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*MARKS & SPENCER RAISED TO TOP PICK AT RBC CAPITAL

*MARKS & SPENCER RAISED TO TOP PICK AT RBC CAPITAL

U.S.-based Elliot Management holds a 7.5% stake in the Sweden-based surveillance video camera company Axis AB, the target company of Canon Inc. [TYO: 7751] planning to acquire the full control, according to a newswire report.

Canon, the Japan-based camera maker, plans to acquire all the outstanding shares of Axis, and Elliot Management's shareholding in the company could be a hurdle to complete the acquisition, Reuters reported on 28 March.

Elliot Management's shareholding was disclosed on 26 March in a filing to Swedish Financial Supervisory Authority, according to the Reuters report.

On 10 February, Canon announced it will launch a tender offer at SEK 340 USD 40) per share to acquire 100% of the shares in Axis. The three leading shareholders of Axis, including founding members, holders of an aggregate 39.5% stake, have agreed to support the tender offer.

Dufry announces that it has entered into a binding agreement with Edizione S.r.l. ("Edizione") to acquire its 50.1% stake in World Duty Free S.p.A ("WDF"). Following completion of the transaction with Edizione, Dufry will launch a mandatory tender offer for the remaining 49.9% outstanding WDF shares. The combination with WDF will enhance Dufry's global position in the travel retail industry. Dufry expects to generate synergies of up to EUR 100m (1). On a pro forma combined basis, once fully integrated and including planned synergies, Dufry would have generated a turnover of CHF 7.8bn in 2014 and an EBITDA of more than CHF 1bn (2). The transaction is expected to be value accretive to Dufry shareholders, resulting in a double-digit cash EPS accretion from the second year post-acquisition.

Strategic rationale

The combination with WDF will further enhance Dufry's global position in the travel retail industry and the combined entity will be present in 67 countries and reach a market share of approx. 24% in airport retail globally

The transaction will enhance Dufry's portfolio with attractive long-term concessions across several major European airports, including the recently extended London Heathrow airport with a large number of emerging market consumers and the Spanish airports which ideally complement Dufry’s strong Mediterranean footprint; in addition, the transaction will also strengthen Dufry's operations in North and Latin America, Asia and the Middle East

Dufry believes that the transaction will create a series of new growth opportunities thanks to the broader breadth of the combined platform

Financial highlights

Dufry agreed to acquire Edizione's 50.1% stake in WDF for EUR 10.25 per share in cash, valuing the entire fully diluted share capital of WDF at EUR 2.6bn (CHF 2.7bn) and implying an enterprise value of EUR 3.6bn (CHF 3.8bn); following completion of Edizione's stake in WDF, Dufry will launch a mandatory tender offer for the remaining 49.9% of WDF’s outstanding shares for EUR 10.25 per share in cash

Dufry expects that the transaction will result in cost reductions and gross profit improvements with an annual run-rate of approximately EUR 100m (1) which are expected to be fully realised by full-year 2017

The transaction is expected to be value accretive to Dufry shareholders, resulting in a double-digit cash EPS accretion from the second year post-acquisition

The financing of the transaction has been secured via a fully committed debt bridge facility of EUR 3.6bn (CHF 3.8bn), of which at least EUR 2.1bn (CHF 2.2bn) will be refinanced through equity and up to EUR 1.5bn (CHF 1.6bn) through debt instruments

Dufry will hold a General Meeting (GM) to approve the equity financing, in form of an at market rights issue, targeting at least CHF 2.2bn from an ordinary capital increase

The rights issue is fully secured by a combination of the underwriting by a bank consortium as well as commitments by the investors GIC (Singapore's Sovereign Wealth Fund), the Qatar Investment Authority ("QIA") and Temasek, which have all committed to invest up to CHF 450m each in equity in the combined entity

By way of the capital increase, Dufry expects to maintain its solid financial profile with a net debt / LTM EBITDA not exceeding 4.3x (pre-synergies)

Transaction overview

Dufry announces that it has entered into a binding agreement with Edizione to acquire its 50.1% stake in WDF for EUR 10.25 per WDF share in cash, equivalent to a total consideration of EUR 1.307bn. Following completion of the transaction with Edizione, Dufry will launch a mandatory tender offer for the remaining 49.9% outstanding WDF shares at a price of EUR 10.25 per WDF share. The consideration to Edizione and in the mandatory tender offer will be fully payable in cash. The transaction with Edizione remains subject to approval of the ordinary capital increase by Dufry's shareholders as well as regulatory approvals.

