(Barron's) Russia Leads Emerging Markets Higher

Russia Leads Emerging Markets Higher
The hard-hit shares rebounded in the first quarter; Brazil still disappoints.

Stocks in developing economies were a pretty good place to be in the first quarter.

The MSCI Emerging Markets Index rose 1.9%–reflecting price returns converted to dollars–in the first quarter, while the Standard & Poor’s 500 index was up 0.4%.

The devil was in the details. Latin America, off 10%, was down for the count in the latest quarter. Eastern Europe was a surprise winner, with a gain of 11%, powered by Russian and Hungarian equities. Asia showed strength, too (up 5%), though for all the hype about India’s gross-domestic-product growth surpassing that of China, the latter’s stocks shone brighter in the latest quarter. (For more on China, see this week’s Asian Trader column.)

The first three months of 2015 were volatile. A total of 24 central banks cut rates to fight disinflation. The Federal Reserve indicated it could raise rates this year and the dollar strengthened. For emerging markets, the net result was weak currencies and a bout of selling.

RUSSIA WAS A NOTABLE EXCEPTION. Its massive ruble devaluation came in December, creating an opportunity for bottom-fishing equity investors in the first quarter; the MSCI Russia Index rose nearly 19%. U.S.-traded shares of Sberbank (ticker: SBRCY) were up roughly 30% for the year. Granted, Russian shares are off 29% in the last year, but the first quarter represented a change in direction.

Turkey headed in the wrong direction, tumbling 16% and erasing fourth-quarter gains. As the dollar strengthened, the lira tanked. And despite a decline in its current account deficit, Turkey remains vulnerable to higher U.S. rates.

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With January’s election of a leftist-controlled coalition of euro-zone bulldogs, fear about a Greek exit remains high. The economy has been relegated to emerging-market status and teeters near bankruptcy, so you would think it couldn’t get worse. But it did. The Greek market was the worst emerging performer in the quarter, down nearly 30%, and 64% over 12 months.

Equities in Latin America also tumbled, and Colombia and Brazil were the notable losers (see table). In Brazil, the commodity-driven export economy continues to struggle as China’s demand wavers. The expanding scandal at state-controlled energy giant Petroleo Brasileiro (PBR) isn’t helping. President Dilma Rousseff insists leaders knew nothing of alleged bribery, but Brazilians took to the streets last month to demand her impeachment.

Looking ahead, with money already flowing out of higher-risk countries, “emerging markets are going to be more resilient to rising interest rates in the U.S.,” says David Ruff, a portfolio manager on the Forward International Dividend Investor Fund (FFINX). He expects some defaults in dollar-denominated corporate bonds in energy and favors oil importers, especially the Philippines, whose market rose 9% in the quarter. As always, owning a basket is safest, but the temptation to pinpoint winners never ceases.

(Barron's) Shanghai’s Stock Market Has Room to Run

Shanghai’s Stock Market Has Room to Run
Skeptics of China’s bull market are overlooking some important facts. Why the rally could take shares 12% higher in three months.

China’s $4 trillion stock market is easily one of the best-performing major markets this year. The Shanghai Composite Index has risen by another 18%, after a 30% jump in the last six weeks of 2014.

This is worrisome, critics say. Almost all of the gain has come from higher trading multiples rather than earnings increases. Analysts have been cutting their profit forecasts. Meanwhile, the Shanghai stock market is now 30% more expensive than Hong Kong-listed Chinese equities, despite a trading link between the two.

What drives the difference in valuation?

Shanghai is in a bull market, with room to run. Citi Research estimates that the Shanghai Index may rise 12% to 4500 this quarter. Propelling the market are retail investors. China’s securities regulator says, on average, over 100,000 new stock accounts were opened every day this year. In the week ended Mar. 27, the Chinese opened a record 1.7 million new accounts. As a result, retail investors generated 90% of the trades this year, up from their historical average of 80%.

Two themes are driving this enthusiasm for equities. First, by cutting interest rates, Beijing is signaling that its priority has shifted from structural reform to stabilizing growth. Second, Chinese money has to go somewhere now that the real-estate boom is over.

IT IS THEREFORE NO SURPRISE that Shanghai’s daily trading volume is equal to around 2% of its total market cap, whereas Hong Kong’s volume amounts to less than 0.5%. Most Chinese investors trade within Shanghai because they don’t have the minimum of $80,000 in their trading accounts needed to participate in the trading link to Hong Kong.

Shanghai isn’t too expensive yet. The Shanghai Composite Index trades at 13.8 times forward earnings, shy of its 10-year average of 14.4 times, on the back of 10.3% expected earnings growth this year.

UBS strategist Wenjie Lu looked at the last seven Shanghai market “bubbles.” On average, the Shanghai Index took 13 months to climb to its peak and three months to dive to lows. The shortest rise was six months in 1992. We are only in the fifth month of this rise. Lu says China’s bull runs usually end for one of two reasons: Either Beijing tightens regulations, or a massive supply of new stock hits the market.

The latter is the bigger problem. Over the next few weeks, 44 IPOs are scheduled, seeking 24 billion yuan ($3.9 billion), according to Chinese data provider Wind. The IPO market is a dinosaur from China’s command economy. Unlike the U.S., where any firm can go public if it meets the SEC’s financial standards, in China, Beijing picks the companies. Beijing also keeps IPO valuations low. Bloomberg last week reported that few companies go public for more than 23 times earnings, and the 68 companies that started trading this year have surged about 200% on average.

Implicit approval from Beijing and instant investment profits make IPOs very popular and they are often over 100 times subscribed. That can drain liquidity from the rest of the market.

Beijing recognizes the flaws and talks about IPO reform, possibly by year end. But it needs to be quick, or China’s masses may be disappointed again.

