Telefonica payouts may go on hold for longer
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, July 26 (Reuters Breakingviews) – Telefonica (TEF.MC: Quote, Profile, Research) may need to put dividends on hold for longer. With Spain’s financial crisis worsening, the telecoms operator has sensibly scrapped the payout for 2012. The move is belated recognition that two previous dividend cuts were too timid, and means the group could now cope with being shut out of bond markets for all of this and next year. But a pledge to reinstate payouts for 2013 could prove too optimistic.
Fears that Spain may need a full bailout, and perhaps a debt restructuring, have sent the country’s borrowing costs soaring, with 10-year bond yields hitting an ugly 7.6 percent this week. That has concentrated minds at Telefonica HQ: with 58 billion euros of debt, and its creditworthiness yoked to Spain’s, the group is suffering collateral damage.
Shelving dividends should save about 4.2 billion euros, Bernstein estimates. It will be particularly unwelcome for the Spanish lenders that are Telefonica’s biggest investors, BBVA (BBVA.MC: Quote, Profile, Research) and La Caixa (CABK.MC: Quote, Profile, Research): each own more than 5 percent and previously enjoyed hundreds of millions of euros a year in income. To placate them, and other cash-hungry telecoms investors, Telefonica has promised to resume dividends next year, at a halved 0.75 euros a share.
But even that may not happen – for reasons partly outside Telefonica’s control. Heavy debt maturities continue into 2014. If Spain’s crisis worsens, the group might well need to be ready for a longer market shut-out. Telefonica also needs to sell more non-core businesses to keep deleveraging, and buyers could prove too scared or too stingy to assist.
Telefonica is also taking on excess boardroom pay – but this move looks as half-hearted as its earlier dividend tweaks. Directors are taking a 20 percent cut, but were very richly rewarded to begin with, with the best-paid independents trousering more than 500,000 euros. Top executives will get about 30 percent less this year. So they should: the reduction is largely because a total return-based “performance share plan” from 2009 will not pay out. In any case, a cut of that size to Executive Chairman Cesar Alierte’s 10.2 million euro package would still leave him earning more than his French and German rivals, combined, made in 2011. Meanwhile, shareholders go empty-handed.
Man Group’s new resolve is welcome
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, July 24 (Reuters Breakingviews) – Man Group (EMG.L: Quote, Profile, Research) is showing welcome resolve. The UK hedge-fund manager has already suffered as volatile markets dented risk appetite and wrong-footed its flagship AHL trend-following fund. With managed assets falling 10 percent in the first half to $52.7 billion, Man is preparing for more difficulty ahead. Shareholders have fared awfully – the stock has plummeted roughly 75 percent since the start of 2011. They should applaud the new determination. But the outlook remains murky.
Man’s expensively acquired stable of human traders, GLG, has grown in importance as the computer-driven AHL has struggled. To make things worse, much of AHL’s demand stemmed from lucrative products that guaranteed to return all of the investors’ principal. These prove un-economic when interest rates are low, and lose their appeal when investors prize assets they can buy and sell at will. Man now admits it under-estimated how quickly the “guaranteed products” business would wilt.
The company’s plight echoes that of 3i Group (III.L: Quote, Profile, Research), the private-equity manager. London-listed specialists in different kinds of “alternative” investments, both man and 3i proved exposed when the financial crisis erupted. Shrinking market values sent both hurtling out of the FTSE 100 and angered shareholders. Enter axe-wielding investment bankers to “right-size” the businesses – in 3i’s case Chief Executive Simon Borrows, once of Greenhill, and for Man, new Chief Financial Officer Jonathan Sorrell, a former Goldman Sachs wunderkind.
With Sorrell at his side, Chief Executive Peter Clarke’s new plan foresees saving $100 million a year by cutting staff, dropping products, and trimming expenses, supplemented by tweaks to AHL and organic growth GLG.
Optimists point to Man’s expertise, distribution network and wide range of products, plus rosy forecasts for industry growth. If Man’s funds pass previous “high-water marks”, lucrative performance fees would kick in, boosting earnings.
Funding ties to Spain hurt Telefonica
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, July 5 (Reuters Breakingviews) – Telefonica (TEF.MC: Quote, Profile, Research) may need to do more to counter its financial ties to Spain. The phone company’s credit ratings and funding costs are suffering as the country totters, even though three-quarters of sales are abroad.
Capital-hungry European telecoms have traditionally relied heavily on bonds. But as the euro crisis shuts corporate borrowers in weaker countries out of the market, maturing debts may need to be covered by bank loans or existing cash resources.