Dufry intends to initially finance the acquisition of WDF and the refinancing of WDF's debt through a fully committed debt bridge facility of EUR 3.6bn (CHF 3.8bn), provided by BBVA, Goldman Sachs, ING, Santander, UBS and UniCredit, which is expected to be refinanced by the rights issue of at least EUR 2.1bn (CHF 2.2bn) and long-term debt instruments for a total amount of up to EUR 1.5bn (CHF 1.6bn).

The equity financing is expected to be implemented in the form of a rights issue of at least CHF 2.2bn from an ordinary capital increase, which is subject to approval by the GM. The rights issue has been fully secured by a combination of a firm underwriting by a banking consortium as well as commitments by the investors GIC, QIA and Temasek. The definite terms of the rights issue are expected to be determined and communicated immediately prior to the GM, which will take place no later than 15 May 2015.

Dufry has secured equity investment commitments from GIC, QIA and Temasek for up to CHF 450m each in the form of a commitment to purchase shares for which existing shareholders have not exercised their pre-emptive rights in the rights issue.

Shareholders representing approximately 30% of Dufry's voting share capital have irrevocably committed to vote in favour of the ordinary capital increase at the GM.

Following completion of the share purchase from Edizione which is expected to occur in the 3rd quarter 2015, Dufry will launch a mandatory tender offer for all remaining shares of WDF in accordance with Italian law at the same price per WDF share of EUR 10.25 as will be paid by Dufry to Edizione, in accordance with the terms of the share purchase agreement. The consideration of the mandatory tender offer will be fully payable in cash. Dufry will, in due course following completion of the share purchase agreement, publish an offer prospectus with further details related to the mandatory tender offer.

Excellent strategic fit with significant value creation potential

Enhancing global industry position in travel retail: The acquisition of WDF will enhance Dufry's global position in the global duty-free and travel retail market. On a pro forma combined basis and based on 2014 turnover, Dufry including WDF would have a pro forma market share of c.24%. Pro forma combined 2014 turnover of the combined entity would have been CHF 7.8bn with a pro forma combined 2014 EBITDA of more than CHF 1bn (1).

Enhancing key strategic areas and emerging market exposure: The combined entity will comprise a geographically diversified concession portfolio with operations in 67 countries and close to 400 locations, providing a balanced exposure to developed and emerging markets and spanning across all five continents. WDF’s operations at London Heathrow have one of the most diverse customer mix, and combining Dufry’s and WDF’s expertise with different passenger nationalities will provide for an unrivalled proposition in the travel retail industry. The WDF businesses in Spain and Italy are highly complementary to Dufry's existing footprint in the Mediterranean region, one of Dufry’s key strategic focus areas. The acquisition of WDF will also reinforce Dufry's position in the Americas, another key strategic area, by adding operations in the US, Canada, Mexico, Brazil, Peru and Chile. Last but not least, the transaction will substantially enhance Dufry's third key growth area in Asia and the Middle East with attractive locations that will support the future growth in these regions.

Attractive potential synergies at Group level with a run-rate of approx. EUR 100m p.a.(2): Dufry intends to integrate WDF into its organisation and expects to generate annual cost synergies with a run-rate of approx. EUR 100m (1) (pre-tax), comprising both cost reductions and gross profit improvements. First, Dufry expects to realise cost reductions with a run-rate of approximately EUR 50-60m per annum (pre-tax) by integrating the global operations of the enlarged company, including combining and streamlining regional and global headquarters, accelerating the functional optimization plans in the UK and Spain and streamlining the new operating model. Secondly, Dufry expects to realise gross profit improvements with a run-rate of approximately EUR 40-50m through improved purchasing power, optimised pricing and promotion strategies. Dufry expects to fully realize these synergies by full-year 2017 with associated, non-recurring restructuring costs of approx. EUR 50m in total during the first two years post completion of the transaction.

Value enhancing transaction for shareholders: The transaction is expected to create significant value to shareholders as a result of the substantial synergies. Dufry expects that this will translate into a double digit cash EPS accretion from the second year post acquisition.

Creating additional avenues for growth: Dufry believes the acquisition of WDF also presents additional growth opportunities and revenue synergies. The combined entity is expected to be better positioned to secure new contracts and renew existing agreements. Together, Dufry and WDF expect to benefit from leveraging their mutual core competencies such as scale of procurement operations, assortment expertise and consumer insights and build on long-term relationships with airport operators. The combined group’s airport retail capabilities and logistics network is expected to offer a differentiated proposition when competing for concessions and provide a solid foothold to successfully realise renewals and win new contracts in key strategic areas.