(Barron's) 10 Stocks With Reliable Yields Up to 5.7%

10 Stocks With Reliable Yields Up to 5.7%
Caterpillar, Philip Morris, Duke Energy and others offer high yields and potential for growth.

There still is plenty of yield left in the stock market. We identified 10 high-quality stocks in the Standard & Poor’s 500 index that carry dividend yields of 3.5% or more, based on a screen from S&P Dow Jones Indices longtime index analyst Howard Silverblatt. The list includes familiar companies like General Electric (ticker: GE), Caterpillar (CAT), McDonald’s (MCD), and Dow Chemical (DOW).

This admittedly is a selective tally, since there are about 60 companies in the S&P 500 with yields of 3.5% or more. To make our cut, each company needs to cover its dividend from estimated 2015 earnings. That test eliminated a group of energy companies, including Chevron (CVX) and ConocoPhillips (COP). Most of the Big Oils are borrowing money this year to maintain their 2015 payouts, given low energy prices. We also excluded real estate investment trusts and master limited partnerships, which are valued differently than regular corporations using cash-flow measures rather than reported earnings.

A 3.5% yield is ample when the 30-year Treasury bond yields just 2.5%. Assuming the dividends hold, investors don’t need a lot of capital appreciation to generate a mid-to-high single-digit annualized return. Many of the stocks also have been laggards in the past year, trailing the nearly 10% gain in the S&P 500. Naysayers argue that yield-rich stocks often offer little growth.

AT&T (T) tops the list with a 5.7% yield. It’s out of favor on Wall Street because of investor worries about its position in a more competitive wireless market. Those fears seem to be captured in the stock, now trading around $33, or 13 times estimates 2015 profit. AT&T does cover its dividend from both earnings and free cash flow, and it’s banking on benefits from its planned merger with satellite-TV operator DirecTV (DTV) in the first half of this year. The dividend matters to AT&T. “Saying the dividend is important to us is an understatement…we are committed to it,” AT&T CFO John Stephens said earlier this year.

Rival Verizon Communications (VZ) is in better shape due to a stronger position in the wireless market. At $49, Verizon trades for 13 times estimated 2015 earnings and yields 4.4%.

Few companies have suffered more from the almighty dollar than Philip Morris International (PM), the global cigarette giant that generates nearly all of its revenue outside of the U.S. The stock, around $77, is near a 52-week low. The company is expected to earn $4.30 a share this year, down from $5.02 in 2014 and reflecting a hit of about $1.40 from a weaker dollar. Morgan Stanley analyst Matthew Grainger wrote recently that the dividend looks “secure” even if the dollar continues to rise. The stock has badly trailed U.S. cigarette makers like Altria Group (MO) and Lorillard (LO), despite its better growth prospects due to exposure to many emerging markets.

Duke Energy (DUK), one of the country’s largest electric utilities, trades for 16 times projected 2015 earnings and yields 4.1%. Bernstein analyst Hugh Wynne sees a total return of 8% annually in the coming years, driven by 5% yearly growth in earnings from an expanding rate base and an increasing dividend.

General Motors (GM) has gotten more investor friendly this year, unveiling a boost in its dividend and an increased share-repurchase program after activist pressure. GM shares, at $37, now yield 3.9%, based on the new $1.44 annualized dividend. This year and next, GM may return about 10% of its market value to holders in dividends and buybacks, according to Sterne Agee analyst Michael Ward. GM trades for just eight times estimated 2015 profit of $4.60 a share.

Caterpillar, whose shares trade around $80, is near a multiyear low. The weakness reflects falling earnings estimates and weakness in key mining and energy markets. The stock doesn’t look cheap at 17 times estimated 2015 projected earnings, but this year’s expected profit of $4.75 a share is way below peak earnings of over $8 in 2012. Caterpillar has one of the highest dividend yields and highest free-cash yields among its peers. Barclays analyst Andy Kaplowitz wrote recently that the company could become an activist target unless it takes self-help actions, including better inventory management, cost reductions, and a higher stock buyback.

Given its well-documented troubles, McDonald’s, whose shares trade around $96, isn’t a bargain at almost 20 times estimated 2015 earnings. However, there is plenty McDonald’s can do for holders beyond menu fixes and other restaurant-level changes. These include cutting high corporate overhead and potentially monetizing real estate, according to JPMorgan analyst John Ivankoe.

Dow Chemical is moving to slim down amid activist pressure. An industry leader trading around $48, Dow Chemical could see profits rise to $4 a share next year from about $3 this year as new chemical plants are completed. Seagate Technology (STX) is following a solid playbook for a dominant company in a mature industry: return cash to holders in dividends and buybacks. One of the two top makers of disk drives, Seagate, at $52, trades for 11 times estimated 2015 earnings and yields 4%.

General Electric remains a work in progress as the company shrinks its outsize financial-services business to emphasize its core manufacturing operations. A laggard due to fears about its exposure to the energy sector, GE looks appealing, trading for under 15 times estimated 2015 earnings and yielding 3.7%.

(the Economist) A deal with Iran : Bargaining with the Great Satan

A deal with Iran

Bargaining with the Great Satan

The consequences of the agreement on Iran’s nuclear programme for a Middle East in turmoil

FOUR places: four contrasting snapshots of a relationship. In Lausanne, Iranian and American delegations are ensconced as diplomatic partners at the Beau Rivage hotel: after eight days of talks, they reach agreement greatly limiting Iran’s uranium-enrichment programme in exchange for the gradual lifting of sanctions.

In Tehran, Iranians watch President Barack Obama in the White House explaining the reasons for the deal. It is the first time an American presidential speech has been shown live on Iranian television.

In Tikrit, and the skies above it, the two countries are undeclared allies: the war against the jihadists of the so-called Islamic State (IS) sees America providing air power while Iran marshals the ground forces, especially the Shia militias.