OTE (OTEr.AT: Quote, Profile, Research), Greece’s former telephone monopoly, is raising funds by selling units in Bulgaria, and has already exited Serbia. Portugal Telecom (PTC.LS: Quote, Profile, Research) belatedly halved its dividend and, like some domestic peers, will now issue new bonds to Portuguese retail investors rather than Europe’s institutional bond buyers.
But the big worry is Madrid-based Telefonica: a far larger company, with 7 to 8 billion euros of debt to refinance every year. Moody’s, Telefonica’s toughest critic among the rating agencies, rates Spain at the bottom of investment-grade and Telefonica only one notch higher, at Baa2. It may cut both again. Yields on Telefonica’s five-year euro bond, which stood below 4 percent in March, spiked at 7.5 percent in late June, and now stand above 5.8 percent.
Other agencies are slightly more generous. But two “junk” ratings – a possibility if Spain is downgraded further – would render Telefonica debt unpalatable for many investors. That would mean a lot of new debt for Europe’s smallish high-yield bond market to digest. Telefonica’s banks would honour credit lines, but replacing expiring ones would become more expensive. New bond debt would prove costly and limited.
Glenstrata wobble another blow for M&A bankers
By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The collapse of Glencore-Xstrata would be a $130 million blow to mergers and acquisitions bankers. Nine banks would lose most of that fee pool, and league-table standing too, if investor pressure nixes the $26 billion Xstrata buyout. Even in a merger boom, that would hurt. But it’s particularly painful in a thin year for deal-making.
The long roster of advisers always looked rich for mining’s most obvious deal. Now the banks may go nearly empty-handed, since their fees tend to be heavily dependent on a successful deal. Xstrata’s five banks stood to make as much as $80 million for financial advice and broking, while the quartet representing Glencore could have made $50 million. This comes shortly after another disappointment for the bulge bracket: KKR’s partial exit of Alliance Boots, Europe’s biggest buyout, for which the private-equity giant relied on the advice of one boutique.
M&A advisers are sunny-side-up types. Big companies are swimming in cash and need new ways to grow, the mantra goes. And beaten-down stock markets make targets cheap. That means more deals like Mexican billionaire Carlos Slim’s recent swoop on European phone companies should be on the way. Investment banking executives hope the same: after all, M&A is a prestigious business that promises big payday without eating up precious capital – and can generate plenty of revenue for other bits of the bank.
Alas, those hopes have foundered on Europe’s debt crisis. At just over $1 trillion, global M&A volumes in the first half of the year are down 25 percent on the same period in 2011, preliminary tallies from Thomson Reuters show. If Glencore-Xstrata collapses, the year’s biggest “deal” to date will be the Spanish government’s rescue of Bankia. That hardly shows a thriving market.
Split wouldn’t fix all News Corp’s shortcomings
By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Spinning off News Corp’s scandal-hit publishing arm won’t solve all Rupert Murdoch’s problems. The media mogul is preparing to drop his long-held resistance to a break-up, according to a report in his own Wall Street Journal. Outside investors will approve on strategic and financial grounds. But with the Murdoch family retaining a firm grip on both parts, governance remains troublesome. That will make it hard to insulate News Corp’s broadcasting and movie operations from Britain’s phone-hacking furore.
Spinning off the publishing unit, which houses HarperCollins books as well as newspapers such as the Times of London and the Australian, makes strategic sense. The division requires too much management attention while accounting for a small proportion of its parent’s $49 billion market cap. Its operating margins are less than half the wider group’s 16.6 percent; operating income of $458 million in the nine months to March was little more than 10 percent of the group total.
There’s financial merit too. These are fissiparous times: Kraft, Sara Lee, ConocoPhillips and others have already carved themselves into businesses that focus on doing fewer things better, and which investors can assess more easily. In theory at least, better stock-market valuations follow.
But there are limits to what a separation would achieve. News Corp’s dual-share structure means the Murdoch family’s 12 percent economic interest comes with effective control, thanks to 40 percent voting rights. That arrangement would apparently continue in both arms post-split.
Moreover, Murdoch will retain direct influence over both arms, probably as chairman. Politicians and regulators will question whether the separation is more than cosmetic. A separate listing might make it easier in time for the family to sell down its stake in publishing. Even so, the reputational damage in Britain could take years to repair. A split might help News Corp persuade regulators it should be allowed to keep its 39 percent stake in BSkyB. But resurrecting a full buyout of the UK satellite operator looks a long way off.
London bankers get swift kick from Boots deal
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Quentin Webb
LONDON, June 20 (Reuters Breakingviews) – British pharmacy chain Alliance Boots [ABN.UL] has been a bitter pill for London bankers to swallow. KKR’s (KKR.N: Quote, Profile, Research) 12 billion pound leveraged buyout in 2007, then worth about $24 billion, turned nasty for big lenders who backed the deal. Adding insult to injury, none were hired to advise KKR or Boots on Tuesday’s $6.7 billion stake sale to U.S. peer Walgreen (WAG.N: Quote, Profile, Research). The timing couldn’t be worse.
