In Case You Missed It: Business News Round-Up

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

After hitting a 4-year low against the US dollar last week, the Euro rallied to above $1.26 on Friday. Equities also sold off across the board, while US and German government bonds enjoyed strong gains. Santander is in talks about merging its US operations with M&T Bank. The US Senate approved a sweeping overhaul of financial regulation.

Economic Backdrop

A dramatic deterioration in investor confidence triggered across-the-board risk reduction and a flight to quality this week. One big knock to investor confidence came from Germany’s unilateral, and totally unexpected, ban on “naked” short-selling (selling securities that are not owned or borrowed). The ban applies to eurozone Sovereign bonds, credit default swaps as well as the shares of a group of 10 leading German financial stocks, including Deutsche Bank and Commerzbank, and will last until March 31, 2011.

The Euro tumbled to a four-year low against the dollar of $1.2142 on Thursday as investors turned to shorting the Euro as a means of betting against the eurozone economy. It subsequently rallied to above $1.26 on Friday, a move traders attributed to short-covering.
Equities also sold off across the board. In Europe, the FTSE Eurofirst 300 shed 4.4% over the week, while the Nikkei 225 tumbled 6.5% – its worst performance in 16 months. The S&P 500 was down 4.23%. At one point on Friday, the Dow Jones fell below the psychologically important 10,000 mark and the FTSE 100 dropped below the 5,000 mark.
Commodities also sold off, with US crude oil down 7.3% and even gold – traditionally viewed as a haven in times of turmoil – down 4.5%.
Sterling also slipped to a 14-month low of $1.4249 on Monday on fears that the incoming Liberal Conservative coalition had been left a fiscal crisis by its Labour predecessors. Chancellor George Osborne commented on “various skeletons in the closet” and the Liberal Democrat chief secretary to the Treasury David Laws revealed his predecessor Liam Byrne left him a letter stating there was no money left.
The flight to safety meant that US and German government bonds enjoyed strong gains and the yield on the 10-year Bund sank to a historic low of 2.66%, while the 10-year US Treasury yield sank towards 3.1%, its lowest level this year.

Mergers and Acquisitions

Prudential launched its delayed $21bn rights issue on Monday aimed at funding its planned $35.5bn acquisition of AIA Group, the Asian business of AIG. Prudential is offering investors 11 new shares for each two that they own at 104p. This represents a discount of 39% to the theoretical ex-rights price (TERP), or a discount of 81% to Friday’s close of 542.5p. The banks advising Prudential on the cash call and acquisition are expected to make £850m in fees.
Hedge fund manager Man Group is to buy GLG Partners in a deal that values its rival at $1.6bn (£1.1bn) it announced on Monday. The deal will create a global alternative investment manager with a combined $63bn of funds under management. The cash and shares transaction will see the shareholders of GLG’s 50% publically listed float receive $4.50 in cash for each GLG share. This represents a premium of about 55% to last Friday’s closing price of $2.91. The remaining 50% of shareholders, mostly comprising GLG partners, will be paid in Man Group shares, valuing each of their GLG shares at $3.50, a 20% premium to Friday’s closing price.
Santander, the Spanish financial group, is stepping up its efforts to expand in the US and has held talks about merging its operations there with M&T Bank, which counts Warren Buffett as a leading shareholder. People close to the discussions suggested the talks had stalled after a disagreement over who should ultimately control the enlarged US unit, which would have some $150bn in assets and more than 1,500 branches in the north-east US. But the talks had reached an advanced stage, with the banks at one point considering an announcement this month, and could yet restart.
Vodafone is in early stage talks about selling its controlling stake in Vodafone Egypt, the country’s second-largest mobile phone operator, in a deal that could be worth £3bn ($4.3bn).
The Royal Bank of Scotland is examining a private sale of The Priory Group, owner of the celebrity rehab clinic, after shelving plans to launch an initial public offering to raise more than £1bn owing to the turbulence in the capital markets.