In Yemen they face off as adversaries in a proxy war: America provides intelligence and logistical help to the Saudi-led military intervention to repel the Houthis, Shia fighters backed by Iran.

Which snapshot gets closest to the truth: are America and Iran old-new friends, or fated always to be foes? The answer will colour any judgment on the outline of a nuclear accord reached by Iran and the so-called P5+1 powers—America, Russia, China, Britain, France and Germany—in lengthy talks on April 2nd. If the Islamic Republic remains a regional threat, legitimising it as a threshold nuclear state is a high cost to pay for a slightly extended “breakout time” should it decide to cross that threshold. But if Iran is showing a new post-revolutionary responsibility, then the deal is the start of a rapprochement between countries whose rivalry has scarred the region but whose interests may, in at least some places, be aligned.

Provisions about centrifuges, fuel rods and inspection regimes, important as these are, are not the whole story. There is also much history. Iran’s Islamic revolution of 1979 transformed America’s dealings with the Middle East. The departure of the Shah, the triumphant arrival of Ayatollah Ruhollah Khomeini and the seizure of more than 50 American embassy staff as hostages marks the start of modern Islamic radicalism. It turned America into a permanent military player in the Muslim heartland, and a permanent target of hatred. It was, after all, Iran’s proxies in Lebanon who introduced suicide-bombings to the region, with powerful attacks on American, French and Israeli forces in 1983.

The chain of events to today’s troubles runs thus: seeking to avoid the spread of the revolution, Western and Arab states backed the Iraqi dictator, Saddam Hussein, in the war he launched against Iran in 1980; Western navies patrolled the Gulf to protect oil tankers; after that war ended an emboldened Saddam invaded Kuwait in 1990; some of the American forces that led the alliance which removed him stayed in Saudi Arabia to contain Iran and Iraq; that presence was used as justification for al-Qaeda’s attack on September 11th 2001; George W. Bush rashly decided to finish the job that his father had supposedly left undone and invaded Iraq to get rid of Saddam in 2003; the subsequent occupation brought forth a jihadist resistance that transformed itself into today’s IS.

If a nuclear agreement could begin to reverse this baleful dynamic, it could help push the Middle East to the “new equilibrium” Mr Obama talked about to the New Yorker last year. As he told another interviewer, political engagement might also moderate Iran over time.

A secret longing?
His harshest critics think Mr Obama is pursuing a reckless grand bargain to turn Iran into a partner, an arrangement in which America could set aside some of the burden in the region and Iran would take up the role as regional hegemon that it enjoyed in the days of the Shah. Iran’s political and military influence is already palpable across the region, and growing.

America’s military collusion with Iran in Iraq; its reluctance to act against Iran’s Syrian client, Bashar Assad; its silence about the encroachment of Iranian power in Yemen—all this suggests that Mr Obama wants “to encourage and augment Iran’s potential as a successful regional power and as a friend and partner to the United States,” according to a recent article by Michael Doran, a Bush-era Pentagon and National Security Council official. In his enthusiasm, the charge goes, Mr Obama is forsaking long-standing alliances with Israel and the Arab monarchies. Israel’s prime minister, Binyamin Netanyahu, has no doubt this is the case. He was cheered in America’s Congress last month when he said that a deal in Lausanne would pave Iran’s path to a bomb. Iran had already “devoured” four Arab capitals—Baghdad, Damascus, Beirut and Sana’a. The Yemeni adventurism, he argued, could let Iran threaten the entrance to the Red Sea, as well as the entrance to the Gulf which it already overlooks, thus putting its fingers on two of the world’s naval choke-points.

Arab leaders are quieter about making such points, but agree with them wholeheartedly. According to a leaked diplomatic cable, in 2008 King Abdullah of Saudi Arabia was already urging America to attack Iran and “cut off the head of the snake”. In March the Saudis cast off their usual caution and took on the snake, or at least its tail, in Yemen. They are leading a ten-member coalition of Sunni states that is bombing the Houthis.

The Muddled East strategy
A less hostile interpretation of Mr Obama’s actions is possible, and more persuasive. Mr Obama was elected promising to reduce America’s role in the Middle East, and sees no evidence that changing tack would actually do much good. Thus his decision to withdraw from Iraq and Afghanistan; his “lead from behind” policy in Libya in 2011; and his reluctance to strike Syria in 2013 without congressional approval.

When he has acted, it has been to stave off disaster at minimum cost. So he ordered air strikes, with a small ground presence, to halt the march of IS when it seemed Baghdad might fall. And he has come close to a deal that may substantially delay, but will not necessarily halt, Iran’s nuclear ambition. By supporting the Saudis in Yemen, he proves that he is not beholden to Iran.

On this analysis the blame for Iran’s increased power goes not to Mr Obama’s caution, but to his predecessor’s toppling of Saddam and the Taliban with insufficient thought of the consequences. Gary Samore, a former Obama administration nuclear negotiator, reckons that Mr Obama’s strategy is “a reflection of the crazy, mixed-up Middle East. He is trying to muddle through a mess of unresolvable problems, most of which are the consequence of the Arab spring.” Unwilling to commit troops, the only option is “to let them fight it out, and occasionally place his thumbs on the scale.” Now that Iran is fighting IS, and Saudi Arabia the Houthis, Mr Obama’s attempt to let the countries of the region deal with their problems might seem vindicated—though it condemns many to untold violence which may well turn against America, or its interests.

It is certainly true that, in the aftermath of the occupation of Iraq and the Arab spring, the region is a bloody mess. Some compare the agonies of the region to Europe’s calamitous Thirty Years War: a bewildering conflict involving religion, meddling outsiders and great cruelty.

