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In Case You Missed It: News Round-Up

martin.jpgContributed by Martin Mitchell, director of eLearning for 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

  • Satyam Computer Services, the scandal-hit Indian outsourcing company where the financial statements were fudged by the CEO, is to invite formal bids from potential suitors. This is despite the fact that the accounts are unlikely to be restated for some months. Goldman Sachs and Avendus Capital are the advisors.
  • Genentech, the US biotechnology group, launched a vigorous defense against Roche’s planned $42bn takeover. Roche is attempting to buy the 44% of the company it does not currently own at $86.50 per share and Genentech’s chief executive claimed the bid undervalues the entity and success might stifle its innovative culture. Later in the week, Roche raised its offer to $93 per share after discussions with big Genentech shareholders.The possible future ownership of LCH.Clearnet added a third possibility, with the revelation that LCH.Clearnet is working on a proposal to buy out its roughly 120 shareholders as part of a conversion to an user-owned facility. There are two further possibilities – a merger with US clearer the DTCC and a rival possible bid from a consortium including eight banks, Icap and the London Stock Exchange.
  • Analysts are speculating over whether Anheuser-Busch InBev will sell its Russian and Ukrainian business to raise cash to help pay down debt and focus more on its American beer brands. The business is thought to be worth around $6bn and possible buyers include SABMiller.
  • Dow Chemical’s takeover of Rohm and Haas is looking increasingly likely again. An original deal foundered when Dow’s potential sources of finance suffered after Kuwait’s state-owned oil company backed out of a joint venture. After the withdrawal of the deal by Dow, Rohm and Haas embarked on a lawsuit that is due to start on Monday. However, the companies have announced that they are ‘in discussions relating to the merger of their companies and the pending litigation’.

Financial Institutions

  • Gleacher Shacklock announced the setting up of a special situations team that will concentrate on restructuring failing companies’ finances. Two senior experienced hires were brought in from Houlihan Lokey. Gleachers is currently working on housebuilder Taylor Wimpey’s bid to strike a deal with its creditors.
  • AIG, the insurance giant that is already 80% owned by the US government, announced a $61.7bn quarterly loss – the largest in US corporate history. The insurer is also to give the US government a controlling stake in its two largest divisions in exchange for a further standby credit lifeline of $30bn. The divisions are AIG’s Asian operations (American International Assurance), and its international life assurance business (American Life Insurance).
  • HSBC is raising £12.5bn through a rights issue on a 5 for 12 basis at 254p per share. The issue is the UK’s biggest ever and will see HSBC’s tier one capital ratio rise to above 10 per cent from 8.9% at the end of September 2008. The deal will generate £350m in fees for the syndicate of banks underwriting the deal, led by Goldman Sachs and JPMorgan Cazenove. BNP Paribas, Credit Suisse and RBS are co-bookrunners. The announcement was made alongside HSBC’s annual results that saw pre-tax profits down to $9.3bn from $24.2bn in 2007, and a cut in the final dividend to 10 cents.
  • Bank of America chief executive Ken Lewis admitted that it was a ‘tactical mistake’ to ask for US government support of $20bn at the end of December. The money was requested to prop up the acquisition of Merrill Lynch, and Mr Lewis now feels that asking for just $10bn would have been sufficient and would have helped to curtail fears that further problems were likely. Bank of America has received a total of $45bn from the US Treasury – $25bn last September and the further $20bn in December.
  • Adding to the Bank of America woes, a London-based currency trader at Merrill Lynch has been suspended after amassing more than $400m of undisclosed losses in recent months. The trades mainly involved Norwegian and Swedish currencies. There are suggestions that the trader involved, Alexis Stenfors, reported a $120m profit in 2008.
  • Terra Firma, the private equity firm, has written off half of its £2.3bn investment in EMI.The pension awarded to the former CEO of the Royal Bank of Scotland (RBS) continued to make waves. The pension of £700k per annum was awarded as part of the compromise agreement that saw Sir Fred Goodwin removed as CEO as the UK-government-bailed-out-RBS. MPs are considering whether there is a possibility of legal action against Sir Fred and others involved in the agreement since the decision to allow him to take early retirement, rather than giving him 12 months notice to quit, meant his pension payout almost doubled from £416k to £703k per annum.
  • Northern Trust, the US bank that accepted $1.6bn from the US government’s Troubled Assets Relief Program (Tarp), is under fire for its corporate sponsorship and entertainment. As well as sponsoring PGA golf, Northern Trust paid for existing and potential clients to enjoy dinners and live performances from the likes of Sheryl Crow and Earth, Wind and Fire. Under criticism from US politicians, Northern Trust argued that the performances were booked moths before, and cancelling would not have saved any money.
  • The US liquidators of Lehman Brothers have asked Barclays to explain what happened to an estimated $3.3bn that the UK bank received when it took over part of the collapsed bank last year. The money was earmarked for bonuses and other liabilities, and the liquidators are looking to make sure that there are no funds left over that should go to creditors.
  • The changing of personnel at the top of UBS continued with the current chairman, Peter Kurer, announcing that he will not be seeking re-election. He will be replaced by a former Swiss finance minister, Kaspar Villiger.
  • Commerzbank has put its $900m fund of hedge funds management operation up for sale. The unit, known as Comas, is expected to a price ‘in tens of millions of Euros’. The move follows a similar pattern at other institutions – for example Deutsche Bank closing its Topiary unit and the closing of Altitude by BBVA. The Australian Securities and Investments Commission extended its ban on short selling of financial stocks for a third time, adding a further three months.
  • Lloyds Banking Group finally reached agreement with the UK Treasury to insure £258bn of assets. The deal is similar to the one agreed with Royal Bank of Scotland. It will see the UK government convert its preference shares into equity, increasing the government’s stake to 65% from the existing 43.5%. However, the economic stake will be an even greater 75%, since the Lloyds will issue non-voting, dividend paying B shares as an insurance fee. Lloyds was advised by JPMorgan Cazenove and UBS, the UK Treasury was advised by Credit Suisse.

