Japan Airlines needs a new flight path. It has no hope of breaking even without jettisoning huge debts, massive pensions obligations and a bloated cost base. Even a last-minute deal with its pensioners will not solve its problems. JAL should opt for bankruptcy.JAL’s troubles are not new. It has reported losses in four out of the five past years. And in the first six months of 2009 alone it was some 131 billion yen ($1.5 billion) in the red.Its shares are in a downward spiral. They have lost more than half their value this year as investors have baled out rather than wait for a government-engineered restructuring plan to deal with the losses, debts of $15 billion in debts and a $3.7 billion pension shortfall.The only reason JAL is still flying is thanks to a 100 billion yen credit line from the state-owned Development Bank of Japan. This is meant to tide JAL over until a state-backed turnaround fund decides whether or not to support it. This could take between one and three months.JAL’s pension hole is a major sticking point, with JAL’s president Haruka Nishimatsu warning pensioners and staff that unless they accept an average 40 percent cut in their pension payouts, the carrier will be forced into a court-led restructuring.Faced with inevitable opposition from 9,000 pensioners and 17,000 JAL employees, the Democratic Party government of Prime Minister Yukio Hatoyama is considering legislation to implement such cuts.Even if such a change in the law were possible, JAL’s problems require more drastic action. With too many planes, too many routes and a heavy cost base, the airline desperately needs to slim down.JAL had cash reserves of just 95 billion yen at the end of the first half. It has admitted to problems meeting its loan obligations and its ability to continue as a going concern. JAL’s biggest creditors include the country’s three top banks.JAL is trying to cut costs, but this will not be enough to see it through one of the toughest periods in airline history.While there is value in JAL’s network in Asia — it is being courted by Oneworld alliance partner American Airlines, rival SkyTeam member Delta Air Lines and private equity firm TPG — only once it has been freed from the weight of its pensions and debts, will it be able to take-off again.Given the rate of descent of its shares, investors are right not to wait for a long-winded government-led restructuring.
British Airways and Iberia are right to merge: 400 million euros of synergies will go some way to help them survive dreadful conditions in the airline industry. But the combined group will need more than cost savings and revenue benefits to lift it out of the red. And BA’s pension fund deficit could yet derail the long-awaited deal. There is no sign of the clouds that have engulfed the world’s airline industry lifting quickly. With losses of almost 600 million pounds forecast for this year, BA is not expected to return to pre-tax profit before 2012. The outlook is only slightly brighter for Iberia, with a return to the black in 2011. As synergies will take up to five years to achieve, these won’t provide any immediate relief.BA’s chief executive Willie Walsh and Iberia chairman Antonio Vazquez — who will be CEO and chairman of the new company respectively — are banking on better use of their London and Madrid hubs to increase revenue. The airlines will concentrate on North American and Asian routes from BA’s base at Heathrow, with Madrid’s Barajas acting as the gateway to Latin America.BA and Iberia are probably underestimating the benefits. Indeed, Walsh’s external advisers have apparently told him that the revenue synergy targets should be exceeded. Air France <AIRF.PA> and KLM identified 385 to 495 million euros in annual synergies when they merged in 2004. That figure has increased since.The big stumbling block is BA’s huge pensions hole. This totalled 3 billion pounds at the end of the first half, but is likely to rise as a result of the latest actuarial review, which should be completed before Christmas. BA will then spend several months thrashing out with its pension trustees just how much it will have to contribute and over what timeframe.BA will presumably argue that it is stronger with Iberia than without and therefore represents a lower risk. But under the convoluted holding company structure proposed for the merged group, the pension fund’s claim will be on the British subsidiary, not the merged group. Discussions with the trustees have to be concluded by June next year, and Iberia can walk away if it doesn’t like the outcome.Given the uncertain outlook for asset prices and the airline industry as a whole there is some serious horse trading to be done. In the meantime, both airlines will have to keep up the cost cutting. This is needed just to survive the downturn and the fierce competitive threat posed by the low-cost carriers in their home markets. Further battles with unions in both companies are inevitable — regardless of whether the merger happens or not. A deal is better than BA or Iberia continuing to fly solo. But they are nowhere near cruising altitude.