There are four Arab civil wars under way—Iraq, Syria, Libya and Yemen—with multiple divisions over religion, ideology, ethnicity and class. The sectarian rift—in which Iran supports the Shias and their allies, while Saudi Arabia backs at least some of the Sunnis—has become more pronounced. It is most apparent in Iraq, where the government is dominated by Shias and is closely aligned with Iran; most Sunni areas have been taken over by IS jihadists.



In Syria President Bashar Assad’s Alawite minority sect, regarded as an offshoot of Shia Islam, dominates the government and is propped up by Iran and is Lebanese proxy, Hizbullah. The Syrian rebels are mostly Sunni and but fragmented into myriad groups, among them IS, Jabhat al-Nusra (affiliated to al-Qaeda) and many more. Many of the rebels are supported by America and Sunni states in often murky relationships.

In Yemen the link between the Houthis (followers of the Zaydi branch of Shia Islam) and Iran (devotees of the Twelver branch) is perhaps least clear. The former president, Ali Abdullah Saleh, a Zaydi who is now allied with the Houthis, was previously backed by Saudi Arabia. Nevertheless, Syria has drawn a red line in Yemen and all sides now see it as the newest battleground between Sunnis and Shias. That said, the first Saudi intervention after the Arab spring, in 2011, was on behalf of the Sunni monarchy in Bahrain, where the Shia-majority population was demanding more democratic rights.

Where there is no sectarian divide and Iran does not play a role, the Sunni powers are often divided among themselves, particularly over the role of political Islam. Saudi Arabia and the United Arab Emirates support the Egyptian strongman, Abdel-Fattah al-Sisi, against the Muslim Brotherhood, which is backed by Turkey and Qatar. The same two groupings support rival governments in Libya. But in Yemen they have all united to confront the Houthis. The rise of Iran has even pushed the Sunni Arab regimes closer to Israel.

Iranian pragmatists like to boast of their country’s growing influence, even as they claim that its belligerence is a response to Western and Arab pressure. Nevertheless, a nuclear deal, says Hossein Mousavian, a former Iranian diplomat, “will make Iran less aggressive”, and strengthen moderates around President Hassan Rouhani, whose primary concern is to revive the sanctions-crippled economy. Some think Mr Rouhani might even succeed the ailing Ayatollah Khamenei as Supreme Leader. For now, though, Mr Khamenei is adamant that a deal will not lead to a rapprochement with America: “No way!” he told a crowd of students chanting “Death to America” last month.

A nuclear deal might over time help to moderate Iran. But it also might increase the region’s instability. One risk is that Iran will cheat, or that hardliners will test the limits of the commitments. Another is that Mr Obama may be prevented by a sceptical Congress from delivering the relief from sanctions that he has promised, or that his successor will repudiate the deal.

Freed from some sanctions, and perhaps feeling immune from an American (or Israeli) military strike, Iran might be emboldened to extend its reach even further, an option which Mr Khamenei might see as a way to mollify hardliners. Or perhaps America’s allies, feeling estranged, will turn more aggressive. In Israel, there is renewed talk among military officers of bombing Iran’s nuclear sites at the first sign of a violation. John Bolton, a hawkish former Bush administration official, has urged Israel to attack soon. Saudi Arabia and the other Arabs might do more to confront Iran, perhaps by trying to strengthen rebels in Syria that have made recent gains. Saudi Arabia has given notice that it will seek to match whatever uranium-enrichment capability Iran is allowed to keep—legally, of course. It lacks skilled engineers, but it might be able to buy the know-how from, say, its close ally, Pakistan (whose scientists sold centrifuge designs to Iran and Libya). Turkey is unlikely to want to be left behind. So a nuclear deal designed to prevent the spread of nuclear weapons might instead promote the proliferation of nuclear threshold states. Some argue that America should extend its nuclear umbrella to its Middle Eastern allies to reassure them.

Negotiating the nuclear agreement might be the easy part for Mr Obama. Harder will be the task of selling the deal to sceptics at home and in the region. Harder still might be to manage the political and military fallout.

(BFW) Gategroup Compromises With Hedge Funds on Board Candidates


Gategroup Compromises With Hedge Funds on Board Candidates
2015-04-03 10:06:53.634 GMT


By Jeffrey Vögeli
(Bloomberg) -- Gategroup proposes 2 of its candidates and 2
candidates proposed by RBR Capital and Cologny Advisors to
resolve impasse, co. says in statement.
* RBR, Cologny agree to vote in favor of 7-member board of
directors at AGM April 16,
* Julie Southern, David Barger, Gerard van Kesteren, Frederick
Reid proposed as new board members
* Chairman Andreas Schmid, Remo Brunschwiler, Anthonie Stal up
for re-election
* NOTE: Gategroup rejected earlier board member proposal from
RBR, Cologny


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To contact the reporter on this story:
Jeffrey Vögeli in Zurich at +41-44-224-4107 or
jvogeli@bloomberg.net
To contact the editor responsible for this story:
Elisa Martinuzzi at +39-02-8064-4218 or
emartinuzzi@bloomberg.net

FT : Lafarge-Holcim urged to pick chief with power to unify factions

Lafarge-Holcim urged to pick chief with power to unify factions

Lafarge-Holcim needs a chief executive with international experience to lead the combined cement group and they must not come from a purely French or Swiss background, Lafarge’s largest shareholder has urged.
Speaking for the first time since the €41bn deal was brought back from the brink of disaster two weeks ago, Gérard Lamarche, who is joint managing director of Groupe Bruxelles Lambert, said the new leader will have to forge a “new culture”.

