In Case You Missed It: Business News Round-up

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

• Mining company Rio Tinto agreed to sell part of its Alcan packaging unit to Bemis of the US for $1.2bn. Bemis will pay $1bn in cash and a further $200m in shares. The sale price represents 7.2x 2008 EBITDA and was structured to enable Bemis to preserve its investment grade rating. Bemis management said that if it had added more than $1bn in debt, the rating would have been in jeopardy.
• AIG, the US government-controlled insurance group has rekindled talks with MetLife about selling American Life Insurance Company. The sale was first discussed earlier in the year, but broke down on the issue of price in difficult credit markets. However, with AIG owing the US taxpayer $100m and under pressure to speed up disposals, the sale talks have reopened. It is thought that the sale price could reach $15bn.
• UK property company Segro is getting closer to acquiring rival Brixton in a deal valuing the target at around £107m. Brixton has net debt of around £862m and is facing a potential breach of a key covenant test in relation to loan-to-value on July 31st. UBS and JPMorgan Cazenove are advising Segro, Citi and Nomura are advising Brixton.
• Owner of British Gas, Centrica has bid £1.3bn for North Sea oil and gas company Venture Production.

Financial Institutions

• A survey of private banks by Scorpio Partnership has shown that, since it took over Merrill Lynch, Bank of America has overtaken UBS as the world’s largest private bank based on assets under management. The top 10 are  (1) Bank of America ($1,501bn); (2) UBS ($1,393bn); (3) Citi ($1,320bn); (4) Wells Fargo ($1,000bn); (5)Credit Suisse ($612bn); (6)  JPMorgan ($552bn); (7) Morgan Stanley ($522bn); (8) HSBC ($352bn); (9) Deutsche Bank ($231bn); (10) Goldman Sachs ($215bn)
• Barclays is using what it is calling ‘smart securitisation’ to reduce the capital cost of risky assets on it balance sheet. With echoes of the structures that have been heavily blamed for the financial crisis, it is securitising some of its assets but doing so in a ‘transparent and less complex way’. The structures involve the pooling of assets from several clients into a secured financial product that can be sold to investors and rated by a credit rating agency.
• Meanwhile, Goldman Sachs is understood to be working on an insurance product that it can sell to a bank with a toxic portfolio, removing most of the risk of the portfolio. The insurance will reduce the amount of capital to be held against the assets.
• Nomura is in talks to move its UK business into an office development by the Thames in the City of London. All of the ex-Lehman and Nomura staff currently based in Canary Wharf will move to the building.
• UBS chief executive Oswald Grubel is thought to have decided to keep the US private banking and wealth management business – but install new management. The unit has recently agreed to pay $780m to settle claims it had defrauded the IRS and continues to battle over efforts by the authorities to force disclosure of the names of 52,000 clients that may have avoided paying US taxes.
• Private equity firm Kohlberg Kravis Roberts has sold half of the equity in South Korea’s Oriental Brewery to Affinity Equity Partners, an Asian-focused private equity fund for $400m. The deal will see KKR share the financial burden and pool their skills and networks with the local specialist. KKR recently acquired the brewery from Anheuser-Busch InBev in the biggest leveraged buyout in Asia in the last two years. The deal was for $1.8bn, including $1bn of debt. The debt included $300m of vendor finance on attractive terms.
• French bank Societe Generale is set to report €1.3bn in losses from credit default swaps in its second-quarter results. The CDSs were taken out as insurance against default on various corporate loans, but their value has fallen as credit spreads have tightened since March.
• UK Chancellor of the Exchequer Alistair Darling launched his white paper on the reform of the regulatory regime in response to the banking crisis. The white paper proposes strengthening the current ‘tri-partite’ system involving the Bank of England, the Treasury and the Financial Services Authority by establishing a council for financial stability which will be chaired by Mr. Darling and include the three authorities. Other changes in the white paper are to require higher regulatory capital to be held by systemically significant firms, to curb ‘casino banking’ where bank’s enter into proprietary trades using their own funds and to begin pre-funding the Financial Services Compensation Scheme.
• Six former executives and brokers of the New York brokerage Sky Capital were charged with a transatlantic fraud. The allegations relate to persuading investors to buy shares in two companies traded on London’s AIM (Sky Capital Holdings and Sky Capital Enterprises) whilst using the funds to enrich themselves and Sky Capital brokers.
• Around a decade after the spectacular collapse of Long Term Capital Management, the next hedge fund set up by former Salomon star bond trader John Meriwether is winding down its operations. JWM Partners flagship fund Relative Value Opportunity II is thought to have lost more than 44% since the financial crisis started, exacerbated by leverage of as much as 15 times.

