates in September, a development that increased the prospects of continued underperformance. Comerica (NYSE:CMA), Zions Bancorporation (NASDAQ:ZION) and Citizens Financial Group (NYSE:CFG) are among the institutions with elevated asset sensitivity. All three have indicated in the past that they aren’t interested in selling, but FNFG long maintained that position until its board realized it had few other options. With regulators now regularly clearing big deals, regional banks no longer have an easy excuse for avoiding BB&T’s (NYSE:BBT) Kelly King’s call. On the flipside to FNFG, the fall’s other major bank sale, Astoria Financial (NYSE:AF), came amid worries that a rate increase would lead to losses as the former savings bank’s liabilities repriced before its assets. A few other New York City metro area thrifts like Dime Community Bancshares (NASDAQ:DCOM) are in a similar position. The AF proxy suggests it attracted interest from two other suitors in addition to buyer New York Community Bancorp (NYSE:NYCB): Investors Bancorp (NASDAQ:ISBC) and People’s United Financial (NASDAQ:PBCT). Along with the NY area, perhaps PBCT could revisit a bid for Massachusetts-based Brookline Bancorp (NASDAQ:BRKL), whose stock has hardly moved since a merger a few years ago. Another area in banking to watch is lenders that still have private equity investments from the financial crisis such as United Community Banks (NASDAQ:UCBI). If these banks prove unable to continue making acquisitions of their own, financial sponsors will likely pressure boards to put up for sale signs.

Consolidation in the hotel sector continues - Marriott International’s (NASDAQ:MAR) proposed acquisition of Starwood Hotels & Resorts Worldwide (NYSE:HOT) created the first hotel chain with over 1m rooms. We think the smaller players will now be pressed to act to create scale and take back margin from the Online Travel Agencies (OTAs). Our best guesses:

Accor (EPA:AC) merges with Hilton Worldwide Holdings (NYSE:HLT) giving Blackstone Group (NYSE:BX) an exit on its remaining shares

Shanghai Jin Jiang International Hotels Development (SHA:600754) acquires InterContinental Hotels Group (LSE:IHG) for instant access to the US market

Wyndham Worldwide (NYSE:WYN) acquires Choice Hotels International (NYSE:CHH) with plans to dominate the budget category

Hyatt Hotels (NYSE:H) does no strategic deals due to Pritzker involvement and instead is taken private

Out of left field: One of the OTAs acquires a hotel company. Priceline Group (NASDAQ:PCLN) and Expedia’s (NASDAQ:EXPE) combined market cap is around USD 82bn. The entire combined market cap of all the publicly traded hotels around the world is only a bit above USD 100bn. One of these OTAs could easily take out any of the major players, combine the loyalty programs and offer exclusive deals in an attempt at synergies.

Activists will have more impact than ever – With more and more investment flowing into passively managed index strategies, the average shareholder will continue to lose influence. Activist shareholders will be called upon to keep executives in check by pushing for more operational and strategic efficiencies. Given the success at the board level of activists in implementing changes in 2015, next year will see an increase in the number and the size of company targets.

At the same time, the best activists will need to adapt to changing conditions for continued success. After a number of wins on pushing tech companies to go private, activists struggled in 2015 to secure buyouts for bigger USD 10bn+ EV targets - see Citrix Systems (NASDAQ:CTXS), NCR (NYSE:NCR), and CDK Global (NASDAQ:CDK). With valuations still high and a much tougher financing environment, this strategy doesn’t look workable in 2016. Instead of quick cash sales, activists need to become an alternative to private equity firms by increasing their due diligence and coming up with (real) detailed operational turn around plans of their own. We saw that work in the consumer goods sector in 2015 to the point where many companies are now making proactive changes before investors get involved. With that group picked over, activists might do well to move on to the next sector in need of a revamp, energy (see above), where hard times could mean outsized influence for activists who can push firms on the hard CAPEX decisions. The REIT spin game may be shut down by the IRS, but activists could turn to pushing existing REITs trading well below NAV to unlock value via asset or wholeco sales.

Looking ahead to this spring’s AGM season, there are a few situations that could develop in 2016. Here are a few upcoming board nomination window openings to keep an eye on:

We’ve discussed the seemingly never-ending rumors of an activist targeting Twitter (NYSE:TWTR), though with shares down roughly 40% over the last year, and the director nomination window approaching, we may find out if this is indeed the year. TWTR has some fairly unfriendly corporate governance, such as a staggered board and ability to adopt a poison pill. However, unlike some of its larger tech peers, the company doesn’t have a dual-class share structure. The company’s nomination window runs from 5 February to 6 March.