How fitting that the London Stock Exchange should be in pole position to buy Turquoise. After all, the upstart exchange was launched last year by some of the LSE’s biggest customers to break its dominant grip on UK share trading. But it would be wrong to dismiss the venture as a complete failure.Turquoise may not have succeeded as a business — it has been loss-making throughout its short life — but it has achieved one of its main aims, to force the LSE to cut its fees.New LSE Chief Executive Xavier Rolet must have calculated that it made more sense to pay up to regain the near 7 percent market share pinched by Turquoise than let the exchange fall into the hands of one of the LSE’s more serious rivals.Turquoise has not been alone in turning the screws on the LSE. It is one of four or five multilateral trading platforms (MTFs) which have grabbed market share following the introduction of European rules designed to promote greater market competition.Collectively they have forced down trading fees and cut the LSE’s market share of trading in FTSE 100 stocks to around 65 percent.But under Rolet’s leadership, the LSE has hit back at Turquoise and other such ventures including Chi-X, BATS and Nasdaq OMX’s pan-European platform.Rolet’s approach is in stark contrast to his predecessor Clara Furse, whose years as CEO saw the exchange end up pitted against some of its biggest customers.Nor is the deal only about protecting the LSE’s position in London. It will also bring Rolet a significant foothold in other European markets.Turquoise has set record trading volumes across the continent during the summer, hitting 11 percent of the Swiss market in July, and in August accounting for 7 percent of trading in Germany’s DAX, 8 percent of the French CAC-40 and 8.6 percent of the Dutch AEX.Having LSE in its backyard will be a new competitive threat to NYSE Euronext. And the LSE will also be plunging fully into the world of “dark pool” trading. It has struggled to get its Baikal dark pools business off the ground, something Turquoise would bring.Assuming the LSE does conclude a deal with Turquoise, its users will need to keep it on the straight and narrow. But as long as there is competition in the market, the banks who channel so much of their business through the London market and shifted some of that to Turquoise could easily threaten to swap the platform for one of the LSE’s rivals.And if nothing else, Turquoise will long serve as a reminder that, with the heavyweight backing and trading flows of nine large investment banks, it is always possible to start a rival exchange from scratch.Having driven fees down and brought competition to the market, the investment banks behind Turquoise can retire secure in the knowledge there will be no return to the bad old days.
Like doting parents of teenagers who have spent their allowance and keep coming back for more, shareholders have so far been extraordinarily forgiving when stumping up cash to bail British companies out of debt. At some point, however, they will lose their patience and say “no”.
Housebuilders Barratt and Redrow are the latest to raise cash from shareholders via heavily discounted rights issues, joining a long list of companies who have gone cap in hand to investors for sums of more than 100 million pounds ($163.4 million) since the start of the year.
Zain by name, zany by nature. A group of Indian telecoms companies and a Malaysian billionaire have promised to shell out an eye-watering $13.7 billion for 46 percent of the Kuwaiti telecoms operator, the Arab world’s third largest.But minority investors hoping to cash out may have to think again. First, the offer has been engineered by — and for — the family-owned Kharafi Group, which is selling 20 percent of Zain, and its associates. Second, there’s no guarantee the deal will actually be completed.Even Kharafi reckons it will take another four months to complete the sale, which involves the consortium paying 2 dinars per share, a chunky 45 percent premium over Zain’s current price.There is also considerable uncertainty about who exactly some of the mooted buyers are. Little is known about India’s Vavasi Group or Malaysian billionaire Syed Mokhtar al-Bukhary, who have teamed up with Indian regional telecom companies Bharat Sanchar Nigam and Mahanagar Telephone Nigam.The consortium has yet to spell out its plans to fund the purchase. And the Kharafis have yet to pool together the shares they need to reach 46 percent. All this creates additional uncertainty for Zain’s minority investors — including the Kuwaiti Investment Authority with 25 percent — who have watched Zain shares tumble from a high of almost 2.5 dinars in mid-2007 to a 0.64 dinar low in January, only to recover to 1.38 dinars on Wednesday.The consortium says it wants to scrap the sale of the African business, which Zain has been trying to sell following a recent volte face in its M&A fuelled growth path.Zain’s acquisition binge has left it operating in 24 countries, including Saudi Arabia, Iraq and Nigeria. While this foothold in some of the world’s least predictable but potentially high growth markets has made it a name on the telecoms stage, it has not come cheaply. Zain has spent more than $12 billion since 2005 on its African expansion alone.But everything changed earlier this year when Zain when reined in spending and cut 2,000 of its 15,000 workforce. It also tried, so far unsuccessfully, to sell a majority stake in its African operations to French entertainment group Vivendi, which has since ruled out reviving the failed talks.Speculation about an outside investor has helped drive the recent recovery in Zain’s share price. If nothing else, the proposed stake sale could flush out buyers for either the whole group or its African assets. Maybe that’s just what the Kharafis are after, but it’s a high-stakes gamble.Given the questions about the consortium and the apparent differences between the Kharafi clan and Zain’s management, there’s plenty of scope for investors to be disappointed.