“The new chief executive will have to unify, integrate and organise the two groups as well as create a new culture. So it should be someone with different experience and with an international profile,” he said.
Cultural differences between France’s Lafarge and Swiss cement rival Holcim were partly blamed for the bitter conflict that developed between Lafarge chief executive Bruno Lafont and the Holcim team over the past year.
The tensions eventually led to a campaign by Holcim to remove Mr Lafont from the top operational role two weeks ago. Holcim won the battle and also renegotiated the financial terms of the deal in their favour.
Two candidates thought to be in the running to be chief executive are Thomas Farrell, Lafarge’s executive vice-president of operations who is American, and Eric Olsen, the Franco-American national who has the same title.
Guillaume Roux, vice-president of operations, also has French and American citizenship and is another contender. Jean-Jacques Gauthier, chief financial officer has a more French background, although he did spend time in the US and is a German speaker.
Mr Lamarche, whose GBL group owns 21 per cent of Lafarge, said the decision would be made in the coming weeks and praised the role of Mr Lafont.
“For over a year Bruno has been one of the main architects of this merger . . . He had a major part in what has been done,” he said. “He will have a key role to play in what is left to do.”
Mr Lamarche said that Mr Lafont had managed to get antitrust clearance for the merger quicker than many analysts had anticipated and led the sale of €6.5bn of assets to Irish group CRH. Both were major hurdles to the deal progressing.
Bruno has been one of the main architects of this merger. He will have a key role to play in what is left to do
- Gérard Lamarche, Groupe Bruxelles Lambert
Despite the financial adjustment won by Holcim, the transaction is still a “merger of equals”, said Mr Lamarche. The new terms mean that Lafarge shareholders will own about 44 per cent of the new company, down from 47 per cent before.
Mr Lafont will be co-chairman of the new group along with Wolfgang Reitzle, Holcim’s chairman, and the two companies will have an equal number of board seats.
“It is always possible on one side or the other to say that there is not enough of this or not enough of the other,” said Mr Lamarche.
“The truth is that what the new group has to offer its future stakeholders is considerable value creation,” he said, adding that returning cash to shareholders would be a key goal of the new group.

One of the final difficulties ahead of the Holcim shareholder meeting to discuss the deal on May 7 — where it will require two-thirds of shareholder votes to secure approval — is the continued opposition of Russia’s Eurocement, which owns 10.6 per cent of Holcim.
Mr Lamarche said he supported the proposition by Mr Reitzle this week of giving a board seat to Eurocement, although he said that there should be no other concessions to the dissenting group in terms of more money or shares.
“I think there is nothing else to discuss. Eurocement is a shareholder like all the other ones,” he said. “But it is normal that with 5 to 6 per cent of the [new] company he is welcome to the board.”
But he added: “We do not know if Eurocement wants to be on the board. [Being] on the board means you are a long-term investor, and that is not yet confirmed.”

Barron's : A Win-Win Opportunity at Vivendi


A Win-Win Opportunity at Vivendi

Dow Jones Global Indexes | Global Stock Markets
Vivendi could offer investors something rare and potentially rewarding—a win-win opportunity.


A minority shareholder’s attempt to force the French media and telecoms giant to return nine billion euros ($9.8 billion) of its swelling cash pile to investors could result in a huge windfall. But if the bid fails–and right now that seems likely–don’t worry. Investors will be left holding stock in a company run by a chairman sometimes likened to Warren Buffett, with a track record for value creation.
Either way, Vivendi (ticker: VIV.France) looks like a good bet.
At Thursday’s closing price of €23.23, Vivendi trades at a multiple of about 38 times projected 2016 earnings, which appears expensive. But Vivendi is undergoing a radical overhaul. In the past couple of years, the Paris-based company has unloaded most of its prized telecommunications assets, such as French operator SFR and Brazilian subsidiary GVT.
Vivendi’s balance sheet has swung from €11.1 billion in net debt at the end of 2013 to one that could show net cash of €12.4 billion by mid-2015. That is equivalent to about €9 per share and 40% of its market value of €31.4 billion.
It is that hoard that P. Schoenfeld Asset Management is looking to unlock. PSAM, which owns less than 1% of Vivendi’s shares, argues that the company has given vague guidance on what it will do with the money and trades at a discount to its excess cash over fears it could sit on the money or make an unwise acquisition. PSAM thinks the shares are worth up to €27.50.


Vivendi has been slow to make acquisitions, citing high valuations and a desire to allocate capital carefully. And its current plans to return cash to shareholders aren’t overly generous. The company expects to pay €1 billion in dividends this year—for a yield of 4%—and again next. It has also allocated €2.7 billion to buybacks, but at a maximum purchase price of €20 per share, or 14% below the current quote.
Vivendi could and should loosen its purse strings to shareholders. Cash generates virtually zero return, and the company would have little trouble raising fresh funds in future if needed.
PSAM’s resolution, which will be voted on at the shareholders’ meeting on April 17, seeks a return of over €9 billion, or about €6.65 a share to investors. But it will have a hard time garnering support, especially from those that have profited from the shake-up championed by Vincent Bolloré.
Bolloré is widely respected in Europe as a smart investor. His listed investment vehicle Bolloré (BOL.France) accumulated a stake in Vivendi in 2012, giving him a seat on the board. He was appointed chairman last year. He has said that he is intent on creating value by transforming the company into a focused media player.
Investors seem prepared to stick by him, and why wouldn’t they? Shares have gained 36% since Bolloré joined the board in December 2012. Indeed, he has a knack for creating value. After gaining control of advertising company Havas (HAV.France) in 2005, he restructured the company and cleaned up the balance sheet, turning a position of net debt into net cash. The stock has gained 64% in that time.


