Contributed by Martin Mitchell of the Corporate Training Group
In case you were too busy to have kept up with all the news, contributor Martin Mitchell has gathered some important market events from last week to help you start this week well informed:
Mergers and Acquisitions
- In light of Pfizer’s $68bn takeover of Wyeth, French pharmaceutical giant Sanofi-Aventis has expressed its interest in acquisitions to expand and diversify its range of businesses. UBS estimates that Sanofi-Aventis could raise $17bn to $20bn and potential targets include Bristol Myers Squibb.
- A consortium of investment banks and inter-dealer broker Icap are in discussions about a possible purchase of LCH.Clearnet, Europe’s largest clearing house. If it goes ahead, the move will break up the deal that would see LCH.Clearnet sold to the Depository Trust & Clearing Corporation (DTCC) of the US. LCH.Clearnet signed a non-binding agreement to merge with the DTCC in October 2008, and due diligence on that deal is still ongoing. The DTCC deal would see LCH.Clearnet’s shareholders receive up to €739m, and the Icap deal is working on offering a premium to that price.
- The shares of the minority in Swedish truckmaker Scania could end up being acquired by Porsche as its share price is now below Porsche’s offer price. Porsche was required by the Swedish regulator to make a bid for the remaining shares in Scania after it took control of Scania by increasing its stake in Volkswagen in January. Porsche stated that it had no strategic interest in Scania, and so launched a lowball bid of SKr67.10 per share. Scania shares have now fallen to SKr66.75.
- Warren Buffet and his company, Berkshire Hathaway were active in the markets. First, by pouring $300m into iconic motorcycle manufacturer Harley Davidson, buying bonds paying a15% coupon and maturing in 2014. Second, by providing $3bn in funds to Swiss Re in the form of perpetual notes paying 12% with an option to increase his equity stake at an attractive price. The capital injection enabled Swiss Re to retain its AA credit rating.
- The German government’s attempts to rescue troubled lender Hypo Real Estate (HRE) are facing difficulties due to US private equity firm JC Flowers. JC Flowers owns 24.9% of HRE and was being ‘unco-operative’ about Berlin’s wish to take control of the real estate lender.
- Alvarez and Marsal, the liquidators of Lehman Brothers are looking at the possibility of putting Lehman’s hard to sell assets into two standalone companies. Creditors would receive stock in the companies and the plan would allow the assets to be cordoned off until the markets improve. One of the companies would hold Lehman’s real estate portfolio, valued at around $43bn. The other would include the bank’s other illiquid assets, including private equity investments and proprietary investments such as its stake in SkyPower, a Canadian renewable energy company.
- It was revealed that UBS held talks with Morgan Stanley over a potential sale of its US brokerage unit late in 2008. The talks were preliminary and Morgan Stanley subsequently fulfilled its goal of boosting its retail business by paying $2.7bn to Citigroup to take a majority stake in the joint venture that amalgamated their brokerage units.
- ABN Amro, the nationalized Dutch retail bank has held exploratory talks with the UK’s Royal Bank of Scotland (RBS) about buying back some of its former businesses. RBS led a takeover of ABN Amro in 2007 that saw Fortis take on the Dutch retail banking assets, and problems at Fortis resulted in the business being nationalised. The most likely candidates for buy back are the international operations and the Dutch corporate banking activities.
- The Manila-based Asian Development Bank is planning to boost its lending capacity by raising as much as $8bn to $10bn this year. The finance raising is starting with a $1bn, three-year international bond issue managed by Daiwa Securities, Goldman Sachs, Morgan Stanley and UBS.
- Private equity firm TPG has broken off talks to sell shares to investors including the Kuwait Investment Authority and two Californian state pension funds. A person involved in the discussions said that ‘the market has changed – the valuation became too low for TPG to accept’.
- The UK government is considering using taxpayers’ money to buy toxic assets from banks – likely to include Royal Bank of Scotland and Lloyds Banking Group. The ‘bad bank’ scheme will be provided alongside the government’s existing plans to insure banks against unexpected losses on their assets.
- The Bank of Japan unveiled proposals to buy up to Y1,000bn ($11bn) of shareholdings from banks to stabilise their financial system.
- Elsewhere in Japan, a businessman Kazutsugi Nami was arrested for a fraud amounting to about £1bn. The scam involved his company L&G that collected money from investors with a promise of 36% annual interest and is thought to have been another ‘Ponzi’ scheme. L&G also issued its own virtual currency – the ‘Enten’ or ‘Divine Yen’ – which could be stored on mobile phones. It became obvious that something was wrong when L&G announced that dividends were to be paid in Enten rather than cash.