Financial Institutions

George Osborne, chancellor, has bowed to pressure for tighter regulation of Europe’s hedge fund and private equity firms, but insisted there was still “much to play for” in improving the final deal. The UK won a concession when the finance ministers noted “the concerns expressed by some member states on certain aspects of the… `proposed general approach, in particular as regards to the third country provisions.” That refers to the rule which would restrict European Union investors from investing in non-EU funds. Critics of the new rules say this will restrict investor choice, push down pension fund returns and make Europe less competitive. Mr. Osborne’s team is not playing up the prospects of a major rewriting of the text but said that the Ecofin meeting kept “the door open” for tweaks. The US may also exert pressure behind the scenes.
The US Senate approved a sweeping overhaul of financial regulation on Thursday evening, paving the way for President Barack Obama to sign it into law and forcing big banks into major restructuring. The legislation – the main response to the financial crisis – bans deposit-taking banks from proprietary trading, introduces a consumer financial protection bureau to police the sale of credit products and empowers the government to seize a failing systemically important firm.
The Securities and Exchange Commission announced on Tuesday proposed rules for introducing “circuit breakers” on individual stocks to prevent a repeat of this month’s so-called “flash crash.” The move comes after 30 stocks in the S&P 500 fell at least 10 per cent during a five-minute period on the afternoon of May 6. Under the new rules, stocks in the S&P 500 will be halted for five minutes if their price either rises or falls by 10 per cent over the preceding five minutes. Market-wide circuit breakers were introduced after the 1987 stock market crash. The SEC also said it “is working with the markets to consider recalibrating” these circuit breakers, which were not triggered on May 6. Traders say the spark for the flash crash appears to be a combination of events, with a wave of selling intensifying as the S&P fell below key levels. The turmoil was compounded by computerised trading programmes, which transact in microseconds, and the fragmented nature of US trading across some 40 different venues.

Credit

Dubai World, the state-owned conglomerate, has reached an agreement ‘in principle’ with its main creditors to restructure debt worth $23.5bn (£16.3bn). Under the terms of the repayment schedule, some of the loans will be paid back after five years, with the remainder after eight years. The five-year tranche pays an annual interest rate of just 1% – far less than the banks themselves have to pay when they borrow in the financial markets. The eight-year tranche also pays 1%, plus the chance to get a further 1.5% to 2.5% if the interest is rolled up and paid later.
The European Central Bank revealed on Monday that it had bought €16.5bn of eurozone government bonds as part of the global rescue plan, amid widespread investor concern that the intervention was not big enough to stabilise debt markets. The move has broken new ground for the ECB, which had previously resisted buying government bonds outright.

Other

National Grid has said that it will launch a £3.2bn rights issue. The company’s two for five issue will see 990.4m new shares at 335 pence each. National Grid will use the money raised for a “significant increase in UK capital investment”, it said in a statement.
British Airways has unveiled its worst annual losses in more than two decades after an economic downturn that has seen airlines around the world plunge into the red. The UK flag carrier reported a pre-tax loss of £531m for the 12 months to the end of March, its largest loss since it was privatised in 1987. The losses come against a backdrop of continuing industrial strife at BA, which is girding itself for a 15-day cabin crew strike from Monday, the second in two months, after the High Court overturned a strike ban.
Inflation jumped in April to 3.7%, sharply higher than expected, prompting a letter of explanation from the governor of the Bank of England, Mervyn King, to the new chancellor George Osborne. The retail price index measure of inflation jumped even higher to 5.3% and reached its highest since 1991. The retail price index is used as a base for many public sector contracts, benefits payments and wage settlements are linked. In his letter to the Chancellor, Mr. King said the sharp rises in oil prices over the last year, the rise in VAT and the effect of the weaker pound on import prices were behind the higher inflation. He insisted that inflation was expected to come down below target within a year.

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