Starting a new era in travel retail

Julian Diaz, CEO of Dufry, commented: "The acquisition of WDF is a truly unique and highly transformational transaction for Dufry and is equally a milestone for the travel retail industry overall. The transaction further enhances our global position and with a market share of 24% in airport retail, we plan to drive our business to new levels in term of capturing global passenger flows, execution capabilities and efficiencies. WDF's business is highly complementary to our existing footprint and will reinforce our leading position in the Mediterranean, the Americas as well as the Middle East and Asia. At the same time, having access to one of the most diverse passenger flows in Heathrow, combining attractive emerging and developed market customer profiles, will allow us to leverage our existing expertise on all the customer groups and to further develop our global offering.

As such, the transaction will transform Dufry into an even more distinct global business with a balanced exposure to developed and emerging markets. This acquisition is a continuation of the global geographic diversification strategy which we have communicated and executed for many years, lastly with the acquisition of Nuance last year. We are preparing a detailed integration plan, focused on implementing the operational initiatives previously communicated by WDF and creating additional value through the integration of WDF and Dufry’s existing platforms. We have a successful integration track record and will work closely with the local teams. Dufry has great respect for the achievements of WDF and we look forward to working with our more than 9,500 new colleagues in 20 countries and across more than 100 locations. Ultimately what we want to achieve is to develop a better company for our employees, customers, suppliers and landlords and a more valuable asset for our shareholders.”

Financial Advisors

Credit Suisse, Goldman Sachs and UBS acted as financial advisors to Dufry on this transaction.

1 On the basis of FY2014 financials, including cost savings of EUR 26m announced by WDF in January 2015

2 Dufry 2014 pro forma for acquisitions of Nuance and WDF, including expected synergies

Macro :

- Greece’s Talks With Creditors Happening in a Positive Climate

- U.K. Govt in Talks to Privatize Network Rail: Sunday Times

- Roubini Sees Room for Compromise to Avoid ‘Grexit’: Investir

- Most Germans Say Country’s Dominance in EU Has Grown: Spiegel

Keep an eye on :

- DBK GY : Deutsche Bank Considers Legally Combining European Units: FAS

- GIL GY : DMG Mori Seiki expects to gain over 50% stake in DMG Mori Seiki AG 

- GKP LN : Gulf Keystone Investors Want Change of Chairman, Sky Reports

- HSBA LN : HSBC Turkey Seeks 20% Loan Rise Amid Bid to Avoid Sale: Hurriyet

- MDLZ US : Mondelez Mulls Sale of $3b Philadelphia Brand in Europe: Times

- UG FP : Peugeot May Reach Auto Unit Operating Margin Goal Before 2018

- PHNX LN : Fosun International Group in talks to buy Phoenix Holdings majority stake, considers buying five insurance firms overseas 

- PC IM : ChemChina Chairman Doesn’t Rule Out Higher Pirelli Offer: WSJ

- PC IM : ChemChina Chairman Says Pirelli ‘Needs an Asian Partner’: FT

- PC IM : ChemChina Hopes to Re-List Pirelli After Takeover: Reuters Link

- QPP LN : Slater & Gordon Close to GBP700m Quindell Takeover: FT

- RSA LN : Cevian Capital Lifts Stake in RSA to More Than 13%: Sunday Times

- STAN LN : Standard Chartered management changes could open door to merger with ANZ

- TEVA IT : Teva close to major acquisition - Globes

- UBSN VX : UBS Says It Will Fight EUR40m French Tax Investigation

- VED LN : Vedanta’s Albanese Sees ‘Huge’ Restructuring Task at Zambia Unit

- YOOX IM : Italy’s Yoox in Talks to Buy Richemont’s Net-A-Porter: Times

- WDF IM : Dufry Agrees to Buy 50.1% of World Duty Free for EU1.3b

Hedge fund managers Pieter Taselaar and Thijs Hovers see opportunities among European mid-cap stocks.

February Hedge Funds: Best, Worst, Biggest

Pieter Taselaar is well traveled. He was studying at Columbia business school when he learned that his father, back in Rotterdam in the Netherlands, had sold the family shipping-supply business he was being trained to run. So, after graduation, Taselaar wound up in Amsterdam instead, working for investment bank ABN, where he advised European companies on mergers and acquisitions. In 1996, the firm, now ABN Amro, shipped him back to New York to help expand its stock brokerage. His experience in valuing small and midsize takeover targets had given him a healthy skepticism for equity analysis. “People don’t do a lot of in-depth work, particularly in Europe,” he says.

