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In Case You Missed It: News Round-Up

martin.jpgContributed 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

  • Sterlite Industries, part of UK-listed Vedanta Resources, has agreed to buy the operating assets of US copper miner Asarco for $1.7bn. Asarco filed for Chapter 11 bankruptcy protection in 2005 after being sued for asbestos, environmental and pollution claims. Sterlite will assume the operating liabilities, but not the legacy liabilities for asbestos and environmental claims. The deal will see Sterlite pay $1.1bn in cash and then a further $600m in senior secured non-interest bearing promissory notes. The promissory notes will be issued over 9 years, starting at $20m per year from year 2, with a final terminal ‘payment’ of $460m in 2018. The amount of promissory notes issued could increase if the copper price rises above $6000 a tonne. The agreement is still subject to US bankruptcy court approval. RBS Securities advised Sterlite and Asarco was advised by Barclays Capital.

  • Pharmaceutical company Merck announced an agreed takeover of its rival Schering-Plough for $41bn. The deal will create one of the world’s biggest drugmakers and is being achieved by a reverse takeover with the smaller Schering-Plough technically acquiring Merck. The deal has been structured in this way to remove the need for Schering to give up its right to a lucrative immunological drug Remicade to its partner Johnson & Johnson. The takeover is the latest in the sector, following Pfizer’s $68bn deal for Wyeth in January and the ongoing negotiations for Roche to takeover Genentech.

  • Apparently the Merck/Schering-Plough deal was code named Project Solar, with Merck referred to as Mercury and Schering-Plough as Saturn. In a reflection of the troubled financial markets Merck is required to pay Schering-Plough $2.5bn if it fails to provide finance for the deal. A similar clause requires Schering-Plough to pay $1.25bn to Merck if it identifies an alternative, superior deal.

  • Swiss pharmaceuticals company Roche won backing from the independent directors of US biotechnology firm Genentech for its latest $95 per share bid. Roche has raised its bid for the 44% of Genentech it does not own from $89 per share. If successful, the purchase will cost Roche $47bn.

  • Kohlberg Kravis Roberts, the private equity firm that owns the British pharmacy chain Alliance Boots, has made an approach to acquire Phoenix, a German drug wholesaler that delivers to more than 43,000 pharmacies in 23 countries. Phoenix could be valued at about €4bn.

  • The pending legal action by Rohm and Haas against Dow Chemical was delayed as the companies continued to negotiate to resurrect the deal to merge the two companies. Dow had refused to complete the merger in January because under the terms, it would have caused ‘irreparable harm’ to both companies. Rohm and Hass argued it is under no obligation to modify the terms, and threatened to commence legal action.

Financial Institutions

  • The former chief executive of AIG, Hank Greenberg, accused the US government of bungling the rescue of the insurance group. Mr Greenberg suggested the imposition of an interest rate of 850 basis points above Libor on the $85bn initial rescue, plus the forced repayment of $30bn to banks and trading partners were ‘a way to liquidate a company, not to save a company’.

  • The private equity business from the collapsed Lehman Brothers, Lehman Brothers’ Merchant Banking Partners is about to be purchased from the administrators by a combination of the management and South African billionaire Johann Rupert. The management will pay $10m for 51% and Mr Rupert will acquire the other 49% in return for taking over Lehman’s $230m outstanding commitments to the unit’s latest fund. The unit will have around $3.4bn of assets under management.

  • Swiss Re, the troubled reinsurer that benefited from a $3bn cash injection from Warren Buffett last month has removed its chairman. Peter Forstmoser is to leave and be replaced by former deputy chairman Walter Kielholz. Mr Keilholz will renounce his chairmanship of Credit Suisse to concentrate on Swiss Re. At Credit Suisse, Mr Keilholz will be succeeded by former vice-chair Hans-Ulrich Doerig. The reshuffle will also see Urs Rohner become vice-chair and John Tiner, former head of the UK Financial Services Authority, will become a board member.

  • Barclays Bank has submitted three portfolios of loans with a combined value of £10bn to the UK Treasury for an initial assessment with a view to obtaining UK government insurance. The portfolios are reported to consist of mortgages, unsecured consumer loans and commercial loans. Lloyds Banking Group and Royal Bank of Scotland have both taken advantage of the government scheme, insuring £260bn and £325bn of assets respectively.

  • New York-based hedge fund Paulson & Co has made more than £344m betting against the shares of Lloyds Banking Group falling over the last 6 months. The disclosure was made in a regulatory filing that has only been required since September 19th – the real profits were almost certainly much higher since the fund started taking bearish bets last spring when Lloyds shares were above 400p – by September they had already fallen to 285p.

  • Bernard Madoff pleaded guilty to 11 charges that could lead to 150 years in prison. The man behind one of the largest fraud schemes in history told the court he was ‘so deeply sorry and ashamed’ and that he turned to fraud when his investment business did badly in the recession of the early 1990s. Since then, Mr. Madoff took money from friends, relatives, charities and strangers and used the money from new clients to cover redemptions. He directed staff to manufacture trade tickets and account statements to cover his actions. Mr Madoff said ‘I felt compelled to satisfy my clients’ expectations at any cost.’

  • The London Stock Exchange has pulled out of a consortium made up of eight banks and inter-dealer broker Icap that is considering a bid for LCH.Clearnet, Europe’s biggest clearing house. The move was attributed to the Exchange only wanting to make investments that will be earnings enhancing.