FAITH IN BOLLORÉ’S ABILITY to use Vivendi’s cash wisely and to increase the value of its remaining assets could be well placed. After divestitures are completed, Vivendi’s core businesses will be French pay-TV leader Canal+ and Universal Music Group, which has more than 30% of the global market for music publishing.
PSAM favors a spinoff of the music group, even as it acknowledges that UMG has great prospects due to the growth in music streaming services. It sees earnings before interest, tax, depreciation, and amortization growing to more than €$1.4 billion in 2018 from €688 million last year.
That confident outlook shouldn’t prevent shareholders taking an important safety measure to keep Bolloré in check. Large institutions have proposed a resolution to maintain the principle of one share, one vote. Under French law, shares held for two years acquire double voting rights, essentially strengthening the hands of insiders at the expense of short-term investors.
In recent days, Bolloré has raised his stake to about 12% as the board’s spat with PSAM has become increasingly heated. That stake could afford him 24% voting rights in 2017. Some investors worry that would allow Bolloré too much control. The company opposes the resolution, as well as the resolution proposed by PSAM. But it seems a prudent step to take.
EUROPEAN STOCKS JUMPED 16% in the first quarter of 2015, the best performance since the third quarter of 2009, and there should be more to come.
The low interest-rate environment and the weak euro create conditions for more upside. German shares produced their best quarter since 2003, climbing 22%, while French equities gained 18%.

WSJ Dexia to Provision for €395 million of Bonds in Defunct Hypo Alpe-Adria-Bank

Dexia to Provision for €395 million of Bonds in Defunct Hypo Alpe-Adria-Bank
Move follows Austria’s decision to impose losses on failed financial group’s bondholders


BRUSSELS—Dexia SA, the rump of a once-sprawling Franco-Belgian banking group, on Friday said it holds 395 million euros ($436 million) in bonds of defunct Austrian financial institution Hypo Alpe-Adria-Bank International AG and warned it would set aside money to cover possible losses on the bonds.

The decision comes after Austrian authorities earlier this week said they would impose losses on the failed bank’s bondholders, even those covered by guarantees from the regional Austrian government of Carinthia.

Dexia collapsed in 2011, as funding problems became too acute for the bank to endure. The Belgian government took over Dexia’s Belgian bank, renaming it Belfius. The French government helped take over the French parts of the bank. Other businesses were sold off.

Dexia SA is all that is left. It holds a portfolio of higher-risk assets accumulated from across the group’s former lending empire—assets like the Hypo bonds.

Dexia said its bonds benefit from the guarantee from Carinthia. But Austria’s finance minister said those guarantees wouldn’t be honored.

The decision effectively places some of the burden on the Belgian government’s finances, since it offered guarantees for debt issued by Dexia to prevent the group’s bondholders from taking a hit in Dexia’s collapse.

The Belgian finance minister Johan Van Overtveldt said he would discuss the situation with his Austrian counterpart on the sidelines of a meeting of eurozone finance ministers next week. The situation in Austria shows that Dexia and its government shareholders must “adopt an attitude of vigilance to protect and preserve in the best way possible the interests of Belgian taxpayers.”

Dexia said the amount it will set aside for losses on the bonds “will be determined in light of further developments of the situation.”

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WSJ : Bayer’s CEO Injects a Dose of U.S. Risk-Taking


Bayer’s CEO Injects a Dose of U.S. Risk-Taking
CEO Dekkers prepares for spinoff of specialty-plastics

Bayer AG has long been a household name to Americans who associate its iconic cross logo with the painkiller. Few know the 150-year-old German pharmaceuticals giant’s product line also includes brands from Flintstones chewable vitamins to blood thinner Xarelto.

Marijn Dekkers, Bayer’s Dutch-born, U.S.-trained chief executive, is out to change that.

Since he took the helm in 2010, Mr. Dekkers has rocked Bayer’s staid culture by demanding that division heads have marketing backgrounds rather than science pedigrees. He presided over the launch of five new blockbuster drugs and has beefed up the group’s over-the-counter drug business with the $14.2 billion acquisition of U.S.-based Merck & Co.’s consumer-care division.


Now he is preparing to spin off Bayer’s $10 billion specialty-plastics business, part of a larger effort to refocus the company on its health-care and agriculture businesses.

Mr. Dekkers, who is 57 years old and spent 25 years of his career in the U.S., says he is trying to transplant the best of American corporate culture to his overly planned German company. His priorities have been speed, adaptability and more risk-taking.

U.S. companies often operate on an “80-20 rule,” he said in a recent interview, meaning they begin to execute ideas with only 80% of necessary data in hand. “Here, if I would be kind, in the beginning, we had a 99-1 rule. And I’m kind.”

Mr. Dekkers suggested Bayer’s aversion to risk was rooted in Germans’ fear of failing. More broadly, that sensibility explains the lack of a “venture-capital mentality,” which is hurting the country’s global competitiveness, he said.

Bayer CEO Marijn Dekkers has rocked Bayer’s staid culture by demanding that division heads have marketing backgrounds rather than science pedigrees.
An avid tennis player, Mr. Dekkers said that while living in Boston, half the friends he played against were venture capitalists. After five years in Germany, he added, “I have yet to meet the first tennis partner who’s a venture capitalist.”

Instead, his tennis partners tend to be lawyers, tax consultants and financial types—“a lot of consultants,” he said, underscoring the apparent dearth of venture capitalists in the German business world.

Bayer’s makeover under Mr. Dekkers is the latest for a company founded to produce synthetic dyes, and which in the 1920s and 1930s was a major player in the I.G. Farben chemicals cartel—a supplier of Zyklon B and other deadly chemicals for the Nazi war machine. Today it is the largest company by market value—with a market capitalization of €118 billion ($128 billion)—in Germany’s DAX-30 blue chip index and should retain that title after the plastics divestment. Bayer employs 118,000 workers world-wide and took in €42.2 billion in revenue in 2014.