Credit

  • Persimmon, one of the UK’s biggest housebuilders, has renegotiated its existing debt terms and acquired new banking facilities taking its total credit facilities to £1.01bn. Its new blended interest rate will be 6.4%, roughly 2.8 percentage points higher than its earlier loan agreements.
  • The UK’s Private Finance Initiative (PFI) is struggling to get the private finance loans in the financial crisis – however, the UK Treasury is prepared to lend all the debt required to get some £8bn of projects off the ground in the coming year. In effect this turns the Private Finance Initiative into a ‘Public’ Finance Initiative during the crisis.
  • Toyota Motor, the world’s biggest carmaker by sales, is seeking up to $2bn in Japanese government-backed emergency loans. Japan has announced that up to $5bn of its foreign exchange reserves will be channelled into low-interest loans to companies affected by the financial crisis.
  • Accounts filed by celebrity chef company Gordon Ramsay Holdings showed that it has breached its banking covenants and is in the process of renegotiating banking terms. The £10.5m facility is with the Royal Bank of Scotland.
  • The UK Debt Management Office announced one of its least successful gilt auctions. The sale drew bids of just 1.48 times as much as the £2.25bn gilts on offer, and the yield tail – the difference between the yield on the highest and lowest bids accepted – was 6.5 basis points, the highest since 1995 for any conventional gilt.
  • A day after the gilt auction results, the Bank of England announced it will adopt ‘quantitative easing’ – creating up to £75bn of money to buy assets, mostly gilts, over the next three months. The policy came as the Bank also announced a further half a percent cut in the interest rate to just one half of a percentage point. Both measures are aimed at using monetary policy to counter the recession.
  • The European Central Bank also reduced its key interest rate by one half of a percent to 1.5%.
  • Premier Foods, the largest food producer in the UK, has finalised a package to cut its £1.77bn of debt through a £404m equity issue and bank refinancing. The equity issue at 26p per share will come in two parts – a placing of 1.06bn shares which shareholders can clawback on a five for four basis, and a firm placing of 498m shares. Private equity house Warburg Pincus is subscribing for 246m of the shares in the firm placing. The renegotiation of the bank debt extended maturities and reset covenants. The equity issue will reduce net debt to EBITDA to 3.9x, comfortably within the 5x limit in the banking covenants. Goldman Sachs and Rothschilds acted as advisors, Citi and RBS Hoare Govett have underwritten the placing.

Other

  • Warren Buffett’s Berkshire Hathaway published its annual results, with net income down to $4.99bn from $12.2bn a year earlier. As usual, Mr Buffett’s annual letter to stockholders gave an insightful commentary on recent events, saying that investors suffered as if ‘they were small birds that strayed into a badminton game’ in the face of frozen credit markets and tumbling stock prices. He also put the blame on irresponsible home lending stating that ‘home purchases should involve an honest-to-God downpayment of at least 10 per cent, and monthly payments that can be comfortably handled by the borrower’s income’.
  • NYSE Euronext opened a state of the art options trading floor in Manhattan. The floor is the result of the takeover of Amex, and is an attempt to recoup market share from the other two dominant US options trading markets, the international Stock Exchange and the Chicago Board Options Exchange. Goodwill writedowns are reflecting the swift deterioration of the economic outlook and the fact that some bidders overpaid for their targets in the boom years. HSBC bought the US consumer business Household for $14bn 6 years ago and has just written off $10.6bn of goodwill. Similarly, News Corp wrote down $3.6bn, the bulk of which related to its acquisition of Dow Jones for $5.6bn in 2007. However, research shows that premiums average premiums of 28.2% paid during this M&A cycle, were conservative compared to the dotcom frenzy with an average of 34.7%.
  • Xstrata’s shareholders voted on its proposed rights issue and the more controversial $2bn acquisition of Colombian coal assets from Glencore, its biggest shareholder. The $5.9bn rights issue was passed with more than 95 per cent of the votes, but the Glencore transaction only saw 66% vote in favour, 16% opposed it and 18% abstained.

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

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