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Aug 6, 2009
via Commentaries

Killing two birds with a partial IPO


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.

Jul 31, 2009
via Commentaries

Debt albatross tails Conti Schaeffler


    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.

Jul 29, 2009
via Commentaries

Santander wins with Brazil float

    Buying ABN AMRO may have bankrupted Royal Bank of Scotland and Fortis, but it has proved another coup for Spain’s Santander whose chairman Emilio Botin has shown his eye for a bargain.
    After flipping Italy’s Banca Antonveneta for an impressive profit before the ink was even dry on the contract to take it over from ABN, Botin is now looking to float Banco Santander Brasil, including another former ABN asset, Banco Real, once part of the Dutch bank’s Latin American empire.
    With Brazilian valuations riding high and the IPO market flourishing, Citigroup reckons BSB could be worth as much as $30 billion. If so, the partial sale would again demonstrate Botin’s ability to spot a good deal.
    Brazil is far too important to Santander — it accounted for 18 percent of the bank’s first half profits of 4.5 billion euros — for Botin to give up control. But a flotation of 15 percent of the Brazilian bank could raise $4.5 billion of scarce capital while giving Botin another currency for shopping in South America. lt is already Brazil’s third-largest bank by assets.
    Santander has been able to keep buying through the financial crisis, becoming the biggest bank in the euro zone as a result. Botin has also picked up Sovereign Bancorp in the U.S. and Alliance & Leicester, along with the remains of failed former building society Bradford & Bingley, in Britain.
    Floating the Brazilian business would crystallise its value. It might also boost Santander’s own share price, but risks investors taking the view that a global roll-out of the bank’s name and brand means the parent is becoming a conglomerate rather than an integrated group.
    The possibility of attracting a conglomerate discount won’t have escaped Botin, whose family still owns nearly 2.5 percent of the $115 billion bank.
    Unlike his colleagues in the banks which have failed, Botin has his family fortune tied up in the business he runs. This, surely, is a powerful reason why Santander has avoided plunging into areas where the risk was far greater than the executives knew or cared. The bank has the strength to take advantage of the fashion for things Brazilian, and he can reflect that the acquisition which sunk RBS has done him no harm at all.

Jul 27, 2009
via Commentaries

Ryanair has sights set on greater market share


Ryanair’s warning that things are going to get worse in Europe’s economies has understandably got investors in airline shares flustered. The airline’s own shares fell by more than 8 percent.The low-cost airline’s finance director Howard Miller couldn’t have been more stark in his comments: “There are no signs of recovery in any country across Europe. We think things are getting worse. There are no signs of green shoots so a tough winter for everyone”.At least Ryanair still reckons it will be profitable — with net profit of around 200 million euros — for the year as a whole.That’s more than can be said of most other European airlines, who must be increasingly concerned by Ryanair’s resilience. Ryanair points out that it has “only” 10 percent of the total European market so far — giving it plenty of scope for gains.Ryanair’s earnings have been helped by lower fuel costs, and chief executive Michael O’Leary should be heartened by a Reuters poll of oil supply and demand forecasts for 2010 which shows the oil market is set to remain well supplied until then.And with plans to increase its fleet to 300 from 200 by 2012, it looks as though you’ll be seeing more not fewer of the airline’s planes — with their distinctive gold harp logo — flying overhead.

Jul 24, 2009
via Commentaries

Biotech merger volumes down but deals numbers booming

An interesting snippet from the weekly Thomson Reuters Investment Banking Scorecard.

While the value of M&A deals in the biotech sector has fallen sharply year-on-year — largely because of the disproportionate impact of Roche’s takeover of Genentech last year — the number of deals done is actually up, by 15 percent.

Jul 8, 2009
via Commentaries

Beijing’s Rio talks must avoid iron fist

Chinese anger at Rio Tinto for reneging on a deal with aluminium group Chinalco and opting instead for an iron ore joint venture with BHP Billiton last month was understandable. Indeed, China has good reason to question the Rio-BHP JV on competition grounds.

But the detention of four Rio Tinto employees – on suspicion of espionage according to Australia’s foreign minister — bang in the middle of sensitive negotiations on iron ore exports to China is a
dangerous step in the wrong direction. Beijing must either justify the arrests publicly or release the Rio staff immediately.

Jul 7, 2009
via Commentaries

Is Jefferies right to be bullish on M&A in AM?