Credit

• As the state of California struggles to agree its budget, it has commenced issuing IOUs. Last week saw $53m worth issued and a total of $3bn of IOUs could be issued before the end of July. The IOUs are due on or before October 2nd, paying an annual rate of 3.75% and are transferable. Whilst some Wall Street firms are gearing up to trade the IOUs, Bank of America and Wells Fargo have agreed to accept them as deposits.
• Shares in UK sports retailer JJB Sports shares fell 25% after it conformed it will ask shareholders for more money. Speculation suggests that the company will try to raise £50m as it prepares to repay a £25m loan to Barclays. JJB recently became the first listed UK company to be saved from administration through a company voluntary agreement (CVA).
• The ‘new’ General Motors emerged from Chapter 11 bankruptcy protection. It will be rather different to the ‘old’ GM: (1) The number of brands will fall from 12 to 7, with the losers including Hummer and Saab; (2) The employees numbers will fall from 235,000 to 185,000; (3 Break-even volumes will fall from 15-16m vehicles to just 10m vehicles; (4) Debt will fall from $54bn to just $17.3bn; (5) The shareholders of the new GM are the US and Canadian governments with 72.5%, the United Autoworkers Healthcare Trust with 17.5% and former bondholders with 10%. The old shareholders have been wiped out.
• US automotive supplier Lear Corporation filed for bankruptcy protection after it missed a $38m interest payment on its bonds. Lear hopes to submit a debt restructuring plan to the court within 60 days. It already has support for the restructuring from 68% of its debt-holders and more than 50% of its bondholders.
• In a prudent move, ArcelorMittal, the world’s biggest steelmaker has started talks with its banks about making conditions for repaying its $26bn of debt less onerous. ArcelorMittal is concerned that any unexpected downturn in the next six months might trigger a technical breach of its 3 covenants. Analysts estimate that EBITDA needs to be at least $6.5bn to avoid a breach.
• Spain’s Santander announced plans to strengthen its balance sheet and capital ratios by offering to swap a nominal €9.1bn of bonds in 30 separate securities for 2 new issues. The old issues were generally issued by subsidiaries and are trading at a discount, so Santander will be able to book a capital gain that will filter through to its capital ratios.
• A new exchange was launched to compete with the CME in the lucrative business of US Treasury futures. ELX Futures hopes to guarantee business both from its owners (a consortium consisting of Bank of America/Merrill Lynch, Deutsche Bank, Credit Suisse, BGC Partners, Citigroup, Royal Bank of Scotland, Barclays Capital, JPMorgan, Goldman Sachs, Peak 6, GETCO and Breakwater) as well as allowing trades in July for free.
• The UK government’s refusal to pay the coupons on £325m of the nationalised mortgage bank Bradford & Bingley tier two bonds has triggered the payout on credit default swaps on B&B. The ruling by the International Swaps and Derivatives Association came at the request of Morgan Stanley to clarify whether a bankruptcy event had occurred. Net exposure on B&B CDSs is estimated to be around $413m.

Other

• The race to set up a central clearing facility for credit default swaps (CDS) in Europe now looks to be between just Eurex Clearing and the InterContinental Exchange after NYSE Euronext placed its project ‘under review.’
• The UK’s Financial Services Authority issued a consultation paper that proposed a hike in penalties for financial wrongdoing. Under the proposals, fines for insider dealing and other market abuse will be set at a minimum of £100,000 and there will be a move towards basing fines on profits. The consultation period ends on October 21st.
• The chief executive of Hays, Britain’s biggest listed recruitment company painted a bleak picture of job prospects in the City of London, saying ‘those jobs have gone and they they’re not coming back anytime soon’. He added that there was little current evidence of a recovery – ‘there may be some recruitment to high-end roles in investment banking, but it’s sporadic and very, very niche.’
• A former computer programmer at Goldman Sachs was arrested in the US. He is accused of stealing trade secrets after he downloaded files from Goldman’s systems after accepting a job offer from another company.
• Beijing based BBMG Corporation plans to sell 993.3m shares (25% of the company) in an IPO in Hong Kong that could raise as much as $800m. JPMorgan, Macquarie and UBS are acting as bookrunners and China Life and the investment arm of Bank of China have already been lined up to subscribe for $50m worth of the shares each.
• Spain’s exchange and clearing group Bolsas y Mercados Espanoles (BME) is to shut its remaining open-outcry trading pits on July 10th. The move will leave just the London Metals Exchange and the Frankfurt Stock Exchange retaining any floor trading in Europe.
• A draft law from the European Union that will subject hedge funds to new regulatory controls needed ‘major surgery’ before it would be supported by the UK, according to the UK’s City minister. The law would require many hedge funds and private equity firms to register with regulators and provide more disclosure. They would also have to meet increased minimum capital requirements and limits on borrowing under the plans. Around three quarters of Europe’s hedge fund-managed assets are managed out of London.
• The world’s biggest accountancy firm, PwC, is about to help Somalia’s interim government with their bookkeeping. In response to demands from international donors, PwC will set up money tracking systems to ensure aid is spent as intended, and not stolen by officials.
• A former investment banker at CLSA and a fund manager in Hong Kong pleaded guilty to insider dealing. Allen Lam, the former banker, tipped off Ryan Fong about plans for JCDecaux Pearl & Dean to buy Hong Kong listed Media Partner International. He learned about the proposed acquisition by overhearing a conversation in the bank’s offices. Mr. Fong then purchased 2.43m MPI shares for himself and a further 8.2m for a fund he managed. Mr. Lam’s wife was an investor in the fund.
• The International Monetary Fund (IMF) said the world is starting to pull out of recession, although is also added that it was likely to be a ‘weak recovery’.
• IBM UK became the latest in a long line of companies to begin consulting on closing it defined benefits pension plan.
• The European Commission fined utilities companies Eon of Germany and GdF Suez of France €553m each for colluding in a carve-up of their domestic markets. The agreement dated from the mid-1970s and was abandoned in 2005. It involved the two agreeing not to sell gas into the other’s market. Both companies plan to challenge the fine.
• After a mammoth five-month process, UK energy group Drax finally made up its mind about its corporate broking relationships. UBS will join Deutsche Bank as joint brokers. Citigroup and Credit Suisse will miss out.

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