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In Case You Missed It: Business News Round-Up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.

The big news this week involved Ireland’s €85bn bailout loan from the EU and IMF, increasing concern over Europe’s spreading sovereign debt crisis, and uncertainty following North and South Korean exchanges of fire over Yeonpyeong Island.

Economic Backdrop

  • Ireland unveiled a four-year, €15bn programme of tax rises and spending cuts billed as “The National Recovery Plan 2011-2014”. It aims to reduce the deficit to 3 % of GDP by 2014, assuming real GDP growth of 2.75 % annually between 2011 and 2014. The government will cut the minimum wage by almost 12 %, slash welfare expenditure, reduce public sector pay and lower the rate at which earners start to pay income tax. Expenditure will be cut by €10bn and taxes raised by €5bn between 2011 and 2014. The plan was needed to win approval from Ireland’s European Union partners and the International Monetary Fund this weekend for an emergency rescue package of €85bn. This will take Ireland’s total debt up to 160 % of GDP. The loan will be at 5.83% and Ireland has been given until 2015 to reduce it deficit to 3%.
  • Stock markets had a turbulent week lower due to fears of Irish political deadlock, European sovereign debt contagion, and geopolitical tension between the Koreas.
  • The euro dropped the most against the dollar in three months as German Chancellor Angela Merkel said the 16-nation currency was in an “exceptionally serious” situation after Ireland asked for a financial rescue.
  • The Ifo index showed that business confidence in Germany this month reached its highest since the reunification of the country.
  • China’s current-account surplus rose to $102.3bn in Q3, double the amount from a year earlier and about 7.2% of GDP.
  • The minutes of the November Federal Open Market Committee (FOMC) meeting revealed the following projections:
    • The Jobless/unemployment rate is projected to rise in Q4 2011 to 8.9% to 9.1 %, compared with 8.3 % to 8.7 % in the June forecast;
    • The US economy is forecast to expand by 3 % to 3.6 % next year, down from a 3.5 % to 4.2 % projection in June;
      Inflation Outlook: forecasts for inflation, excluding food and energy, were little changed for the next two years;
    • Previously-owned home sales in America were 2.2% lower in October than in September, and 25.9% lower than in October 2009, when first-time buyers rushed to take advantage of an expiring tax credit
    • America’s economy grew faster in Q3 than previously thought: by 2.5% at an annual rate, against an initial estimate of 2%.
    • Federal Reserve policy makers disagreed over expanding record monetary stimulus this month, with a majority seeing a boost to growth and employment and a minority concerned about risks to inflation and the dollar.

Mergers & Acquisitions

  • Novell, a software-maker which develops products using the Linux open source operating system announced it was being bought by Attachmate, a software company that is owned by several private-equity firms.
  • Blackstone abandoned a deal to buy Dynegy, an energy company, in the face of opposition from Dynegy’s activist shareholders, including Carl Icahn, who thought the company was being sold at too low a price. Dynegy said on Tuesday it would solicit alternative proposals. The latest offer valued Dynegy’s equity at about $603m.
  • SABMiller, the second-biggest brewer in the world by volume, will purchase Argentina’s third-largest beer company, CASA Isenbeck, from Germany’s Warsteiner. Latin America is already the brewer’s biggest profit engine, accounting for more than one-quarter of earnings before interest, tax and amortisation in the first half.
  • A buy-out group, led by Kohlberg Kravis Roberts, has agreed to acquire Del Monte Foods for $19 a share, in a deal which values the US food and pet products company at about $5bn including debt.
  • Deloitte Touche Tohmatsu announced that it had not given up hope of one day forming an alliance with Roland Berger Strategy Consultants, even though the German firm’s partners voted overwhelmingly to reject its proposed deal.

Credit

  • The focus of the eurozone debt crisis moved to Spain and Portugal, as their borrowing costs escalated. José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country even as the premiums demanded by investors to hold Spanish sovereign debt over that of Germany’s rose to euro-era highs.
  • Spanish 10-year bond yields rose to 5.2 %; Irish yields rose 3 basis points to 9.071 % and Portuguese yields rose 3 basis points to 7.038 %.
  • Caterpillar, the US manufacturer of earthmoving equipment, launched a two-year Rmb1bn bond with a coupon of 2 % in Hong Kong, becoming the first foreign industrial multinational to issue debt in the Chinese currency. The issue, which is only the second of its kind by a multinational to date, dwarfs a Rmb200m issue launched by McDonald’s in August.

