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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 Contributed by Martin Mitchell of the Corporate Training Group important market events from last week to help you start this week well informed:

Mergers and Acquisitions

  • Rio Tinto’s proposal to raise $19.5bn from Chinese company Chinalco is concerning Rio’s shareholders. The deal involves Chinalco buying stakes in Rio assets for $12.3bn and buying convertible bonds for $7.2bn and is currently being proposed to shareholders as an ordinary resolution, requiring a simple majority. The UK institutional shareholders believe it should be a special resolution requiring 75% to be passed. The concerns revolve around the principle of ‘pre-emptive rights’ that allow existing shareholders to retain their stakes in capital raising efforts, something that the Chinalco deal fails to accommodate. In Australia, one of Rio Tinto’s largest institutional investors, the Australian Foundation Investment Company (AFIC) that owns almost 1% of Rio’s Australian listed shares, also expressed concerns about the deal. AFIC argue that the investment will hand the Chinese state-owned company significant influence for no premium.The ongoing need to placate shareholders has led Rio Tinto to turn to a new chairman. Jan du Plessis will replace current chairman Paul Skinner at the AGM scheduled for April 20th.
  • After being caught out by the announcement that Porsche controlled 75% of the shares in Volkswagen last October, hedge funds are gathering under the auspices of the Alternative Investment Management Association to explore whether legal action is possible. An extraordinary spike in the price of Volkswagen shares – they increased 400 per cent in a few days and saw VW temporarily become the world’s biggest company by market value – led to billions of dollars of losses for a number of hedge funds.
  • It was revealed that in the weekend after Lehman Brothers collapsed last September, Goldman Sachs was involved in talks to buy regional lender Wachovia. The deal foundered on the amount of federal support available, and Wachovia ended up being taken over by Wells Fargo.
  • China’s largest securities company, Citic Securities is teaming up with Evercore Partners, the US investment bank, in a joint venture to make direct investments and advise clients on both sides of the Pacific.
  • Coca Cola’s $2.4bn takeover of China’s leading juice company, China Huiyan Juice was rejected by the Chinese ministry of commerce. The Huiyan Juice brand has 42% of the pure fruit juice market in China, and the rule against the proposed acquisition was on competition grounds. The ministry quoted limited choice and harm to smaller domestic companies as reasons for the rejection.
  • Hedge fund Paulson & Co is buying an 11.3% stake in South African gold miner AngloGold Ashanti for $1.28bn. The purchase from Anglo American, underlines Paulson’s view that gold will benefit as paper currencies suffer from the combination of the financial crisis and countries printing money.
  • IBM is in advanced talks to acquire rival Sun Microsystems for about $6.5bn in cash.
  • Microsoft CEO Steve Ballmer said he still thought there was a ‘good opportunity’ for a deal with Yahoo that would combine the two companies’ internet search operations. Last year Yahoo rebuffed a potential $47.5bn deal from Microsoft. However, since then Jerry Yang, Yahoo’s chief executive at the time has stood down.

Financial Institutions

  • Insurance giant AIG that has received $160bn from the US government dominated the news. Early in the week, the group announced that it had no option but to pay $165m in bonuses to senior managers at AIG Financial Products, the division where derivatives trading got the group into trouble. Apparently, the bonus arrangements were legally enforceable and put in place well before AIG got into trouble. In the middle of the week, Barack Obama pledged to pursue ‘every single legal avenue’ to block the payments. By the end of the week the US House of Representatives approved a bill that will extend to all recipients of more than $5bn from the troubled assets relief program. This would embrace AIG, Fannie Mae, Freddie Mac, Citigroup, JPMorgan and Goldman Sachs. The bill will make any employee with a gross income of more than $250,000 who received a bonus this calendar year face a 90% tax rate on it. It was passed by 328 votes to 93 and now goes to the Senate. AIG also revealed the counterparties that had benefited from the US government bail-out – including collateral payments on credit default swaps to Soc Gen of $4.1bn, Deutsche Bank $2.6bn, Goldman Sachs $2.5bn and $12.1bn paid to municipalities.
  • UK bank Barclays is considering selling a stake in its fund management arm, iShares. The sale could raise between £3bn and £5bn, and would assist Barclays in strengthening its capital ratios and avoiding joining the UK government’s insurance scheme for bank assets.
  • UK hedge fund Centaurus Capital is considering launching a low fee, back to basics fund. The risk arbitrage fund will charge fees of 1.5% per annum, plus 15% of profits, against the industry standard of ‘2 and 20’. It will also allow monthly withdrawals with 30 days notice.
  • Morningstar revealed that JPMorgan was the top selling mutual fund manager in the US for the year to the end of February, gathering $140bn of new money. However, it was a difficult year for mutual funds with most money flowing into money market funds. Ignoring money market funds, JPMorgan’s recorded an outflow of $1.3bn.
  • Long standing market leader Fidelity had total inflows of $53bn including money market funds, and a net outflow of $32bn excluding money market funds. Fidelity’s assets under management fell to $1,200bn.
  • The list of personal assets of convicted fraudster Bernard Madoff that US government prosecutors want to seize includes four homes (in Manhattan plus holiday homes in Montauk, NY: Palm Beach, Florida: and Cap d’Antibes, France), $17m in a Wachovia bank account, $45m in municipal bonds, two Mercedes, a BMW, a VW Touareg, a Steinway piano and four boats.The accountant that worked with Bernard Madoff for 17 years was charged with securities fraud. He faces up to 105 years in prison if convicted of the charges of failure to audit, aiding and abetting fraud and filing false regulatory reports. David Friehling CPA is the sole practitioner at Friehling and Horowitz.
  • Goldman Sachs is asking the investors in its $15bn private equity fund for approval to shift most of its uninvested funds into distressed debt. The fund has around $9bn uninvested and is earmarking only $3bn of this to traditional buy-outs.
  • In a glimmer of positive news, UK government controlled Royal Bank of Scotland said it has benefited from ‘buoyant’ corporate banking activity since the turn of the year. This supports the positive news that has also emanated from Barclays (‘strong start’ to 2009) and Citigroup and Bank of America. However, the RBS chairman expressed caution saying ‘it is pretty brave to call a turn’.
  • Founder of private equity group Terra Firma Capital Partners, Guy Hands, has relinquished day-to-day control to concentrate on investments and building relations with investors. General counsel Tim Pryce will become chief executive with Mr Hands taking the role of chairman and chief investment officer.
  • UK regulator the Financial Services Authority (FSA) announced an overhaul of its regulatory regime. In a break from its previous ‘light touch’ approach the FSA will look to: introduce higher capital requirements for bank; regulate liquidity more closely; gather more information about hedge funds’ activities and potentially regulate them like banks; dig deeper into accounting methods at banks; adopt a more ‘intrusive and systemic’ approach to supervision; and contribute to more effective cross border and pan-European regulation.
  • Weavering Capital, a $639m London hedge fund collapsed after the discovery that its main asset was a $637m derivatives trade with an offshore fund controlled by the fund’s founder and chief executive.
  • UBS is offering to buy back up to €1bn of its junior bonds at a discount. It is expecting to pay 62.5 to 65 per cent of face value, which is marginally above the current market price.
  • As part of the exchange of preferred stock for common stock that will see the US government own as much as 36% of the bank, Citigroup will ask its shareholders for the option to conduct a reverse stock split. Citi said in a filing with the SEC that it will seek approval for seven different reverse-split ratios from 1-for-2 to 1-for-30, the option will expire in one year.
  • Citigroup also announced that its current CFO, Gary Crittenden, would be replaced by Edward ‘Ned’ Kelly – a veteran investment banker and lawyer.