The original takeover required a heaving 9 billion pounds of debt, furnished by a gaggle of mega-banks. Both Bank of America (BAC.N: Quote, Profile, Research) and Merrill Lynch were involved, as were Barclays (BARC.L: Quote, Profile, Research), Citigroup (C.N: Quote, Profile, Research), Deutsche Bank (DBKGn.DE: Quote, Profile, Research), JPMorgan (JPM.N: Quote, Profile, Research), UniCredit (CRDI.MI: Quote, Profile, Research) and Royal Bank of Scotland (RBS.L: Quote, Profile, Research). But credit markets seized up before the loans could be sold. Some banks hung on while others unloaded at a discount.
Their support and suffering won them no recognition in an industry often built on relationships and back-scratching. The two-stage Boots sale is potentially worth over $16 billion. It’s likely to be one of Europe’s biggest deals in what is shaping up to be a very thin year. But none of the original lenders – or any big bank, for that matter – was hired to advise the sellers.
They relied instead on Centerview Partners, a six-year-old boutique. It makes sense that Boots turned to its longtime adviser Richard Girling, who moved from Merrill to Centerview a few years ago. And it can’t have hurt that founding partner James Kilts has invested in at least two deals alongside KKR.
What’s more, the sellers didn’t require financing so could live without the bulge bracket. Walgreen couldn’t, and turned to Goldman Sachs (GS.N: Quote, Profile, Research) and Bank of America Merrill Lynch, along with Lazard (LAZ.N: Quote, Profile, Research). Fewer bankers also can prevent leaks into the market or the press. And indeed, a tight lid was kept on the deal. And mispricing the Boots risk in 2007 didn’t entitle banks to any make-up fees five years on.
Everything Everywhere LBO: someday, somehow?
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, June 18 (Reuters Breakingviews) – It sounds more 2007 than 2012. But even if markets aren’t quite ready for an 8 billion pound ($12.5 billion) buyout of Everything Everywhere, it could make sense someday, somehow. Britain’s biggest mobile operator would be a rare investment opportunity, and the sector is beloved by both private equity firms and debt investors.
Tom Alexander, who stepped down as chief executive last year, is reportedly trying to line up backers for a buyout. The pitch should find an audience: mobile companies are cash cows, and it’s rare for a big opportunity like this to come up in Europe – especially one that hasn’t previously been through the PE wringer.
However, parents France Telecom and Deutsche Telekom seem reluctant to cede a powerful position in Britain, and might only exit for a knockout price. The sheer scale is another big headache. A transaction would probably entail about 3 billion pounds of equity finance, and 5 billion of debt. So every possible funding source would need to be tapped.
Even the biggest PE firms would struggle to deliver that kind of equity ticket without making their funds dangerously dependent on one deal. But consortium deals have fallen out of favour: running a company in tandem with rivals is a recipe for deadlock. Unorthodox sources of capital would need to tapped: perhaps major fund investors, such as sovereign wealth funds.
Debt would also be less than straightforward. Apax’s recent buyout of Orange Switzerland came with borrowings of about 3.8 times EBITDA, according to Thomson Reuters LPC. A similar multiple here, with 2011 EBITDA of more than 1.4 billion pounds, implies a maximum 5.3 billion pounds of leverage. Debt investors like telecoms, but this would be a stretch.
Nokia retains the power to shock
By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
How many times can Nokia shock the market? A new warning on margins follows a similar upset in April, and another jolt in May 2011. The mobile-phone maker was caught napping by the smartphone revolution. It has now lost about three-quarters of its market value, or roughly 20 billion euros in absolute terms, since turnaround Chief Executive Stephen Elop took the helm in September 2010. At least he is taking action. But success still looks far from guaranteed.
Elop staked Nokia’s future on smartphones that rely on the mobile operating system of his former employer, Microsoft. To its credit, Nokia has never pretended the transition would be quick or smooth. But the onslaught from cheap competitors running Google’s Android, coupled with high-end pressure from Apple’s iPhone, has been relentless.
At an operating profit level, Nokia is already losing 3 cents on every euro of sales made in its phone business. Nokia now warns this will worsen this quarter. Hence the fresh fall in Nokia shares, returning them to levels last seen 16 years ago. There was no mention of revenue on June 14 but it is presumably under pressure too.