General Motors doesn’t do deals in a hurry — at least when it is selling.With the Opel sale grinding along, the U.S. automaker is also in the process of offloading its Saab brand to luxury sportscar maker Koenigsegg.Financing is the major sticking point in the Saab sale process. Koenigsegg — backed by U.S. and Norwegian investors — reached a deal in June to buy Saab from GM but the process then stalled.Now Koenigsegg — which boasts having developed the world’s fastest sportscar — has apparently sent the Swedish government a new plan for financing the Saab purchase. This we’re told no longer includes any extra loan from the government on top of funding guarantees from the European Investment Bank (EIB). There were reports that Koenigsegg Chairman Augie Fabela thought he needed an additional 3 billion Swedish crowns of financing.GM has always said it expects to close the deal by the end of the year. Given progress so far and the complications of agreeing autos deals with governments, it looks as though the automaker will have it right.
Marks and Spencer should have one thing firmly at the top of its own shopping list — a new chief executive. The British retailer has said for a while it wants to appoint a new chief executive to replace Sir Stuart Rose — who is both CEO and Chairman – next year, allowing Rose to step back to non-executive chairman before eventually standing down by July 2011.That process seems finally to be getting underway, although it took a shareholder revolt over Sir Stuart’s role in July — which saw almost 38 percent of votes back a resolution to seek the appointment of an independent chairman by July 2010 — to shake the company’s rose-tinted view of the world. The Financial Times is reporting that M&S is close to appointing headhunters to begin the search for a new CEO, increasing speculation that the job will go to an external candidate rather than one of the existing management team. That would be good news for shareholders. An outsider should find it easier than an internal hire to provide a balance for Rose. Wrestling Sir Stuart’s dual role from him may prove to be the easy part, however. Getting him to give up the day-to-day running of the high street stores is likely to be an altogether tougher task.
Banks and insurers are looking for ways to bolster their capital, while having the flexibility to strike if there are acquisitions to be had on the cheap. To achieve these twin goals, Spain’s Santander and now British insurer Aviva intend to float minority stakes in subsidiaries.Aviva’s chief executive Andrew Moss, who cut the insurer’s dividend with its first-half result on Thursday, argued that it must be ready to take advantage of acquisition opportunities. Moss plans to float 25-30 percent of Delta Lloyd so that Aviva’s 92 percent owned Dutch insurance unit can take part in the restructuring of the Benelux insurance market.This has echoes of Santander’s plan to float around 15 percent of Banco Santander Brasil. That move will not only allow the parent to bank as much as $4.5 billion from the sale, but will give the subsidiary an acquisition currency, allowing it to go out and buy more assets.The logic of a minority IPO is fairly clear. It allows parent banks to raise capital by selling shares in more highly rated subsidiary companies, and also gives those subsidiaries a more highly rated acquisition currency. It sidesteps any objections parent company shareholders might have to capital raisings. And it is a way — at least in theory — to reveal the value of a “hidden gem”.But there are plenty of pitfalls. Creating a listed subsidiary can spawn all sorts of other complexities. First, it limits the scope for any synergies between the subsidiary and the parent because of the need for a formal legal separation. Second, the subsidiary’s board needs to be accountable to the minorities as well as the parent. This raises governance issues, not least the question of arms-length transactions and ensuring that the offspring has an independent board. And there is the additional financial penalty of tax leakage if the parent’s stake falls below a certain threshold.From the parent’s perspective, there is a risk that these drawbacks will lead to the market actually penalising the parent with a “conglomerate discount”. This somewhat defeats the valuation argument for listing a