- As Barack Obama labeled Wall Street bonus payouts as ‘shameful’, Andrew Cuomo, the New York Attorney General is considering demanding the return of the $4bn of bonuses paid by Merrill Lynch in December – just before the acquisition of Merrill by Bank of America, and the announcement of a $15bn loss for the 4th quarter. Mr Cuomo is examining executive pay at lenders that have received government financial assistance, and Bank of America received $25bn last year and a further $20bn this month.There was also a wave of criticism of excessive executive pay at financial institutions. Barack Obama imposed a cap on executive pay at $500,000 per annum for all government- assisted institutions; both UK and French governments urged restraint.
- Meanwhile Deutsche Bank’s chairman indicated that US curbs on pay could enable Deutsche to attract the best US bankers. Deutsche has not received any government financial assistance to date.Swiss private bank Julius Baer shares fell by up to 40% after an anonymous letter to the Swiss regulator about alleged trading irregularities. The letter resulted in an angry response from the bank’s CEO, stating that he thought the anonymous writers ‘deserve to go to prison’.
- January saw a bonanza in corporate bond issuance as non-financial companies worldwide raised almost $170bn – the largest amount for January on record. However this coincided with syndicated loan volumes falling to their lowest level in 10 years, as banks reacted to pressure on their own balance sheets. Global loan volumes were $71.5bn in January, a 63% fall on January 2008. Many bankers are predicting the trend to switch from bank lending to bond issuance to continue in 2009, with Citigroup anticipating $450bn of corporate bond issuance this year.
- The US Treasury has reintroduced seven-year notes, after reintroducing three-year notes last year. The market was not surprised by the reintroduction, but was shocked to find that the seven-year note will be auctioned monthly. The additional issuance will be required to help fund the US government spending spree.
- UBS expects net issuance of Treasury securities to be $1,900bn this year. Rio Tinto, the Anglo-Australian mining company has pledged to cut its $37bn of debt by $10bn by the end of 2009, and is rumoured to be considering a rights issue. However, the need for a rights issue could be avoided by allowing Chinese state-owned aluminium producer Chinalco to increase its stake. Chinalco already owns 12% of Rio’s London-listed shares and 9% of the whole group.
- Talks are ongoing about a cash injection in the form of minority stakes in operating businesses and convertible instruments. Moody’s lowered its credit rating forBarclays by two notches from Aa1 to Aa3, citing that continued turmoil in financial markets could lead to ‘significant further writedowns on the bank’s credit market exposures’.
- Moody’s is also considering downgrading the ratings of six Dubai corporate entities due to the worsening economic climate in the Gulf’s business hub. The six companies are DP World, DIFC Investments, Dubai Electricity & Water Authority, Jebel Ali Free Zone, Emaar Properties and Dubai Holdings. All are currently rated at A1, except Emaar, which is rated at A3.UK banks and building societies have borrowed £185bn from the government’s special liquidity scheme that was introduced last March. The scheme involves swapping illiquid bonds for UK Treasury bills, which can be used as collateral for borrowing in the money markets. The scheme was only expected to be required for 6 months and was estimated to reach about £50bn.
- India is planning to ease its takeover rules for ‘abnormal cases’ to ease the sale of the scandal-ridden Satyam Computer Systems. The Securities and Exchange Board of India’s existing rules say that an investor that has acquired 15% of a company is required to make an open offer for an extra 20% at the six month average price. Satyam’s shares have averaged about Rs40 ($0.82) since the former chairman’s revelations of manipulating its books.
- Over the last six months the average is Rs345.Australian authorities announced an A$42bn ($26.5) fiscal stimulus package and a full one per cent cut in interest rates to counteract its cooling economy.
- SAS Scandinavian Airlines is planning a SKr6bn ($728m) rights issue to help finance a drastic restructuring programme. SAS is battling for survival as an independent airline in a rapidly consolidating European airline industry.
- Bernard Madoff’s pyramid scheme continued to feature heavily in the press. The whistleblower that first identified the scheme branded the US regulator the SEC as ‘roaring like a mouse and fighting like a flea’ in their response. Law firm Lovells was appointed to hunt down Madoff assets in Britain and plaintiffs’ lawyers were generally reported to be targeting the global auditing firms for compensation.
- Marks & Spencer (M&S), the UK retailer, won a 13 year legal battle about whether its popular chocolate-covered treats – ‘Teacakes’ – were deemed to be cakes or biscuits. The UK tax authorities considered the Teacake as a biscuit, so charging VAT at the standard rate, whilst M&S considered the Teacake a cake and argued that VAT should therefore be zero. The European Court of Justice decision results in a £3.5m rebate for M&S.