Credit

  • The US Federal Reserve announced plans to introduce ‘quantitative easing’. It will buy $300bn of US government debt and will more than double its purchases of securities issued by housing agencies Fannie Mae and Freddie Mac. The moves should ‘help improve conditions in the private credit markets’ as well as bring down mortgage rates and support the housing market.
  • The UK Debt Management Office plans to raise £147.9bn by issuing gilts in the 2009/2010 financial year. The amount is marginally higher than the £146.4bn raised in 2008/2009 and more than three times the figure for 2007/2008. The issuance could become even larger depending upon the Budget scheduled for April 22nd.
  • Corporate bond issuance is at an all time high, with companies issuing bonds to cover the uncertainty of bank finance in the current climate, to ensure capital expenditure plans are maintained and, for some, anticipating acquisitions. Year to date totals for the US are $179.4bn, Continental Europe $123.7bn and the UK $24.9bn. The biggest UK issuers for the year to date were BP ($4.5bn), Imperial Tobacco ($3.4bn), Tesco ($3.2bn), Network Rail ($2.4bn) and Vodafone ($2.3bn).
  • S&P downgraded a series of Dubai government-linked companies over concerns about the emirate’s worsening economic climate. Emaar Properties, DIFC Investments, DP World, Jebel Ali Free Zone, Dubai Multi Commodities Centre Authority and Dubai Holding Commercial Operations Group. Three banks were also placed on review for downgrade – Mashreqbank, Dubai Islamic Bank and the merged Emirates Bank International and National Bank of Dubai.

Other

  • Anthony Bolton, renowned investment guru at Fidelity, thinks ‘we are pretty near the end of this pretty awful bear market’. He does not believe this is a bear market rally, but the start of a new bull market. Similar views were expressed by Jeremy Grantham, co-founder of GMO. He said the market turns ‘when all looks black, but just a subtle shade less black than the day before’.
  • The story behind the ‘Gem of Tanzania’ continued to feature in the press. It involves UK builder Wrekin Construction that was put into administration last week. Questions are being asked about an asset that was on Wrekin’s balance sheet in its 2007 accounts. The asset is an £11m ruby called the ‘Gem of Tanzania’ that was purchased from a corporate shareholder in Wrekin called Tamar Group in exchange 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. The gem was previously in the accounts of Tamar Group at just £300,000. The gem does exist – it is a 2kg rock the size of a cricket ball – but there are doubts about its £11m valuation.
  • The final report from UK antitrust body the Competition Commission requires airports group BAA to dispose of not only Gatwick airport, but also Stansted and either Edinburgh or Glasgow. BAA currently owns seven UK airports – three in London (Heathrow, Gatwick and Stansted), three in Scotland (Edinburgh, Glasgow and Aberdeen) plus Southampton. It is already selling Gatwick airport. BAA is owned by Spanish infrastructure group Ferrovial that purchased it in a highly leveraged £10.1bn takeover in June 2006. BAA has two months to appeal against the orders to the Competition Appeal Tribunal.
  • Europe’s largest oil group, Royal Dutch Shell revealed an $8.3bn pension deficit – equivalent to about 5% of its market capitalisation.
  • The US Financial Accounting Standards Board is poised to publish two papers that would allow banks and other companies more freedom in how they value financial assets. Companies would be allowed to value more securities by computer models rather than at current market prices. The International Accounting Standards Board has also agreed to put the papers out for comment.
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