subsidiary.It is also questionable how effective listed subsidiary stock is as an acquisition currency. Stocks with a small free float are often difficult to value, and can be extremely volatile. Sellers of businesses can be deterred by the idea of taking shares in a majority owned company.Of course, some of these issues are familiar to Aviva. Delta Lloyd already has minority shareholders and the Dutch insurer has always viewed itself as a separate independent company with a large majority shareholder. This has fuelled disagreements over governance with Aviva, which — like Santander — has gone to great lengths to present a unified global brand.By giving Delta Lloyd — which tellingly has not yet adopted the Aviva name — more independence and diluting its shareholding, Aviva may put paid to these niggles. But equally it could raise expectations of full sovereignty for the Dutch.Depending on the reaction to Santander’s Brazilian IPO and Aviva’s Dutch flotation, others may be tempted to follow. Those who do, should weigh up the dangers very carefully first. Buying out minority shareholders down the road isn’t half as simple as selling them stock in the first place.
The war between Continental and Schaeffler rumbles on. Karl-Thomas Neumann has got board assent for the capital increase he wants to pay down Continental’s heavy debts, a hard-fought for move that is likely to dilute the company’s largest shareholder Schaeffler. But it is only a partial victory for the chief executive of the German auto parts group — and one that may yet turn out to be Pyrrhic. Neumann may yet be ejected from Conti for resisting Maria-Elisabeth Schaeffler and her right-hand man Juergen Geissinger (CEO of the privately-owned ball-bearing maker). Schaeffler has already seen off several former Conti bosses — Manfred Wennemer left in August last year and CFO Alan Hippe has since quit. If it succeeds in pushing out Neumann and replacing him with its own candidate, Elmar Degenhart — at a meeting scheduled for August 12 — Schaeffler will then certainly push ahead with the sale of Conti’s well-known rubber business as a way of reducing its 11 billion euro debt. Conti and Schaeffler have been deadlocked since the private group took a majority stake last year after an acrimonious takeover battle. Schaeffler’s ability to exercise control is constrained by its own heavy borrowings, much of which are against Conti stock which has lost two-thirds of its value. Meanwhile, Conti is also labouring under massive borrowings, which its banks would like it to reduce. Both groups are at odds over how to reconcile their differing interests. Schaeffler, which has entered into a standstill agreement which prevents it from taking over Conti till 2012, does not want the target to issue more equity because it doesn’t have the cash to follow its money. Nor does it want to merge with Conti because it fears the exchange ratio would be disadvantageous. What it would like is for Conti to sell assets to reduce its debt — even though this is hardly an ideal moment to do this. Shares in Michelin <MICP.PA> are trading at less than half their mid-2007 peak, while Bridgestone <5108.T> shares are at just over half their level in May 2006 and Pirelli <PECI.MI> shares are less than a quarter of their peak. Neumann wanted Conti to raise 1.5 billion euros in fresh equity and then to merge with Schaeffler. The board has now consented to the first of these moves. However it remains to be seen if the banks will be queuing up to underwrite the issue, especially as Conti seems keen to issue it at a very narrow discount to the market price. If Conti goes ahead, and neither Schaeffler nor its allies follow their money, Schaeffler’s direct stake could fall to 35 percent from 49.9 percent and its total stake (including shares held by its banks) to 63 percent from nearly 90 percent. What seems clear is that the key players in this deadlock are the banks to both companies. They may themselves have differing interests. Conti’s bankers may not be keen on a change of management at the company, especially given the rapid changes which have already taken place at the top. And Schaeffler’s bankers might not welcome capital increases at Conti that diluted their equity position. Debt has become an albatross around the necks of both companies, which only the banks are able to remove.