The plastics division, called Material Science, could be spun off directly to shareholders but Mr. Dekkers suggested an initial public offering could be preferable because it would generate cash. He said Bayer’s €20 billion in debt “is not an impossible number” but limits financial “flexibility.” Cutting debt “would always be good,” he said.

Plans to divest Material Science started about a year ago. As executives discussed company strategy, it was clear the business would require big capital investments to stay competitive. “I said, ‘We can just not do this anymore,’” Mr. Dekkers recalled, noting that investing in the health-care or crop-science businesses yields far greater returns.

Crop Science posted earnings before interest and taxes of €1.81 billion last year, while Health Care reported an EBIT of €3.58 billion for last year, boosted by sales of the five new prescription drugs. That series includes Xarelto, which operates under a partnership with Johnson & Johnson in the U.S.; eye treatment Eylea; cancer drugs Stivarga and Xofigo; and pulmonary hypertension drug Adempas, which contributed combined sales of €2.9 billion last year and are projected to reach near €4 billion in 2015.

Material Science—which manufactures polycarbonate, polyurethane and other polymers used in products ranging from laptops to soccer balls—contributed EBIT of only €555 million, down from €1.04 billion in 2007.

Still, some analysts are skeptical that Bayer’s drug pipeline is strong enough to deliver many new products with selling power like the current wave. But Bayer expects at least three new drugs in midstage clinical testing, including two for chronic heart failure, to advance this year. “Strong data is expected” for those trials, said Ali Al-Bazergan, an analyst at Datamonitor Healthcare in London.

Mr. Al-Bazergan said Bayer’s pharmaceutical division is poised to benefit from new synergies as the group becomes a more integrated life-sciences company.

Investors have largely welcomed Mr. Dekkers efforts to streamline Bayer. Its share price hit an all-time high of €145.85 in mid-March, up roughly 60% from a year earlier.

“Dekkers is definitely listening to shareholders,” said Odile Rundquist, an analyst with Helvea SA of the Baader Bank Group, who credits investors with prompting Bayer’s tighter focus.

“Material Science really didn’t fit in a life-sciences company,” said Markus Manns, a portfolio manager at Bayer shareholder Union Investment Privatfonds GmbH.

That strategy fits a growing trend in the drug industry, said Ms. Rundquist, noting that Switzerland’s Novartis AG and the UK’s GlaxoSmithKline PLC have both recently taken similar paths.

Mr. Dekkers said he faced initial resistance to the separation from employee representatives on the supervisory board who were concerned about maintaining the division’s 17,000 jobs. He ultimately won approval from all 10 representatives by guaranteeing current employment levels for a number of years, he said.

The planned divestment comes on the heels of the Merck acquisition, which allows Bayer to expand its nonprescription offerings and stamp the Bayer cross on products ranging from Claritin allergy medicine to Coppertone sunscreen.

Mr. Dekkers’s bet in the Merck deal is that Bayer’s global consumer sales network offers a pipeline for its new American products to other countries, while shoring up the Bayer brand in the U.S.

The brand name is important to Mr. Dekkers, who recalls that when he joined Bayer he thought its OTC offering “was just aspirin.” American consumers, he said, “used to see ‘Bayer’ only on aspirin—the ugly yellow bottle.”

Mr. Dekkers left the Netherlands for the U.S. in 1985, with no plans to return. His American career included stints at General Electric Co., where he currently sits on the board, Honeywell International Inc. and, most recently, at Thermo Fischer Scientific Inc., where he was chief executive.

When he moved to Germany five years ago with a U.S. passport and an American wife and children—who spoke neither Dutch nor German—some Bayer staff worried he was “just an American,” or “somebody who was just interested in shareholder value,” he said.

One former Bayer employee, who was with the company from 2006 through 2014, said some staff had feared the company’s small-town, traditional values would be undermined by a foreigner. “Leverkusen was Bayer town,” the person said, noting that Bayer used to run a local swimming pool—which it stopped doing well before Mr. Dekkers came aboard—and still sponsors a local equestrian club. Bayer sponsors 26 clubs in total, including the professional Bayer 04 Leverkusen team.

The person said initial employees fears have largely dissipated, while Mr. Dekkers has struck a balance between addressing shareholder concerns and respecting company tradition.

For Mr. Dekkers, who is set to step down at the end of 2016 and will likely return to the U.S., the goal of his tenure has been to find the right balance between the American and German business approaches. “Making it more 90-10 than 80-20 or 99-1 is very important,” he said.

>>> Weekly Market Update: Iran Deals, Payrolls Bomb

Weekly Market Update: Iran Deals, Payrolls Bomb

The first quarter of 2015 came to an end this week, with Europe and Asia equities up big, while the S&P500 underperformed and the DJIA posted a losing quarter for the first time in two years. There were some green shoots in European and Chinese data. China's March PMI data showed manufacturing returned to expansion after two months of contraction, while Euro Zone manufacturing registered its 21st straight month of growth. But Friday's US payrolls data disappointed, posting the worst gain in over a year, and sending treasury yields and the dollar lower. The Iran talks were extended past the Tuesday deadline, allowing negotiators to arrive at a preliminary agreement that hopes to curtail Tehran's nuclear ambitions. For the week, the DJIA rose 0.3%, the S&P500 gained 0.3% and the Nasdaq slipped 0.1%.

Though most Western markets were closed for Good Friday, the US Labor Department remained open on the religious holiday and released a hair raising jobs report. March Nonfarm payrolls came in at a +126K versus the +245K estimate and February was revised down by over 30K, taking the Q1 average monthly gain down to +197K (vs. +324K in Q4). Similar to last year's slow start, the weak numbers were largely blamed on poor weather conditions. In illiquid holiday trading, the dollar sank after the jobs reports. After remaining in a fairly tight range through early Friday, the greenback slid about 1% to one-week lows against other major currencies, rising to above 1.10 against the euro and dropping below 119 yen. The 10-year treasury yield approached a two month low around 1.82% after the payrolls number.

