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.
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.
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.
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.
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.