His life—and his locale—changed once more, when Taselaar decided it was time to start his own firm. In 2002, appropriately enough, he named his long-short equity hedge fund Lucerne Capital Fund after the Swiss hometown of his initial investor. He based it in Greenwich, Conn., but chose to focus across the Atlantic on European stocks.

TODAY LUCERNE OVERSEES $478 MILLION in assets. In 2007 Taselaar, now 52, hired fellow Dutchman and former colleague Thijs Hovers, who had run ABN Amro’s European mid-cap equity research team and had accompanied him on a number of trans-Atlantic trips to visit European companies. Hovers, 40, later became a partner in Lucerne.

Hovers (left) and Taselaar, of top-performing Lucerne fund, see two more years of stock gains in Europe. Photo: Matthew Furman for Barron’s

The two spend a lot of their time researching balance sheets of mid-cap companies, many of which they believe suffer from poor coverage from European analysts. They like companies with strong free cash flow that might look risky, but actually command a dominant market share and strong pricing power. Lucerne won’t buy a stock unless the partners think that 30% upside is possible within a year, including dividends, based on discounted cash flow calculations.

This straightforward strategy has produced some of the best returns of any long-short equity hedge fund in the past 13 years. Since inception in 2002, the fund is up 14.8% annualized, net of fees, through Feb. 28. It has trounced its benchmark, the Stoxx Europe 600 Index, up a meager 2.1% a year during the same period. It’s also been on a roll for the three years ended Feb. 28, aided by unexpected European gains last year, delivering a 20.2% net return. Management fee: 1.5%. Performance fee: 20%. Minimum investment is $250,000.

Taselaar and Hovers don’t impose gates on withdrawals. While that’s great for investors, it didn’t help in 2008, explains Mark Anson, chief investment officer of Acadia Investment Management, the family office of Robert Bass, which invests in Lucerne. In a year when the Standard & Poor's 500 index fell 37%, investors who needed cash “used us as their ATM machine,” Taselaar recalls, forcing the fund to sell stocks it liked. Between redemptions and falling markets, Lucerne lost 43% of its assets, about 10% to 15% worse than if they had been able to hold onto stocks. Lucerne rebounded with an 87% gain in 2009.

TASELAAR AND HOVERS expect another strong year in 2015, driven by unlocked value in mid-cap stocks. Lucerne has stocked its portfolio with mid-cap companies they believe will grow faster than others on the Continent.

Some of Lucerne’s 25 long positions play the weakening euro, which has fallen by more than 20% since last May—and, Taselaar forecasts, will slip another 10% by year end. That will make European exports, particularly German cars, more competitive, he says.

Lucerne Capital Selected Holdings

Company/Ticker Industry

Braas Monier Building Group /BMSA.Germany Construction materials

Hella KGaA Hueck /HLE.Germany Car parts

Mediobanca /MB.Italy Finance

Stabilus/ STM.Germany Car parts

Tele Columbus/TC1.Germany Cable TV

Eurazeo/RF.France Private Equity

Ei Towers/EIT.Italy Cable TV towers

Note: All returns as of Feb. 28. Three-year, five-year and since-inception returns are annualized. Source: Lucerne Capital Management

Lucerne doesn’t buy large-cap car makers, but it has bought shares in German auto-parts makers such as Hella KGaA Hueck (ticker: HLE.Germany), which makes LED lighting systems. With only a couple of real competitors, Hella fits Lucerne’s pursuit of dominant market share and pricing power. It also has a free cash flow yield of about 8%. Hella is keeping pace with an annual growth rate of 20% to 25% for the automotive LED lighting industry worldwide. Taselaar and Hovers set a target price of 58 euros ($63.22) for the stock, up from its recent level of €46.

With the European Central Bank and the region’s other central banks driving interest rates down, Taselaar and Hovers expect companies and consumers to borrow and spend more. As a result, they project rising demand for new construction.

That’s why they bought shares of Braas Monier Building Group (BMSA.Germany), a German roof-tile maker. Braas also has a strong market position and has been able to withstand the pressures created by a 30-year low in European construction. The company remains profitable; its strong cash flow is equivalent to 10% of its market value, and it has a 10% free cash flow yield. The stock has 50% upside by Lucerne’s calculations.