The Iran nuclear talks went into double overtime, with the P5+1 negotiators extending talks through Thursday after missing the deadline to reach a preliminary deal on Tuesday. The additional 48 hours of talks yielded a framework agreement that, if fully implemented, will curtail Iran's nuclear activities for up to 25 years. In the draft document, Iran agreed to remove or dilute 95% of its enriched uranium stockpiles, and to confine its centrifuge operations to one location, moves that purportedly would extend Iran's "break out" period for developing a nuclear weapon to more than 12 months. In return, the EU and US agreed to lift all financial and economic sanctions once IAEA inspectors confirm Iran's compliance. The preliminary deal starts the clock on a more detailed final round of talks with a June 30th deadline.

Elsewhere in the tumultuous Middle East, the Saudi-led coalition continued bombing Yemen even as Houthi rebels consolidated their grasp on most of the country and began taking the key port city of Aden, the last big holdout of government forces. Saudi ground forces gathered on the Yemen border have not entered the country yet.

The weekly inventory reports whipped crude prices around again. API crude inventories registered their third consecutive build, while the DOE report notched its 12th straight build in inventories. However, the gain seen in the DOE report more or less met expectations for the first time in weeks, with no big overshoot, lending some strength to prices on Wednesday. WTI managed to stay in the high $40's and Brent in the mid-$50's all week. Crude didn't lose much ground even as a nuclear deal started to shape up, as the prospects of Iranian oil flooding the market were tempered by comments from Secretary of State Kerry that it may take Tehran as much as a year reach compliance with the agreement.

The launch of ECB QE and euro weakness helped boost European equities in Q1: the DAX index gained 22% in the quarter, its best performance since the second quarter of 2003, while the EuroSTOXX gained 16%. EUR/USD was down 11%, while the ICE dollar index gained 9% in the first quarter, its best performance since 2008, and pushed out to a 12-year high. Asian indices did very well too: the Shanghai Composite gained 16% while the Nikkei advanced more than 10%. The S&P 500 eked out a slight quarterly gain, its ninth in a row, while the DJIA turned negative for the quarter after taking a 200-point hit on the final day of the month. Tech stocks and small caps outperformed, with the Nasdaq up 3.5% in the quarter and the Russell 2000 up 4%. The 10-year UST yield fell nearly 24 basis points, from 2.173% to 1.937%.

Yet another round of funding talks between Greece and its European partners ended inconclusively on Tuesday. Greece submitted a list of proposed reforms, including an extra €4.7-6.1B in revenues and more concessions, but EU officials said they did not expect a deal before the next scheduled meeting of euro zone finance ministers, in Riga on April 24th. There were concerns that Greece might defer payment of a €450M IMF loan that is due on April 9th, which would constitute a big breach of Greece's commitments, but EU officials said the country would be able to make the payments.

The ECB released minutes from last month's meeting, although there was little earthshaking in the document. The notes suggest policymakers still worry that risks to the economic outlook remain to the downside, with national representatives somewhat skeptical of the ECB's raised growth forecasts for 2016 and 2017. Central bank representatives cited worries about Greece and wider geopolitical problems in the Middle East and Ukraine as possible problems for the outlook.

Fiat Chrysler recorded its 60th straight month of US sales gains in March while Ford, Nissan and General Motors saw sales contract. Toyota's sales gained a strong 4.9% y/y in the month, while GM was down 2%, Nissan dropped 2.7% and Ford fell 3.4%. Given the bad weather, analysts had projected that overall sales volume would fall for the first time in more than a year.

In M&A news, UnitedHeath struck a deal to acquire pharmacy benefit manager Catamaran Corporation for $61.50/share in cash, for a total deal valued at $12.8 billion. Teva entered a deal to acquire orphan drug developer Auspex for $101/share in cash, valuing the firm around $3.2 billion. Simon Property Group ended its hostile bid for Macerich after the deadline passed on its best and final offer of $95.50/share. Shares of Macerich fell hard, but recovered some ground on Thursday after reports emerged that activist investor Jonathan Litt was upset with Macerich's tactics in dealing with the offer and that in response he has nominated four director candidates. Shares of Lorillard and Reynolds were volatile on reports that the FTC was discussing possible remedies to be required for the proposed merger of the two tobacco firms to close. Recall the two entered a stock-and-cash deal valued around $27 billion last July.

The Shanghai Composite rose for the 4th consecutive week, gaining another 4% and reaching a new 7-year high above 3,850. Property sector names continued their strong performance early in the week after the PBoC decision to lower down-payments on 2nd mortgages from 60% to 40% and to do away with the "business tax" on transactions of homes purchased for over 2 years. Chinese markets were also helped by PBoC governor Zhou commenting that the central bank is increasingly focused on deflation, raising expectations for a steady increase in monetary easing in the pipeline. March PMIs released later in the week were mixed. The official manufacturing PMI figure returned to expansion after two months of contraction, but the rebound was largely attributed to seasonal post-holiday demand. The Non-manufacturing PMI slipped to 53.7 from 53.9. Both reports expressed concern over the slowdown in demand for labor, potentially raising a political issue for leadership in Beijing down the line.

The Nikkei225 was little changed for the week, consolidating an otherwise impressive month of March above the 19,000 level - although a powerful reversal is to be expected after Friday's Yen rally following the lackluster US jobs report. Japan's quarterly Tankan survey offered few signs of building momentum. The flat assessment of large manufacturing was somewhat worrisome, considering that it is the sector of the economy that prompted the most optimism from the BOJ in recent months, while the CapEx portion of the report showed its first decline in 2 years. The outlook for inflation among companies as surveyed by the BOJ also fell short of the official 2% inflation target several years forward.