Back in August, when Teradata (NYSE:TDC) was trading around USD 36 per share, this news service reported that the data warehousing company’s valuation could keep suitors away, but a drop down to USD 30 per share could attract suitors or an activist. And after reporting poor 2Q15 results shortly after, shares dropped below USD 30, and have yet to trade strongly back above that level. The window opens 30 December, and runs through 29 January. We wonder if an activist will try for some board representation.

Carlson Capital went active at Vitamin Shoppe (NYSE:VSI) back in April, but has been relatively quiet. There has been ongoing speculation that the company could look to merge with peer GNC Holdings (NYSE:GNC). Shares of the two companies had a rough 2015, with GNC down 34% YTD and VSI not far behind with a 31% decline. And with the companies having overlapping nomination windows (GNC’s runs from 23 January to 20 February, while VSI’s runs from 3 February to 5 March) could Carlson, or another activist, target the nutrition retailers for a board shakeup or merger deal?

Xerox (NYSE:XRX) has already pushed back its director nomination deadline for its 2016 AGM from 8 December to 29 January and is working with Goldman Sachs on a strategic review after Carl Icahn went active with a 7.1% stake on 23 November. With Icahn now finally finished with the Pep Boys – Manny Moe & Jack (NYSE:PBY) bidding war, he may turn his attention to XRX next, although we would expect a settlement before the deadline as opposed to a proxy fight given XRX’s actions thus far and Icahn’s relative silence on the tech name.

Activist fund performance will be subdued – Overall market valuations are quite lofty by most historical standards and will limit stock appreciation in 2016. We see an upside scenario of mid-single digit appreciation with a downside scenario in the negative 20% range. Even as activists become more influential, overall performance could be even worse than 2015 considering the current risk/reward imbalance and given that most funds are still bullish and relatively unhedged, running 80%+ net long.

LONDON—The diplomatic crisis between Saudi Arabia and Iran presents a new test for the Organization of the Petroleum Exporting Countries at a particularly challenging time for the oil-producing cartel.

The 13-nation group that controls more than a third of the world’s oil supplies has been able to function in the past even when its members were at war. Iraq and Iran sent representatives to OPEC meetings during their war in the 1980s, and Saddam Hussein’s oil officials sat at the table with representatives of Kuwait’s exiled government after Iraq invaded in 1990.

But the confrontation over Saudi Arabia’s execution of a prominent Shiite cleric, Nemer al-Nemer, could prove to be an even trickier situation for OPEC because of the sectarian anger it has unleashed across the Middle East in countries whose economies have been slammed by depressed oil prices. Saudi Arabia is primarily a Sunni Muslim country, while Iran is mostly Shiite.

Other Sunni Muslim countries, including OPEC member, the United Arab Emirates, followed Riyadh in cutting off diplomatic ties with Iran after Saudi Arabia’s embassy was set on fire by protesters in Tehran.

Meanwhile, religious and political leaders in Shiite-majority OPEC member Iraq have criticized Saudi Arabia for the execution of the cleric.

“We have not encountered a similar situation before,” said one OPEC delegate from a Persian Gulf Arab country.

The difference this time, the delegate said, was resilient American oil production, which has kept crude markets flooded and prevented OPEC from using its main tool for calming markets: regulating oil output flows. Prices have crashed by more than 60% over the past 18 months, trading at less than $38 a barrel on Monday.

Saudi Arabia and Iran—arguably the two most powerful OPEC members—were already at odds over oil-production policy.

Iran is expected to boost international exports of its crude early this year after the likely end of western sanctions over its nuclear program. At last month’s OPEC meeting in Vienna, Iranian officials called for other members to pull back production so that crude prices don’t fall further when Iranian crude comes rushing back to the global market. Saudi Arabia rejected those calls and OPEC gave up all pretense of controlling output, abandoning its production target of 30 million barrels a day. Iranian oil minister Bijan Zanganeh was visibly upset when he left the meeting.

Saudi Arabia has pumped at record levels over the past year and encouraged other members to do so as well, a strategy that diverges from its policy in the past of propping up the market with production cuts.

Saudi Arabia and Iran have negotiated coordinated action on production in the past, including in the late 1990s. Hopes for such an agreement have dimmed, analysts said.