The overhaul underscores how much slimmer even a successful Nokia needs to be. That comes with a sizeable human cost. A further 10,000 job cuts means personnel, excluding its networking joint venture with Siemens, will now be a third lower in 2013 than 2010. Among the casualties are some experienced managers. But in financial terms, operating costs should fall to 3 billion euros at the core phone unit, a 44 percent drop from 2010, though the move also entails 1 billion euros of new restructuring costs.
Shares shed 11 percent on June 14. Nokia’s continuing power to shock may lead investors to ask if there’s a plan B, perhaps with a new boss. But Nokia has little to gain, at this late stage, by reversing course and adopting Android. The obvious sell-off would be Nokia Siemens Networks, but the joint venture has big problems of its own. And a bid for Nokia looks implausible, as does a full-on break-up, even if TomTom’s recent Apple tie-up highlights the attractions of Nokia’s own mapping business. For investors, buying Nokia stock looks like a brave call even at these prices.
English soccer deal is doubly worrying
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, June 14 (Reuters Breakingviews) – English Premier League soccer has just broken a 1 billion pound ($1.55 billion) barrier. That is the annual cost for BSkyB (BSY.L: Quote, Profile, Research), the satellite broadcaster, and BT (BT.L: Quote, Profile, Research), the telecoms group, to share domestic rights to three seasons of matches, starting in 2013. In response, nearly a billion pounds promptly vanished from the duo’s combined market value. For their investors, the outcome of the auction is doubly worrying.
Part of the market backlash is simply because the payouts are bigger than expected. BSkyB, which gets 116 games a season, is paying 760 million pounds a year. That is a 40 percent increase on its current settlement, and at least double the increase most analysts anticipated. Soccer is less central to BSkyB than it once was, but still helps lure and retain subscribers and popular sport remains a key part of the customer appeal.
The company says it can run more efficiently and trim content spending elsewhere, so its financial targets remain intact. But there is a second worry: BSkyB, soccer’s dominant media partner, and BT, a surprise newcomer, are engaging in closer combat. Having started in different niches, both now offer “triple-play” phone, cable and broadband packages. BT has been slower to build its television service than BSkyB has been to move the other way, but the phone firm plans to build a dedicated channel around its new soccer offering. That still leaves BT a long way from BSkyB’s market-leading pay-TV service, built up over many years, but should make its alternative more attractive. And more hot auctions for important content could follow.
Even before the new deal, broadcasting rights were already the biggest source of revenues for premiership clubs. Most of those revenues end up in players’ pockets: wages ate up 68 percent of all club revenues in 2009-2010, according to Deloitte.
That may help secure sporting talent for the English soccer league, which is already one of the world’s most admired, and underpin the value of the rights just sold. But the stock market reaction suggests that rather too much of the proceeds of this new deal will end up in the pocket of players and too little in the hands of shareholders.
Man Utd’s IPO transfer keeps owners in control
By Quentin Webb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Manchester United’s IPO transfer will keep the Glazer family firmly in control. For months, the owners of the English soccer club had sought a $1 billion initial public offering in Singapore. Now the plan has switched to a U.S. listing, reports IFR. New York doesn’t seem like the natural venue for a soccer share sale. But it’s plausible the deal will still fly, and the lop-sided governance in plan A remains.
Brand-building in soccer-crazy, fast-growing Asia was a supposed benefit of the Singapore IPO. Instead United, which ranks only behind Spain’s top two soccer sides for revenues, must confront American public indifference. Only 1 percent of respondents to a U.S. poll by Harris in January named soccer as their favourite sport – placing it behind 13 others, including boxing and horse racing.
That might have mattered in the original plan, which anticipated lots of interest from small investors. But the U.S. buyer base will presumably be more skewed to institutions. And while they may bargain harder on valuation, they will surely see an investment case in a strong global franchise with a straightforward business model. It might also help that, unlike in Singapore, these buyers can compare United to domestic, listed sporting and media concerns such as Madison Square Gardens, the home of the New York Knicks, or Speedway Motorsports, an owner of Nascar tracks.
Nonetheless, United’s pricing aspirations still sound ambitious, especially in view of the team’s poor performance on the pitch. Assume the $1 billion sought is for shares equivalent to 30 percent of the company, and new stock, sold to pay down debt, makes up a third of the offering. Net debt would fall to a shade under 190 million pounds ($300 million), implying an enterprise value of about $3.6 billion. With EBITDA for the first three quarters of the year pointing to an annual haul of about 113 million pounds, that would point to a lofty enterprise multiple of about 21 times EBITDA.
Worse, a version of the Singapore plan to “staple” non-voting preference shares with ordinary stock lives on, IFR suggests. That was intended to let the Glazers keep control in excess of their economic interest. This could be accomplished in New York simply by issuing different classes of shares. In Britain such a scheme would be shown the red card. But raising capital is played by different rules around the world.
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