A bull(ish) note from growing investment banking group Jefferies Putnam Lovell predicting “a steady flow of M&A activity in the global asset management industry” for the second half of 2009.

Jefferies is basing its view on the following factors:

    divestitures by larger financial groups shoring up their capital base  pure-play asset managers looking to bulk up private equity firms drawn not least by lower capital requirements

And the firm is putting its money where its mouth is. It has recently been hiring scores of senior bankers from rival firms as it seeks to build itself a major presence.

Jul 2, 2009
via Commentaries

Water down the tube in London heatwave


London’s transport bosses are telling travellers on the tube system to beat the heat by carrying a bottle of water with them when they venture underground.But how many of us are refilling our bottles with tap water rather than pouring money down the tube — not to mention the cost of recycling the plastic bottles — by buying a new bottle of water each day?Cue the National Hydration Council whose eye-catching advertising campaign to encourage people to buy more “naturally sourced bottled water” — on health grounds — featured prominently on the underground network earlier this year.The worrying thing for the bottled water lobby is not that people are doing what would appear to be the most sensible thing and refilling their bottles from the tap, but that Britons are replacing bottled water with sugary drinks instead.We’re told that sales of bottled water fell by 7 percent last year, with 71 percent of that decline the result of people buying sweet drinks instead. Good news for the soft drinks industry perhaps, but a worry for health officials.Meanwhile, beneath the streets of London, the hot and flustered faces of fellow tube passengers shows just how dire it is on board the capital’s underground trains when the mercury rises.With a decent air-conditioning system on most lines a distant prospect, Transport for London (TfL) could show it cares by offering each of its cash-strapped passengers a free TfL water bottle and the opportunity to refill them at its stations.

Jun 26, 2009
via The Great Debate

Fee bonanza spells more trouble for banks


– Alexander Smith is a Reuters columnist. The views expressed are his own –Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they’ve had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday. Click here for related news.True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching — often in disbelief — the huge amount of capital raising that has been going on in both the equity and bond markets.Take the bond markets, where total first-half issuance — excluding financials — has already reached $598 billion, outstripping previous records for an entire year. If anyone pretends it has been tough selling these bonds, don’t believe them. The sales teams have been pushing at an open door, with fund managers buying anything they could get their hands on. The fees are good and so far this year, the risk has been limited.The ones to suffer have been the loan desks, with syndicated lending hitting a 13-year low. But since this market has always been seen as a loss-leader to help sell other products, there are probably fewer tears being shed at the top of the banks involved.The real star of the show, however, has been equity capital markets. Traditionally the poor cousins to the sexier and higher profile “rainmakers” in mergers and acquisitions, ECM desks have raked in underwriting fees of $7.6 billion in Q2 alone, almost half the industry total. As with bond issues, lead managing or underwriting such deals does carry a risk, but so far this year that has been limited as shareholders have lapped up the rights issues.There’s no denying that many companies badly needed capital and that the banks have the expertise to get these deals done. The question that will increasingly be asked is whether the fee structure can still be justified. True, rights issues can fail, as underwriters of the 4 billion pound offering by British bank HBOS last year no doubt recall. But with banks charging bigger fees and pricing offerings at larger discounts, the rewards currently outweigh the risks.One area of investment banking which is still in the doldrums is M&A, despite the best efforts of some of the brightest minds in the game to get dealmaking back on track.The Thomson Reuters data shows global M&A revenues declined for a third consecutive quarter, with fees on completed deals down some 66 percent on the same period last year at just $3 billion. M&A activity — measured by the value of deals done — is down almost 45 percent so far this year, the lowest figure since 2003 and the sharpest fall since 2001. Click here for related news.Of course, it is possible that these big fees will be wiped out by continued losses on the toxic assets that some investment banks still have on their balance sheets. But for an industry that was teetering on the brink last autumn, investment banking appears in rude health. With a second backlash already beginning as salaries rise and bonuses come back into fashion, the big investment banks — particularly those which still owe taxpayers money or government shareholders — will need to make sure their lines are well rehearsed.– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.–

    • About Alexander

      "I am a Reuters columnist specialising in financial services -- particularly investment banking, M&A and corporate finance. I am based in London, but have lived and worked in Spain and South America. I have been a journalist and editor for almost 19 years and before moving into commentary at the beginning of 2009 I was the editor responsible for Reuters coverage of company news in Europe, Middle East and Africa."
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