“Before the latest development, there was a possibility that OPEC could reach an agreement or a coordinated action,” said Mohammad al-Sabban, a former senior adviser to the Saudi oil minister. Now, “Iran will refuse to coordinate on a cut and Saudi Arabia won’t compromise.”

The mood among some in Tehran was equally pessimistic over the potential damage inflicted to OPEC.

“Already, Saudi Arabia was not cooperating with Iran in the oil market,” said Roozbeh Aliabadi, managing partner at political risk and business consultancy Global Growth Advisors, which helps businesses interested in working in Iran. “Now I expect the Saudi attitude in OPEC will turn from noncooperation into confrontation with Iran.”

Ole Hansen, head of commodities strategy at Saxo Bank, said in a note Monday that Saudi Arabia, the world’s largest oil exporter, would be negotiating with a “more equal partner” as Iran ramps up production.

“This may be difficult to achieve given the current turmoil,” Mr. Hansen said.

The tumble in oil prices has put intense pressure on the oil-dependent economies of OPEC members. Last week, Riyadh disclosed a record deficit of nearly 367 billion Saudi riyals (around $98 billion) in 2015, or about 15% of gross domestic product. The kingdom expects to run a deficit of 326.2 billion riyals in 2016, as projected revenue falls to 513.8 billion riyals. The kingdom’s national oil company, Saudi Aramco, is also slashing spending.

In Iran, oil officials are facing the prospect of boosting production just as prices are tanking even more. Last week, Mr. Zanganeh said Iran’s budget for the next fiscal year starting in March assumes an average oil price of $40 per barrel, compared with $72 a barrel in 2015.

The price of Iran’s heavy crude oil had plunged below $30 per barrel in mid-December trade, according to Iran’s oil ministry.

- not concerned about the market turmoil seen today

- Fed's forecast includes the weakening path of China economy

- Fed should not think about ending reinvestment until there are a few more rate hikes under the belt

- my personal longer run rate target is 3.5%

- Chinese stock market has a fairly small impact on overseas stock markets, given its small size.

Baxalta, the US biotech company facing renewed takeover interest from Shire, has agreed a deal worth up to $1.6bn to develop cancer drugs with a Danish company called Symphogen.

The partnership, announced on Monday, signalled Baxalta’s determination to press ahead with its own plans even as talks continue over a potential sale to UK-listed Shire for more than $30bn.

The deal could further increase the appeal of Baxalta to Shire, whose chief executive, Flemming Ornskov, has expressed a desire to expand into cancer drugs. However, adding further potential assets to Baxalta’s pipeline could complicate negotiations over a sale to Shire.

Baxalta resisted a $30bn all-share offer from Shire in August, but people close to the situation say talks have since made progress towards a higher bid that would be sweetened with a cash component.

In the tie-up with Symphogen, Baxalta has agreed to make an upfront payment of $175m to the Danish company in exchange for exclusive rights to six cancer “immunotherapies” that it has in pre-clinical development. Further sums would be payable subject to progress through clinical studies, up to a maximum of $1.6bn.

Illinois-based Baxalta — spun-off last year from US medical group Baxter — is best known for its treatments for haemophilia, the rare blood disorder, but it also has a presence in immunology and oncology.

The Symphogen deal is focused on a burgeoning area of cancer research called immuno-oncology, which involves boosting the ability of the body’s immune system to hunt and destroy cancer cells.

David Meek, head of oncology for Baxalta’s cancer business, said the alliance was “just the beginning of our focus in building world-class capabilities in immuno-oncology”.

Few details were given about the six drug candidates to be worked on with Symphogen other than that they would be “checkpoint therapies”, which aim to clear a path for disease-fighting white blood cells to attack tumours.

Under the terms of the deal, Symphogen will be responsible for early clinical development, due to start in 2017, at its own expense; Baxalta will then have an exclusive option to take the therapies through later-stage trials to market.

Kirsten Drejer, Symphogen chief executive, said: “We know how to clone the antibodies and take them through pre-clinical studies; Baxalta has the machinery for late-stage development and commercialisation.”

The partnership will provide privately owned Symphogen with funds to push forward its own development pipeline, including a treatment for colorectal cancer in mid-stage trials. Its biggest shareholder is the investment arm of Novo, the holding company that controls Novo Nordisk, the Danish drugmaker.

Symphogen is focused on antibody therapies that use genetically engineered proteins to target diseased cells and tissue. It is pursuing similar technology to Genmab, another, more mature Danish drug developer which has emerged as one of Europe’s most promising biotech companies.