  • The Financial Times/Starmine 2008 broker rankings were announced. Winner for the best stock recommendations in both the US and Latin America was Goldman Sachs, whilst the old ABN Amro brokerage scooped the award for European recommendations for Royal Bank of Scotland and Deutsche Bank Securities won in the Asia Pacific. Amongst the Goldman Sachs US recommendations were Wal-Mart and McDonalds that were both given year-long ‘buy/neutral’ recommendations and outperformed the S&P 500 by 23% and 20% respectively.

  • UK private equity company Candover is considering selling all or part of its listed vehicle to avoid collapse. The company is facing difficulties after several of its investments ran into trouble because of excessive debt, including Gala Coral (the UK’s biggest bingo group), Hilding Anders (the Swedish bedmaker) and Ferretti (the Italian yachtmaker).

Credit

  • German engineering group Siemens’ successful €4bn bond issue last week that attracted €16bn of demand was partly credited to retail demand. This in turn, was credited to the fact that the deal was available in lots of €1,000. In contrast, most UK bond issues are in minimum lots of £50,000, precluding the vast majority of retail investors. The greater lot size is due to the requirements of the prospectus directive that a minimum size of less than 50,000 requires a full prospectus. However, with the heightened interest in corporate bonds and the competitive yields available, the report suggests that perhaps a full prospectus would be worth be worth the effort.

  • London listed oil production and exploration company Tullow Oil completed a $2bn refinancing. The deal involved a consortium of 14 banks including Royal Bank of Scotland, Lloyds banking Group and BNP Paribas.

  • Royal Bank of Scotland reaffirmed its commitment to lend in the Middle East. This month it helped to manage and underwrite a $1.5bn credit facility for Qatar Telecom, along with other main arrangers and bookrunners Bank of Tokyo-Mitsubishi UFJ, Barclays Capital, BNP Paribas, DBS Bank and Qatar National Bank.

  • US government controlled agencies Fannie Mae and Freddie Mac are preparing for a flood of applicants wanting to refinance their mortgages under Barack Obama’s housing market rescue plan. Borrowers will be allowed to refinance under the scheme even if the value of their home is up to 5% underwater. Previously, borrowers owing more than 80% of the value were unable to refinance. Estimates are that up to $1,000bn of mortgages could be refinanced at lower rates under the scheme, and banks like JPMorgan and Wells Fargo that originate mortgages for Freddie and Fannie could see a substantial influx of fees.

  • General Electric (GE) lost its triple A rating from Standard and Poor’s for the first time in more than 50 years. Citing mounting concerns over its finance arm, GE’s rating was reduced a single notch to double A plus. S&P now has only five triple A rated non-financial companies worldwide: Automatic Data Processing, ExxonMobil, Johnson & Johnson, Microsoft and Pfizer.

  • Later in the week, Warren Buffet’s Berkshire Hathaway had its triple A rating from Fitch cut to double A plus. Fitch cited concerns about the exposure to volatile markets and the daunting task of finding a successor to Mr Buffett. Standard & Poor’s and Moody’s maintained their triple A ratings.

  • Australian infrastructure investment group Babcock & Brown collapsed into bankruptcy as subordinated debt-holders rejected a restructuring plan that would have seen them lose 90% of the nominal value. Babcock & Brown had expanded rapidly from a largely Australian focused financial advisory firm to become a leading global participant in acquiring and managing infrastructure assets including toll roads, ports, property and power generators.

Other

  • Two more US operators of share trading facilities have entered the crowded market for European equities – NYSE Euronext’s NYSE Arca Europe platform and Pipeline, a privately-owned operator of ‘dark pool’ facilities. These newcomers will join relatively new start-ups Chi-X, Turquoise, BATS Europe and other ‘dark pools’ Liquidnet, Nyfix and Posit.
  • Lloyd’s of London insurance company Brit Insurance became the latest UK company to leave the UK and establish its tax domicile overseas. It will shift its HQ to the Netherlands. The move follows several Lloyd’s insurers including Hiscox, Omega and Beazley.
  • After a cut in the forecast earnings from joint house broker Nomura, the London Stock Exchange looks increasingly likely to lose its FTSE 100 status. Attempts in the UK to allow auditors to strike deals with their audit clients that limit their liability, look likely to need a rethink. The US Securities and Exchange Commission has indicated that it will not accept any limits to the liability of auditors by British companies registered with it. Pensions were in the news on both sides of the Atlantic. The UK’s Pension Protection Fund announced that their index showed the combined shortfall in corporate pension schemes was £228.1bn in February, a record high.
  • In the United States, a wave of companies are suspending employers’ contributions to their staff 401(k) retirement plans, largely to contain costs in the economic downturn. The companies include Saks, General Motors, FedEx, UPS, Coca-Cola Bottling, Motorola and Sprint Nextel.
  • European antitrust officials seized documents and computers from French energy company EDF. Suspicions are that EDF abused its dominant market position.
  • UK builder Wrekin Construction was put into administration this week, and questions are being asked about an asset that was on the balance sheet in its 2007 accounts. The asset is an £11m ruby called the ‘Gem of Tanzania’. It was purchased from a corporate shareholder in Wrekin for interest-bearing preference shares. The note to the accounts states that the fair value of the gem was determined by a professional valuer at Institutio Gemmologico Italiano on 31 August 2007 – however on that day the institute was closed for a holiday and an employee of the institute said that it never assesses the value of gemstones, only their quality.
  • The week saw the InterContinental Exchange start acting as central counterparty for credit default swaps, followed by the CME Group being given the final go-ahead to do the same.

Note : The details contained in this article have been drawn from a daily review of the Financial Times.

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