Lower rates also mean cheaper credit for European companies to finance acquisitions. One acquirer Lucerne likes is EI Towers (EIT.Italy), which operates transmission towers for both media and mobile telephony in Italy. EI Towers has already bid €1.2 billion for a majority stake in its domestic rival RAI Way, roughly doubling EI Towers’ size. “EI Towers is in a good position to acquire,” says Hovers, because it has very little debt and a free cash flow yield of 7%.

He believes the shares can hit €80.

Lucerne is currently short about 15 companies that have major cash-flow problems, according to Taselaar.

One is Royal Imtech (IM.Netherlands), a Dutch contractor that installs electrical wiring in large public buildings. They shorted the stock, when it was trading at €9.83, and since then it has fallen to a split-adjusted €4.85. But Taselaar says he doesn’t plan to cover until the “equity value reaches zero.” To pay its creditors, Imtech has held two rights offerings, but still has about €450 million in debt, uncomfortably close to its €550 million market value.

Taselaar and Hovers still see loads of opportunities. “It will take a while for people to believe that Europe is a better market,” says Taselaar. “You could be looking at a two-year time frame.”

And lots more frequent-flier miles.

Cover story: Positive on JPM: Chief Jamie Dimon "has cemented his position as the world's top banker," using the firm's strength to gain ground in investment banking, credit cards, and asset management; Shares could rise 30% in a year, not including a 2.9% yield.

Features: 1) Positive on HDS: Company, one of the country's largest wholesalers of commercial building supplies, is affected by economic cycles, but has trimmed underperforming business lines and paid down debt, and has an upside of 30% or more; 2) Investors still hold about $50B of auction-rate securities that could remain outstanding for another 10 to 20 years, some yielding 0.5% or less; 3) Positive on SJM: Maker of jams and jellies has gotten into the pet food business with its purchase of Big Heart Pet Brands, a deal that could help it achieve double-digit earnings growth. 

Tech Trader: Positive on SWKS, BRCM, LRCX, TXN, ATML: Semiconductors are priced in dollars, so chipmaker shares have dropped on signs the strong greenback may be crimping demand, but though there may be more pain ahead, there is nothing fundamentally wrong with the industry.

Trader: "Stocks could be in a dead zone for the next week--or two or three--as the economic-data schedule is relatively light and there is no news scheduled from the Fed; Cautious on SHAK: Shares of fast-casual chain appear overvalued, as New York-centric company may not be able to generate strong profits as it expands elsewhere; Cautious on CPB: Company, long seen as a takeover target, could see shares drop if that possibility becomes less likely following the Heinz-KRFT deal. 

Follow-Up: Positive on HAS: Toy maker is doing many things well with its seven key brands; shares could rise further if movie tie-up deals with DIS pay off, so investors should keep shares in play for now; Cautious on URBN: Despite strides, retailer still faces problems, now may be the time for investors to take profits or wait for a pullback to buy in.

Profile: Pieter Taselaar and Thijs Hovers, portfolio managers, Lucerne Capital, see good opportunities in Europe (selected holdings: Braas Monier Building Group, Hella KGaA Hueck, Mediobanca, Stabilus, Tele Columbus, Eurazeo, EiTowers).

Interview: Mark Roberts, founder, Off Wall Street Consulting Group (picks: CCK; pans: TRAK, SLH, HCSG).

European Trader: Positive on ING Groep: "Dutch bank has bounced back from its near collapse during the financial crisis to become a solid performer among European financial companies.; 

Asian Trader: India's bull market could be slowing down, becoming a stockpicker's market, with TTM and Bharti Airtel good defensive plays. 

Emerging Markets: Despite the negative view of Iran in the U.S., some analysts see the country as the next great emerging market, and a nuclear deal is likely to throw open its markets. 

Commodities: Wheat prices are on the rise amid bad crops in Russia and Ukraine and a strong dollar, and could more than double from current levels, depending on the weather. 

Streetwise: Companies that have been big buyers of their own shares, such as ANTM, HAL, ITW, CBS, KR, and LYB have typically underperformed the S&P 500 during the blackout period before earnings season.

- Policymakers are monitoring global economy and decline in commodity prices.

- Monetary policy is normalizing to a "new normal."

- Says: "Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not... This year, we may be able to thoroughly update the laws on foreign exchange controls... If we can set up new rules, we will have basically established free capital account convertibility... China still has room to adjust both price [interest rate] and quantitative... We can employ comprehensive policy measures to adjust the economy."