Financial Institutions

  • Ireland’s three largest banks could receive an immediate cash injection of about €12bn (£10bn) from the government and be given access to a much larger pool of rescue funds, as they grapple to meet the tough new capital requirements that are expected to form part of Ireland’s bail-out package. It is estimated that the two state-backed banks, Allied Irish Banks (AIB) and Bank of Ireland, could need €3bn and €1.5bn respectively, while as much as €7.5bn may be required to strengthen already-nationalised Anglo Irish Bank.
  • Citigroup is planning to reopen some retail branches in Europe, which were forcibly wound down under the terms of the US -government bail-out.
  • UBS is the object of a 23-count fraud lawsuit, alleging that UBS “lent an aura of legitimacy” to the Bernard Madoff’s Ponzi scheme, and seeking the return of $2bn. The lawsuit names as defendants the bank, its Luxembourg arm and a firm called Access International that together sponsored and administered several international feeder funds, including Luxalpha SICAV and Groupement Financier Ltd.
  • Santander and BBVA, Spain’s largest banks, which remained profitable during the crisis largely because of their geographical diversification, are now diversifying across business areas as well, putting more emphasis on the high-margin global business of wholesale and investment banking to reduce dependence on their core retail operations.
  • JPMorgan Chase is to abandon plans to build a £1.5bn European headquarters in London’s Canary Wharf financial district, opting instead for the former UK premises of Lehman Brothers in the centre of Canary Wharf.
  • An earlier Financial Times report, revealing concern among some senior Bank of England Monetary Policy Committee (MPC) officials about Mr King’s endorsement of the coalition’s austerity plans, was confirmed by MPC member Adam Posen, at a parliamentary hearing on Thursday.

Retail

  • Tesco supermarket plans to build more than 1,000 Chinese hyper- and supermarkets, to achieve £4bn in annual sales by 2015: its sales there are currently rising at 8 % year-on-year. The firm is eyeing further expansion in Asia following its success in Thailand, and its lack of success breaking into the US. Tesco is the third largest supermarket, after Wal-Mart and Carrefour.
  • Armani Group launched an e-commerce site for its Emporio Armani brand in China, as the luxury goods sector seeks to extend its appeal among the fastest-growing consumers of high-end wares.
  • Montblanc, the German fountain pen maker, plans to open a 1,500 sq m shop in Beijing next summer. After just three years, China has already toppled the US as its single largest market.
  • Galeries Lafayette, the Paris department store, set up a joint venture agreement with IT Limited, the Hong Kong-based retailer, to open stores in China starting in 2013. It plans to open 10 to 15 shops in China in a big push for overseas growth to compensate for a slow-growing domestic market.
    TPG Capital and Leonard Green & Partners, two private-equity firms, agreed to buy J.Crew, a clothing retailer, for $3bn. J.Crew got a big boost when Michelle Obama wore its designs in a fashion shoot for Vogue in early 2009, though net profit for its most recent quarter fell by 14% compared with a year earlier.

Companies

  • A jury in California awarded Oracle $1.3bn in damages for copyright infringement in its lawsuit against SAP. SAP had admitted that a former subsidiary illegally downloaded the software, but assessed the damage to Oracle, its arch-rival, at around $40m. The damage award is eight times higher than the $160m provision that SAP had made in its balance sheet. During a three-week trial, SAP had admitted that its former TomorrowNow subsidiary had illegally accessed Oracle’s servers to download millions of files.
  • Hewlett-Packard profits and revenue were up solidly for the three months to October and the company raised its sales forecast for next year.
  • Rolls-Royce won a contract to provide the engines for 20 Air China aircraft, its second such deal in China recently.

Other

  • Insider Trading Probes. Regulators in the US and UK have stepped up sharply their efforts to crack down on trading ahead of mergers and other big announcements.
    • The FBI raided three American hedge funds as part of its investigation into potential insider trading within the hedge fund industry. The funds include Diamondback Capital Management and Level Global Investors, in Connecticut (both founded by former SAC Capital Advisors traders) and Boston-based Loch Capital Management. The WSJ reported that federal prosecutors are preparing to unveil a series of new insider trading cases against hedge fund traders, consultants and Wall Street bankers.
    • Don Ching Trang Chu, an Asia and technology expert at Primary Global Research, a US firm that links expert sources at public companies with hedge funds, has been arrested by the FBI on conspiracy charges. It is alleged that in July 2009 Mr Chu arranged for a hedge fund trader to obtain revenue, sales and margin figures from an unnamed official at a publicly traded technology firm, before the figures were formally announced. He faces up to 30 years in prison if convicted.
    • In the UK, a City broker and his wife were charged with criminal insider dealing. The Financial Services Authority also charged three directors and employees of Blue Index, which sold contracts for difference (CFDs), with insider dealing ahead of mergers between 2006 and 2008.

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

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